GAIAM, INC. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Gaiam is a lifestyle media company focused on yoga, fitness, wellness and conscious media. Following the 2013 sale of its non-branded entertainment media business and discontinuation of DRTV operations, those activities are presented as discontinued operations.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Continuing-operations revenue | $37.6 million | $36.7 million |
| Gross profit / margin | $17.0 million / 45.3% | $15.8 million / 42.9% |
| Operating loss / margin | $(2.5) million / (6.5)% | $(3.2) million / (8.6)% |
| Net loss attributable to Gaiam | $(2.1) million; $(0.09) per share | $(0.3) million; $(0.01) per share |
| Cash from operating activities | $(2.2) million overall; $(2.4) million continuing operations | $6.2 million overall; $3.7 million continuing operations |
At March 31, 2014, cash was $29.5 million, total current assets were $83.9 million, current liabilities were $25.0 million, and total assets were $129.2 million. The balance sheet does not report a debt balance. Interest paid in the quarter was $13,000. Capital expenditures, including investment in Gaiam TV, were estimated at approximately $6.0 million for 2014.
Changes and operating drivers
- Revenue increased 2.5%. Direct-to-consumer revenue grew 16.8% to $13.2 million, mainly from travel sales and Gaiam TV subscriptions; business-segment revenue declined 3.8% to $24.4 million.
- Management said converting media category management from a licensed to a distribution model reduced business-segment revenue but did not affect gross profit; the change was intended to improve margins, simplify operations and improve working capital and cash flow.
- Gross margin improved to 45.3% from 42.9%. Selling and operating expense rose 6.7% to $16.4 million, primarily reflecting investment in digital subscriptions. Operating loss narrowed, but the net loss attributable to Gaiam increased, largely because Q1 2013 included $2.0 million of discontinued-operations income versus $26,000 in Q1 2014.
- Continuing operations used $2.4 million of operating cash, versus providing $3.7 million a year earlier. Cash declined by $2.7 million during the quarter. Lower accounts receivable partly offset cash uses from reduced accounts payable, participations payable and accrued liabilities.
Outlook, risks and notable items
- On March 17, 2014, the board agreed to pursue separating the subscription unit from the Gaiam-branded business, currently expected to be a tax-free spin-off, subject to approval and completion. The company cautioned that a separation could materially change future operations, results and liquidity needs.
- Gaiam intends to focus investment on branded yoga, fitness, wellness and subscription streaming, including Gaiam TV. The filing provides no specific revenue or earnings guidance.
- The company recorded a $438,000 gain on the sale of 100,000 Real Goods Solar shares. It continued a valuation allowance against deferred tax assets; management said the assets may offset future income as generated.
- Contractual obligations totaled $10.8 million: $2.8 million in operating leases and $8.0 million in media distribution advances, with $5.6 million due within one year. Management believed available cash, expected operating cash, potential asset or share sales, tax attributes and borrowing capacity should be sufficient for short- and long-term needs, while noting needs could change.
- Risks cited include competition, consumer and pricing trends, brand reputation, supply and fulfillment issues, shipping costs, reliance on third parties and key personnel, foreign-exchange exposure, and the founder’s control. Management reported no material market-risk exposure at quarter-end. It said routine legal proceedings were not expected to have a material adverse effect and reported no material change in risk factors.
Important facts to verify
- Whether the proposed subscription-business separation proceeds, its structure and its effects on liquidity and operating results.
- Whether the media distribution model improves margins and working capital as intended, and whether direct-to-consumer growth—particularly Gaiam TV—continues.
- The source and sustainability of operating cash flow, given the Q1 cash use and the decline in cash.
- The outcome of the post-closing working-capital adjustment related to the 2013 GVE sale, which was still being negotiated.
- Progress against the approximately $6.0 million 2014 capital expenditure estimate and the $10.8 million contractual obligations.