GAIAM, INC. — Form 10-Q Summary
Business context and period: The filing is for the quarter ended September 30, 2015; financial statements are unaudited. Gaiam sells yoga, fitness and wellness products and operates Gaiam TV, a subscription video service. The filing reports two segments: Gaiam Brand and Gaiam TV.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $51.3 | $41.3 | $130.1 | $111.3 |
| Gross profit / margin | $21.9 / 42.6% | $18.0 / 43.7% | $57.3 / 44.1% | $50.5 / 45.4% |
| Operating income (loss) | $3.2 | $(1.9) | $0.4 | $(7.6) |
| Net income (loss) from continuing operations | $2.4 | $(2.6) | $(1.0) | $(6.9) |
| Net loss attributable to Gaiam | $(8.8); $(0.36) per share | $(3.0); $(0.12) per share | $(13.8); $(0.56) per share | $(7.5); $(0.31) per share |
- Segment revenue: Gaiam Brand revenue was $47.8 million in Q3 and $120.2 million year to date; Gaiam TV revenue was $3.5 million and $9.9 million, respectively. Q3 segment contribution income was $4.2 million for Brand and $0.2 million for TV; year-to-date contribution was $6.4 million and a $3.2 million loss, respectively.
- Cash flow: For the first nine months, continuing-operations operating cash flow was $16.2 million, versus cash used of $7.1 million in 2014. Discontinued operations used $4.0 million; total operating cash flow was $12.2 million. Investing activities used $6.9 million and financing activities used $0.3 million. Cash increased $4.3 million to $20.1 million.
- Liquidity and debt: Current assets were $74.9 million and current liabilities $44.1 million at September 30. The balance sheet lists no debt balance. A $5.5 million revolving credit facility was entered into by Boulder Road LLC; it was undrawn at quarter-end and is guaranteed by Gaiam and Gaiam TV and secured by the company’s principal-office property.
- Other position data: Total assets were $130.5 million, total equity $86.4 million, and accumulated deficit $90.2 million. The company estimated 2015 capital expenditures of approximately $9.0 million. Contractual obligations disclosed were $4.4 million, primarily media distribution commitments.
Changes versus prior period
- Q3 revenue rose 24.3%; nine-month revenue rose 16.9%. Growth came from the apparel launch and other branded products, as well as Gaiam TV subscriber growth and its Comcast launch. Management said revenue excluding planned catalog reductions rose 29% in Q3 and 22% year to date for Gaiam Brand.
- Operating results improved substantially: Q3 operating income compared with a year-earlier loss, while the nine-month operating loss narrowed to near break-even. Lower selling and operating expenses, including reduced catalog spending, contributed; corporate, general and administrative costs increased.
- Gross margin declined year over year in both periods. Management attributed this to lower average margins on the new apparel line, while noting direct importing reduced freight, fulfillment and inventory-risk costs.
- Despite improved continuing operations, attributable net loss worsened, mainly because of a $10.7 million Q3 discontinued-operations charge related to the Cinedigm dispute. The 2014 year-to-date comparison included a $1.5 million investment-sale gain that did not recur.
Outlook, unusual items and risks
- The board had approved a proposed tax-free spin-off of Gaiam TV, but completion remained subject to conditions and the board could abandon it. Management said separation would affect liquidity and could end Gaiam’s funding of Gaiam TV’s operating losses and capital expenditures. No assurance was given that the spin-off would occur.
- Management described continued investment in digital engagement, apps and product expansion, and international growth for Gaiam TV. It cited a goal of Gaiam TV profitability before September 30, 2015; the filing reports a year-to-date segment contribution loss, while Q3 segment contribution was positive. No forward revenue or earnings guidance was provided.
- The Cinedigm settlement resolved the parties’ claims except for a remaining cash-reconciliation claim to be decided in a final arbitration not yet scheduled. The settlement requires a $2.3 million payment. Q3 discontinued-operations charges included a non-cash $7.3 million write-down of the working-capital receivable. Management said it had adequately accrued for the remaining claim and did not expect material additional settlements beyond its estimate.
- The company maintained a full valuation allowance against deferred tax assets; disclosed gross net operating losses were $86.8 million federal and $39.6 million state. Risks highlighted include the spin-off, legal proceedings, consumer and competitive trends, inventory and supplier exposure, foreign exchange, shipping costs, and reliance on fulfillment and information systems. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the Gaiam TV spin-off occurred, its final terms and distribution timing, and the resulting allocation of assets, liabilities, costs and cash needs.
- The final outcome and cash impact of the remaining Cinedigm arbitration, including whether the accrued amount and $2.3 million settlement payment fully capture the exposure.
- Whether revenue growth can continue while gross margins are pressured by apparel mix, and whether Gaiam TV can achieve sustainable profitability.
- The composition and repeatability of the strong continuing-operations cash flow, including working-capital changes, and actual capital expenditures versus the $9.0 million estimate.
- The impact of the tax valuation allowance and the usability of the disclosed tax losses; also note that reported total losses include discontinued operations and are not equivalent to continuing-business performance.