Jirka Rysavy - Chairman and Chief Executive Officer Paul Tarell - Chief Financial Officer.

Mark Argento - Lake Street Capital Markets Jamie DeYoung - Goudy Park Zacary Sherman - Foxhill Capital Partners Douglas Coburn - Venture Capital Matt Sweeney - Laughing Water Capital.

Good afternoon, everyone, and thank you for participating in today’s conference call to discuss Gaia’s Fourth Quarter and Full Year 2016 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 a Safe Harbor statement on the Private Securities Litigation Reform Act of 1995.

Except for the historic information contained herein, the matters discussed in this call today are forward-looking statements and involve numerous assumptions as well as 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 in our filings with Securities and Exchange Commission, including the company’s reports from 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 that this call will be available for a replay through March13, 2017 starting at 7:30 PM Eastern Time tonight. With that, I would now like to turn the call over to Gaia’s Chairman and CEO, Jirka Rysavy. Please go ahead, sir..

Thank you, Matt and good afternoon everyone. Our fourth quarter including the subscriber count ended again ahead of our expectation and guidance. Paid subscriber grew 52% to 202,000 from 133,000 at the end of fourth quarter 2015, with the growth rate increasing sequentially another 6% from 46% during the third quarter.

As discussed, we intend for our subscriber growth rate to keep accelerating about 4% to 10% per quarter and end up 80% for 2017. Gross margin increased again 360 basis points to 85.7 and we have maintained our investment discipline and kept our loss below the plan even with the higher subscriber growth.

Net loss from continued operation for the fourth quarter was at about 3.4 million, same as the fourth quarter in 2015. During the quarter, we relaunched our site with an entirely new technology stack.

The new site was built to optimize the speed and performance and provide personalized experience for each subscriber and leverage our search engine optimization and also provide foundation for expansion into foreign languages this year. We also invested in our retention technology and launched new android, iOS, Roku and Fire TV apps.

During the year, we completed the sale of our consumer product business, recognizing 114 million gain as well as 12.8 million sale of our 51% in Natural Habitat, which we acquired for 0.6 million. Most of the gains were offset by our NOLs and we expect to recover taxes paid on the gains in future.

We utilized the majority of the proceeds from the disposition to repurchase about 10.5 million shares, invested options at 7.75 per share. The remaining proceeds will be used, as we said to fund continuing growth and development of our business as well as general corporate purposes.

The full year net income increased to 87.1 million from a loss of 11.7 million during the previous year. Now, Paul Tarell will speak more about fourth quarter results..

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 1 and our interest in Natural Habitat which we sold on May 5.

The assets, liabilities and financial results from these businesses are reported as discontinued operations for all periods presented.

Now moving on to our Q4 results, streaming revenues in the fourth quarter increased 40% to 4.1 million compared to the year ago quarter due to continued strong subscriber growth, slightly offset by the decline in revenues generated from non-streaming, including our legacy DVD subscription club.

Gross profit in the fourth quarter increased 41% to 4.1 million, compared to 2.9 million in the year ago quarter. Gross margin increased 360 basis points to 85.7%, up from 82.1% in the fourth quarter of last year.

The increases in gross margin were primarily due to leverage gain on streaming costs due to our higher volumes and our investment in owned and produced content. Total operating expenses in the fourth quarter increased to 9.4 million, compared to 6.3 million in the year ago quarter.

The increase was primarily due to spending 4.5 million on customer acquisition and branding during 2016, compared to 1.5 million in the year ago quarter.

Our loss from operations was reduced by an income tax benefit of approximately $2.1 million during the quarter, as we were able to offset the losses against taxes due on combined gains from our divestitures.

Net loss from continuing operations in the fourth quarter was 3.4 million or $0.23 per share, compared to a loss of 3.4 million or $0.14 per share in the year ago quarter. Net income for 2016 was 87.1 million or $4.39 per share, compared to a loss 11.7 million or $0.48 per share in 2015.

At December 31, after paying our estimated taxes due on the gains, we had 54 million in cash and continued to carry no debt, resulting in a current ratio of 5 to 1. We also own a 150,000 square foot office headquarters that’s unencumbered.

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?.

