GAIA, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. Financial statements are unaudited. Gaiam is a lifestyle media company with direct-to-consumer and business segments.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net revenue | $45.4 million | $50.7 million | $92.8 million | $105.5 million |
| Gross profit / margin | $28.0 million / 61.6% | $22.6 million / 44.6% | $55.1 million / 59.4% | $48.5 million / 45.9% |
| Operating loss | $2.0 million | $7.2 million | $3.3 million | $8.7 million |
| Net loss attributable to Gaiam | $2.1 million | $4.1 million | $3.3 million | $5.1 million |
| Loss per share | $0.09 | $0.18 | $0.14 | $0.22 |
- Reported revenue fell year over year largely because Real Goods Solar (RSOL) was deconsolidated at the end of 2011. On a basis excluding RSOL from the 2011 comparison, revenue increased 47.8% in Q2 and 36.2% in the first half. These comparisons are not the reported GAAP comparisons.
- Q2 business-segment revenue rose to $28.5 million from $14.6 million; direct-to-consumer revenue rose to $16.9 million from $16.2 million. The business segment generated a $1.6 million contribution profit in Q2, while direct-to-consumer recorded a $3.6 million contribution loss.
- Cash at June 30 was $11.5 million, down from $14.5 million at December 31, 2011. Current assets were $97.5 million and current liabilities were $52.9 million. The balance sheet showed $14.0 million drawn on a revolving line of credit.
- First-half operating cash flow was $17.4 million, versus $5.9 million in 2011. Investing activities used $15.7 million, including $13.4 million for the Gaiam Vivendi Entertainment acquisition; financing activities used $4.7 million. Cash declined by $3.1 million overall. Management attributed much of operating cash generation to lower receivables; cash flow also reflected a net loss.
- At June 30, Gaiam held a 37.5% interest in RSOL and recorded a $1.6 million first-half equity-method loss. No long-term debt balance is presented on the balance sheet.
Material changes and unusual items
- On March 28, 2012, Gaiam acquired Gaiam Vivendi Entertainment for provisional consideration of $32.1 million: $13.4 million cash and an $18.7 million 90-day note, which was satisfied from collections of pre-closing receivables. The acquisition contributed $6.3 million of Q2 revenue and $1.1 million of Q2 net income. Purchase accounting was provisional; reported goodwill was $6.7 million and acquired intangibles were $8.6 million.
- Management said integration was beginning to produce operating and financial synergies, including lower distribution, fulfillment, post-production, and digital distribution costs, but also noted redundant integration costs during Q2. First-half acquisition-related costs were $1.7 million.
- Gross margin improved substantially, which management attributed primarily to the acquired media-distribution business’s sales mix, including revenue with no cost of goods sold. Selling and operating expenses rose, including higher television advertising spending.
- Gaiam’s Q2 non-GAAP net loss was $1.2 million, or $0.05 per share, excluding its RSOL equity-method loss. First-half non-GAAP net loss was $0.6 million, or $0.03 per share, excluding the equity-method loss and acquisition-related costs. These are company-defined non-GAAP measures.
Outlook, liquidity, and risks
- On July 31, Gaiam’s subsidiaries entered a new asset-secured revolving credit agreement with PNC for up to $35 million, subject to borrowing-base limits, with a maturity date of July 30, 2015. On August 1, Gaiam repaid the prior lender and terminated the old facility; new-facility borrowings were approximately $14.2 million at an annual rate of 4% on that date.
- The PNC agreement includes customary covenants and default provisions, restrictions on additional debt, liens, investments, dividends, and mergers, and early termination fees under specified conditions. Management stated available cash, the new facility, and expected operating cash generation should be sufficient for short- and long-term needs, while noting that acquisitions, product development, and operational difficulties could change cash requirements.
- Management planned to complete Vivendi integration, pursue additional distribution and licensing contracts, expand digital-provider sales, launch additional direct-response products, reposition e-commerce and catalog offerings, and transition the e-commerce platform. The filing provides no quantified earnings or revenue guidance.
- Key risks cited include economic conditions, competition, pricing, brand reputation, consumer trends, acquisitions and new initiatives, merchandise supply and returns, fulfillment and customer-service dependence, shipping costs, information systems, legal exposure, and founder control. The company noted exposure to interest-rate changes and foreign-currency movements; a one-percentage-point rate increase on the August 1 debt balance was estimated to add about $0.1 million of annual interest expense.
- Gaiam reported ordinary-course legal proceedings and said it did not believe they would materially adversely affect the business. It reported no material risk-factor changes and stated disclosure controls were effective.
Important facts for investors to verify
- How acquisition-related revenue, margins, integration costs, and expected synergies develop, and whether provisional purchase accounting changes.
- Whether the improved gross margin and operating cash flow persist; first-half cash generation was substantially affected by receivables collections.
- PNC borrowing-base availability, covenant compliance, interest costs, and the company’s ability to refinance or repay its secured revolving debt.
- RSOL’s operating performance and the value and collectability of Gaiam’s investment, related receivables, and potential tax-sharing payments.
- Progress and costs associated with planned product launches, digital initiatives, and the e-commerce platform transition.