Gaiam, Inc. (NASDAQ: GAIA) — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 13, 2015. Gaiam sells yoga, fitness and wellness products and operates Gaiam TV, a digital video subscription service. Results reflect continuing operations unless otherwise noted; the company’s former non-Gaiam entertainment distribution and direct-response TV businesses are reported as discontinued operations.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net revenue | $166.7 million | $155.5 million |
| Gross profit / gross margin | $75.5 million / 45.3% | $65.3 million / 42.0% |
| Operating loss / operating margin | $5.1 million / 3.1% loss | $21.6 million / 13.9% loss |
| Net loss attributable to Gaiam | $9.9 million; $0.41 per share | $22.8 million; $0.99 per share |
| Cash and working capital at year-end | $15.8 million; $39.7 million | $32.2 million; $53.7 million |
| Net cash used in operating activities | $9.0 million | $23.1 million |
| Long-term debt | None | None |
Revenue grew 7.2%. Gaiam Brand revenue rose 4.7% to $156.8 million; Gaiam TV revenue increased 75.4% to $9.9 million. Gaiam Brand reported segment contribution of $6.6 million, while Gaiam TV had an $8.7 million contribution loss. Gross-margin improvement reflected a more favorable product mix and lower costs on certain products. The consolidated operating loss narrowed, but Gaiam remained loss-making.
Cash from continuing operations was negative $8.8 million. Continuing-operations investing activities used $8.4 million, including acquisition and media, property and equipment spending. Cash declined $16.5 million during the year. Management estimated 2015 capital expenditures of approximately $6.0 million, including Gaiam TV, expected to be funded from operating cash flow. No financing arrangements were in place; the company cited cash, expected operating cash flow, potential shelf-stock sales, or new credit facilities as possible sources of funds.
Material changes and unusual items
- Revenue increased from $155.5 million in 2013; the largest customer’s sales fell after a data breach at that retailer, partially offset by a new major account and growth in Restore and SPRI products. Target accounted for 29.3% of 2014 revenue, down from 32.1%; it represented 44.1% of year-end receivables.
- The 2013 comparison included a $25.1 million gain on investment sales, $11.0 million of restructuring, impairment and other costs, and a $23.2 million deferred-tax valuation allowance. In 2014, investment-sale gains were $1.5 million and the full valuation allowance remained; no tax benefit was recorded for the net loss.
- FY2014 discontinued-operations loss was $3.3 million, including a $3.0 million reserve for anticipated legal expenses and related reserves tied to the Cinedigm dispute and other wind-down costs.
- Gaiam acquired the Yoga Studio app in 2014. It also reduced catalog circulation and planned a further shift toward digital customer engagement; management anticipated launching Gaiam yoga apparel in spring 2015.
Outlook, contingencies and risks
Management said it expected to return to operating profitability, but the filing provides no quantified earnings or revenue guidance. The proposed tax-free separation of Gaiam TV was not assured: Gaiam TV filed a Form 10 in February 2015, and completion remained subject to conditions and the board’s right to abandon the transaction. Management said a separation would change Gaiam’s funding needs; the company also transferred ownership of its principal-office property to Gaiam TV effective January 1, 2015.
Cinedigm seeks more than $30 million in arbitration, including an alleged $12.9 million working-capital adjustment and other claims. Gaiam disputes the claims, says Cinedigm owes it more than $7 million under the working-capital mechanism, and is pursuing an additional approximately $700,000 claim. The outcome and timing are uncertain; legal costs could continue into 2016. Other material risks include customer concentration, consumer and competitive pressures, inventory and returns exposure, dependence on third-party suppliers and fulfillment, and ongoing operating cash use. Gaiam’s dual-class structure gives its chairman approximately 75% of voting power. The company paid no dividends in 2014.
Important facts for investors to verify
- Whether Gaiam TV’s proposed spin-off was completed, its final terms, and the resulting allocation of assets, liabilities, costs and cash needs.
- Developments and eventual resolution of the Cinedigm arbitration, including potential exposure beyond the $3.0 million reserve and collectability of Gaiam’s counterclaims.
- Whether operating cash flow improves enough to support operations and planned investment, given year-end cash of $15.8 million and no long-term debt or financing arrangement.
- Whether Gaiam can sustain revenue and margin growth while reducing dependence on Target, which accounted for 29.3% of revenue and 44.1% of receivables.
- Underlying recurring performance apart from investment gains, discontinued operations, restructuring charges and deferred-tax valuation effects.