Yeah, I just wanted to add that during the fourth quarter we also have expanded our subscriber reach to several new territories, which brings our current count to about 140 countries. We also added to our content, growing the current U.S. library to about 77,000 titles.

Our pool of subscribers show that number of Gaia subscribers, they’re also the subscriber to Netflix, it’s over 70%. This validates our exclusive content in each positioning which is truly complimentary to large entertainment driven SVOD players.

Also during the fourth quarter still about 80% views on Gaia were generated by content produced all internally.

As previously noted, we have elected to expand our subscriber acquisition cost in the period which the cost incur and despite the significant lifetime value we do not record in our balance sheet, which obviously the result that no value of our subscribers being reflected in our GAAP financial statement.

And I want to say that we expect our subscriber growth to keep accelerating and after a higher than expected jump from 46% from the third quarter, we expect our fourth quarter subscriber growth to be at about 56%, second at 62, third at 70 and fourth at 80.

So this expected 56% subscriber growth during this quarter would bring the paying subscriber count at the end of the first quarter to about 243, up from 202 what we had at the beginning of the quarter. I’ll have to say, I’m really enjoying my return after eight years to the CEO role to this amazing opportunity Gaia is through.

And I would like to take the call for questions.

Operator, Matt?.

[Operator Instructions] At this time we’ll take a question from Mark Argento with Lake Street Capital Markets..

Hi, guys. Good afternoon..

Hey, Mark..

Just maybe peeling the onion a little bit on kind of the subscriber growth and in particular kind of the acquisition and the acquisition cost and acquisition channels and I know you guys aren’t breaking out the financials for us to be able to kind of get a good look at what the customer acquisition cost is, but maybe you can talk through at least a little bit about customer acquisition cost, how do you see it trending, channels of acquisition and then maybe just suppose a little the lifetime value overtime you anticipate seeing from your subscribers..

Okay. Well, yeah, we don’t do the specific because we intend to follow the same disclosure what Netflix does, but obviously our subscriber growth was ahead of what we expected and our overall loss for the quarter was actually slightly less.

So it means that we continue to spend less on acquisition than we budget and it’s mostly due that we thought we might have to pay a little more than we actually have to pay.

And it also depends which kind of customer we’re going after because if you go for yoga customers where we would be for example, in January that would be a heavy yoga month because kind of new mean than you kind of get more subscribers on low cost on average, so for us we have to real to track it by the channels because if you go more for seekers, seeking through customers, we would spend more per subscriber, but their lifetime value is probably 2X plus higher.

So we kind of watch it in different segments, also by the channels, so our search engines are - ambassadors will be significantly lot lower than certain paid media, so it’s about how we balance averages, which has to do a lot of this growth by quarter. That’s why you kind of see the slower growth in the summer months, same as Netflix.

Most of their growth will happen kind of around fourth and first quarter and it’s not going to be that different to us, however, we probably have a little more balance than Netflix does, but still there’s definitely trend that adding subscribers is more effective from like October to February is probably the best spot..

Yeah, and just to add to that, Jirka mentioned in his comments that when we launched new gaia.com website, we built certain optimization into the core of the product and that’s really been starting to bear fruit for us.

Our search volume, organic search volume has been increasing month-over-month since we launched the new site and I’ll continue to provide some tailwind at our customer acquisition efforts that we don’t have to pay for..

Yeah, that’s helpful. And then the acceleration, you guys are going to - obviously going to turn up the heat a little bit here in current growth.

When you think about sit back and model this, do you anticipate, obviously overall, marketing expense going up as your sub acquisition goes up, but your average cost per customer in terms of the acquisition cost, do you anticipate that going up on a per unit basis and how comfortable - like what level of customer acquisition to, let’s say, lifetime value are you guys comfortable running - spending money up until kind of what of point as a percentage of lifetime, given that you had a significant - pretty large growth margin, so you have some dollars to spend..

Well, we actually already kind of increased kind of step on a palace you kind of say and as you see now. It’s just kind of manifested the growth kind of keep spending, but it’s kind of function pretty constant saying.

So we don’t expect to spend any more than we’re spending currently, we have this hard cut at 50% lifetime value, but it’s really what the market takes to get us on the straight and we kind of figured that 80 is probably what we want to get to, but we can change the target up and down depends what we see in the market, so for us it’s not necessarily to - it’s hard that we need to end up 70 will be okay, I mean 80 will be okay, 70 or 90, I think it’s more like a target to see what the market kind of give us.

But so far we didn’t have to payout for the acquisitions, so we don’t really intend to keep increasing spending proposition. I think it’s just kind of spending and more channels as we test more different - we permanently have few hundred maybe even 1000 test going and from that particularly 10% will continue.

So as we go forward we have more of these venues would actually pay to market, so that’s why we can grow better and on lower cost. Also from second part of the year, we will have the language launches which we’ll start with Spanish or to be in German, kind of probably by quarter and so we would have new markets to market..

Okay and then last in terms of the - how do you think about your content catalog last time, over 6000 title. Have you go and continue to require content and also I know you have your own studio and do create your own kinds as well.

Maybe talk about how you think about that mix of organic versus acquired content and if your content cost going forward?.

It is pretty controlled, not much - content we acquired, it is actually about same as it was two years ago for cost because it is so naïve, so nobody ever bits on it. It is more of like how much of the content there, we really want to have. So we probably added about 200 [ph] title in the last quarter to 7700.

Hence probably kind of the pace, we have long term titles, so we typically loose them, even in licenses and probably you would say that form 7700 to licensed content might be like 3000 maybe slightly less, the rest is internal.

On viewing, we already said it is about 80% viewing from internal content and I think that makes a little probability about what it is.

But we always look how much it would cost for us for the content and then the customer look at the content how much it costs us internally or an acquisition and we balance that mix between produce and license based on viewing cost.

I mean basically we kind of look how much if customer views an hour how much it cost and based on that we balance those numbers, so we optimize it.

But I don’t see any dramatic change from kind of things, I think as a percentage the viewing we could cover to keep somewhere, I would say between 15 and 22% viewing from the content what’s licensed and count will grow much faster and produce content because we are increasing our capacity and producing this year probably 30% more content than last year, maybe even little more.

So it will probably skew that way, just by one of the reason is it is not, the content what we license, the quality always is not necessary what we want to put up there, is the contents produced in our niches. So I think we have been repeated bending or actually we tried to drive it to more our content what we produced. It cost us both same..

Great, that’s it for me, congrats on quarter..

Thanks Mark..

At this time we will move to Jamie DeYoung with Goudy Park..

Hi, good afternoon, congratulations, again on a nice quarter progress, just got a couple of questions for you.

You could just walk me through what drove the 360 basis point prevent in gross margin?.

So primarily what we are looking at is the mix of our content that’s producer owned taking our more and more of the viewership, which then drives down the cost of license content from a royalty perspective, so that’s a big piece of it and then the second piece of it is as we locked in our streaming contract for the next two years, we are able to take advantage of our anticipated growth and subscribers and viewing to lock in a lower rate.

So we are actually paying per hour of content streamed which is what the positive impact on margin is. That eventually flip out at some point but we expect to be able to still maintain the long term 82% to 83% margin, we were just able to leverage it pretty nicely in Q4..

Great that’s helpful Paul.

The other question I had was I couldn’t find it in the K, what year was the Colorado headquarters purchased?.

2008, I think. It is pretty my time, but I think that’s around the time, 2007 or 2008..

Yeah, I think it was early 2000, in March or something..

Okay great, so you had eight nine years of appreciation on that cost and then my next question here is your CITV for the Transformation and Seeking Truth channels around $300, $350?.

Well transformation, we didn’t say the numbers, because we really just launched the channel in October. So I wouldn’t want to venture what that is and the life time volume goes it is little bit broken if you take overall, it is hard to say exactly but we are seeing 300 plus, that’s kind of what we use..

Okay and you are using Yoga around 125 to 175, is that right?.

Yeah, we are somewhere in that range..

Okay and the mix of new subscribers is the majority of the growth, the organic now is more Seeking Truth than what is the uptick you are seeing on Transformation in the short period of time, and you offered that..

I wouldn’t really kind of go in a Transformation because it is so new and it is still kind of defying which kind of how we classified the subscribers when we bring them because some of them watch other channels.

So I think we need like couple of quarters to really speak to it intelligently but the first part of the question we definitely going more after seekers because it is their life time value but as I said in January it is different, January go after Yoga because that’s what you do, people just want to subscribe in January for Yoga.

So we have to kind of go with the market..

Okay, thank you.

And my last question, do you anticipate adding an additional channel in 2017?.

It depends how the Transformation goes but we don’t really focus in second part of the year on languages. So my guess would be if it is, it is going to be end of the year. We probably take one channel from Transformation and have really focus on that which later becomes a channel.

So we actually make it achieve, you would see that focus, you could kind of see where it is going but we officially launch it, we didn’t really decided nor, we have the discussion on that.

Because we wanted to see the kind of Transformation track and what learned from launching new channel because we technically never launched new channel we started pretty much with those two.

So we would know what is their lesson from how it moves between the channels and how we learned the marketing because our new channel we have to test different two universe of places where we go to market and so it depends on quickly we kind of master it..

Okay, great, thanks very much..

Thanks Jamie.

We’ll now move to Zacary Sherman with Foxhill Capital Partners..

Hi, guys. I know you broke it out last quarter, but I don’t know if you mentioned on this call already, if you did I am sorry but I think you said you spent 2.9 million on custom acquisition in branding in last quarter.

Did you break that out this quarter?.

Yeah, in my remarks, it was 4.1 for this quarter and 16 versus 2.9 in the year ago. Sorry, 4.5 million compared to 1.5 in a year ago quarter..

Got it, and do you have a target for how many titles you guys plan on offering? Is that something that US look at?.

You mean in terms of total library?.

Yeah, total library..

In terms of what we are going to add - yeah the total library, I would kind of say that, we probably crossed - I would say the year will end up north of 8000 and you would see a continuous growth but somehow the title of what we have, we might want to republish before viewing, kind of remark it, but so it is still kind of new for us to find a call but I would say that we will continue to grow the library.

It is different than Netflix that goes slow in opposite direction. For us, since we have a really long term contract and titles to be done, what if we lose any title unless we feel that, I mean if we don’t lose it but we might take it out, only if we see that customers. The completion rate is not high enough so, from that we cannot say the quality.

It is mostly in the title stay license. So in license style we see how people view it, what is the completion, how many people look to other content, so you might de-publish some, but it is just because of the performance that we close them. So I think our content will continue growth.

We don’t have specific target, it is more, the out rate, that kind of it is budget what we will spend big some subscriber growth but I didn’t see there are headcount, I mean our title count will go down.

I couldn’t say that what happened to one specific quarter, if we do something but so far it did not and I don’t expect that bill and nothing you see kind of consistent growth. I am not sure, if we are going to update every quarter, if we just grow, 57 in titles but we will generally keep you posted.

You will be always even mentioned on call in bottom on our press release, we always use that number, number of countries and number of titles, so you can always see it on our site..

Okay and I was curious, are you purchase like a gift card or purchase of subscription for the service that you can give to someone else as a gift?.

We have historically offered that with the new site launch, we took it down and we are working on re-implementing that for next holiday season. One of the things that we are working on as we go internationally is obviously the payment process and all those different countries and languages.

So we have been focusing on that and just trying to simply the offering rather than expand it..

Okay, thanks a lot..

Thank you. [Operator Instruction] We’ll now move to Douglas Coburn with Venture Capital..

Hey, guys, congrats on a strong year and Jirka welcome back, we are happy to have you. I think you touched on some of my questions but I will just kind of confirm a couple of things. The first it sounds like your customer acquisition cost is quietly lower than your previous quarter.

Is that right?.

I’m not sure that’s actually true. I think it is kind of consistent. It is less than we budgeted but we were previous quarter also below our budget. So I would say that actually pretty stable because the budget was down for the year previously. So the budget is done once a year. So I think it is kind of stable..

Got it, okay. Perfect.

On that average life are you seeing any difference or is that pretty consistent as well, just in your trends overall?.

I mean, if you look at group, few market more say Yoga was seeking increased in the quarter, obviously the average life time value as an average come down because you have lot of people who are new which have a lower thing.

If you look at it by segment, like six month, year, two years, three years, that’s kind of the goal is that the retention kind of grow into segments. But if you market more aggressively, you bring lot of new customers who by definition have lowest staying powers on average.

Do you understand what I am saying?.

Yeah, I understand on a segment by segment basis, do you see that staying about the same or do you see it trending to become higher retention and kind of longer life?.

I think, generally yeah, you see the growth but if you have new company, by definition longer more mature is our base, more retention you would have than average. So longer we are in business, the retention should improve even if we stayed generally flat just by the function having more matured based.

Because customer, any extra months they stay, the increase, basically, the longer you have them, the longer will they stay. .

Okay that’s fair.

One more question on 2017, I know you pop up about a couple of things that are important what would you say as kind of top liner or any biggest priority for the year?.

I think as far as to keep growing the subscribers, it kind of similar value, I mean cost I think those are really thing things, can we grow as to cost, we kind of put this in a play, there is a plan to hit 80% growth rate, as I say 80% is kind of number we try to calculate to optimum, we will see when we get there what the number is, so we might adjust it probably by third quarter we would know, do we want to grow 2018 again an 80 or do we want to kind of set different target.

But for right now, it is kind of get those numbers and but obviously they are tough, like launching new site to support retention and organic growth, getting new countries, those are kind of probably the priorities to get there..

Excellent and I know it is early for transformation but is there any additional update that you can share?.

Frankly I wouldn’t even internal if somebody asks me, I couldn’t say. It is like, it is too short to, me too kind of define the segment. So it is like the problem, if you understand why we kind of talking this way. When created the channel, some channel, some titles move from Yoga, some titles move from Seeking Truth when we create that channel.

So that’s create interesting dynamics and we have to kind of separate and look at that mix and across channel viewing to really provide any numbers. Even I would, internally it is hard to establish a goal for acquisition.

So we are taking very light, which will be same when we go to a country, I think we will go very light and so if we launched new language, we now are going to push it for a while so that we make sure that all the payments and all the stuff is optimized.

In this business if we kind of say the number we want to kind of make sure that it is solid and we know kind of everything about - everything it moves in the company, that’s why it is the beauty of digital but to make kind of all wheel sensor we can predict the trend.

I think it is always beginning, kind of choppiest, so we want to make sure that settle us before we started talking intelligently. And it is not that dramatically important over the next couple of quarter results anyway. .

Okay that’s all I had. Thank you..

Thank you. At this time we will take question from Jamie DeYoung with Goudy Park..

Hi, thank you, just had one follow up.

So what are you targeting - what subscriber level are you targeting in cash break even?.

It is a decision, I mean you asked right, honestly we could add any level, we could break even from a cash flow perspective right now. It is just the trade-off of the growth.

Because you now follow us for a while and Q3 of 2015, we actually got the company to place where we can operate profitably at that subscriber level, which at that time was around 120,000 subscribers. So we haven’t really grown the fixed cost of the company meaningfully since then.

So we could cut back marketing, some acquisition spend, really at any point and generating cash or the breakeven but be it a much lower growth rate, which would then significantly impact a long term value of the company..

So is it safe to say that you are going to continue to grow as fast as you can while keeping the company self-funding?.

Well I wouldn’t say as fast as we can. My previous company Corporate Express I said that we are going to grow every year for 100% and plus revenue and for ten years, I was there we grew 100% and plus every single year between 109 to 420 a year.

So I know what it takes, we can’t grow over 100% here but I think the cusp for acquisition might exceed that 50%. So that’s why we calculated 80%.

So I wouldn’t say that we first as far as we can, I think we are not grow on this optimum range and we would decide as we go what it is, it might be changing but the goal as we kind of stated over last couple years is to kind of grow on this kind of pace to some over a million subscribers and then kind of start to slow down.

But it is more designed than it is needed and of course it is self-funding, we would definitely if, the cash available and means what we have obviously that’s what we kind of expect to fund the project.

That can be a play but when we did tender for 40% of our stock, we even with fully subscribed tender, we kind of want to have enough cash to do our plan..

My question, really just gets to, if you spend 10 million a quarter with 54 million on the balance sheet. You are going to have some decisions to make, if you continue to grow and spend what you are spending by the second half of next year..

Well I think you are counting taxes of what we paid on the gains when you say 10 million.

Now think the other side of that Jamie, as that we grow subscribers the same dollars invested will be less cash rate because with our margin as we grow subscribers in revenue, we are not going to grow marketing and absolute dollars the way that we have been growing at this year. So the cash use is going to decrease over that period after this year.

So the answer is they were designed to use the cash available to get to that million subscriber level, but as Jirka said this year is really going to be the year where we evaluate what is the right growth rate for us based on cash needs and then set expectations for next year what that looks like, so that we don’t necessarily need to go out and raise more money to get to a million subscribers..

Okay great, that’s helpful. Thank you..

We’ll now move to Matt Sweeney with Laughing Water Capital..

Hi guys, how are you doing? Jirka you mentioned, you are going to increase production of content by 30% this year.

I wonder if you could just provide some color around what type of content that would be, whether that’s domestic or international or foreign language or whether that channel or whatever kind of color you can provide around that, increasing focus on content?.

So it is definitively more focused this year on Seeking Truth than Yoga. Because it is kind of general, they from the second part of the year, will start to have some original language which is more of the actually spending time to money than we produce the content to produce also in a language what we already operate.

Because, when we kind of translate whole library to Spanish, it actually hits the P&L as we don’t capitalize that because it is existing content but now the guidance is from GAAP, if it is new content, you capitalize, if it is old content, you expense it.

So they will start to shift, because again when we are expensed you don’t count it in content number, so that kind of come to the content dollars but the language is actually not meaningful. I mean on that for this year the March will be more following year.

The content generally, we spend a little bit more, we grow the content cost, the new content production, we increase the production value, back to the subscribers, so as we kind of have more subscribers that we produce, we do more animation, we do more B-roll, we might shoot on location, so that kind of stuff.

So from the cusp points, from titles count, we feel like, as we grow subscribers, we kind of provide more variety in different categories and channel as we focus on different categories based on the viewing patterns.

We get more sophisticated key words, so we do search tag the content and see the pattern what people watch internally comparing with search in Google and then we produce content also. This having in mind what’s the current trend in our space what people looking for..

Okay it sounds like definitely deemphasizing Yoga and more moving towards Seeking Truth where you have more defensible position rather than being Yoga where it is super competitive, is the right way to think of it?.

Well, I think Yoga is going to need to base set of new content to keep our existing and new subscribers happy. But the cost for our traditional yoga contents much lower than it would be for the Seeking Truth type content that has the animation and the post production value in it.

And I think the other piece here is as we launched the transformation channel and we are trying to bridge the physical practice of Yoga with the spiritual practice of Yoga we are starting to create content that would be in the Transformation channel that would be it more of a format of Seeking Truth type show.

So those are little bit more in terms of dollars to produce and but less in terms of the number of titles that we would do with Yoga practices..

Thank you and just one more kind of housekeeping, last year 10-K there were two line items, one for land and one for building and then just looking at the press release it is kind of all lump together as in for the last few quarters.

So was there something with one of the divestures or the land went with something or is the land and building still are going to be two separate line items in this year’s 10-K.

Yeah, we will be filing the K tomorrow and it will be broken out in the K. The balance sheet in the earnings release is a condensed balance sheet which is why they are lumped together but it will be broken out in the K and it is the same property, it is just the K requires to list land separately its 12 acre campus and 150,000 square feet.

So it is not separate but we cannot sell the land without the building. So it is one line, but K requires to break it up..

Okay, I am just asking because I think if I am remembering in the K last year it was been like 6 million for the land then 17 million for the building and in the press release here the building and land net is around 17 million..

I think you are looking at growth numbers without the depreciation factored in. The land has that historical cost basis, that doesn’t change and the building gets depreciated..

Understood, thanks very much guys..

Yeah..

This does concludes the question-and-answer session. I’d now like to turn the call back over to Mr. Rysavy for closing remarks..

Thank you, Matt. And thanks to everyone for joining. And we look forward to speaking with you when we report our first quarter results which will be in early May. Thank you, very much..

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