GAIAM, INC. — FY 2012 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2012. Gaiam sells lifestyle media and products focused on yoga, fitness, wellness, personal development, and conscious media through retail, business distribution, ecommerce, catalogs, direct-response television, and subscriptions. It reported two operating segments: business and direct to consumer.
Comparability is affected by Real Goods Solar (RSOL): Gaiam deconsolidated RSOL on December 31, 2011 after its voting ownership fell to 37.5%. Accordingly, 2012 GAAP results exclude RSOL operations, while 2011 GAAP results include them. The filing also presents pro forma comparisons excluding RSOL from both periods.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 comparable, pro forma excluding RSOL |
|---|---|---|
| Revenue | $202.5 million | $165.5 million |
| Gross profit / gross margin | $116.1 million / 57.3% | $89.0 million / 53.8% |
| Operating income (loss) | $0.6 million | $(6.6) million before 2011 goodwill impairment |
| Net income (loss) attributable to Gaiam | $(12.9) million; $(0.57) per share | $(27.1) million; $(1.17) per share |
| Adjusted EBITDA (non-GAAP) | $12.8 million | Break-even |
| Non-GAAP net income (loss) | $0.6 million; $0.03 per share | $(3.9) million |
GAAP net loss in 2012 principally reflected an $18.4 million equity-method loss on RSOL, largely noncash, partly offset by a $5.7 million income tax benefit. The reported GAAP operating margin was approximately 0.3%; net margin was approximately negative 6.4%. Cash provided by operations was $16.5 million, compared with $5.2 million in 2011; investing used $18.2 million and financing used $3.1 million. Cash declined by $4.7 million to $9.9 million.
At year-end, working capital was $51.4 million, current assets $126.4 million, and current liabilities $75.0 million. The company had $16.2 million drawn on a revolving credit facility, with $12.6 million reserved for letters of credit and other reserves. Total liabilities were $75.0 million, up from $32.1 million a year earlier. The facility provides up to $35 million, subject to borrowing-base limits, and matures July 2015. Management estimated 2013 capital expenditures of approximately $2.3 million.
Fourth-quarter 2012 revenue was $66.7 million, with net income attributable to Gaiam of $1.5 million and diluted EPS of $0.07. Fourth-quarter 2011 comparable revenue excluding RSOL was $55.6 million. The fourth quarter is typically the company’s strongest season.
Material changes versus the prior period
- On a comparable, RSOL-excluded basis, revenue rose 22.3%. Business-segment revenue increased 47.5% to $130.2 million, including $19.9 million from the March 2012 acquisition of Gaiam Vivendi Entertainment and approximately 25% internal revenue growth. Direct-to-consumer revenue fell 6.4% to $72.3 million.
- Gross margin improved to 57.3% from 53.8% on the comparable basis, partly due to the acquired distribution business’s net-revenue accounting and sales mix. The acquisition added distribution scale and rights to thousands of titles; integration synergies were not fully realized by year-end.
- Gaiam invested an additional $3.9 million in digital subscription businesses, which recorded an operating loss of approximately $5.9 million. Management launched Gaiam TV out of beta late in 2012 and transitioned ecommerce to a new platform.
- Gaiam’s 37.5% RSOL investment and related loans were reduced to zero carrying value after recognizing its share of RSOL losses; the company said it did not expect to record further RSOL losses. The quoted market value of its RSOL shares was $7.6 million at year-end.
Outlook, risks, and unusual items
Management expects acquisition-related cost savings and improved selling opportunities to support stronger earnings in future years, and plans to expand digital distribution, subscriptions, licensing, and proprietary media and products. The filing gives no specific revenue or earnings guidance. Management stated that cash, operating cash generation, financing capacity, and other potential sources were expected to be sufficient for operations, while noting that needs could change with acquisitions and other factors.
- Key risks include reliance on major retailers and customer concentration: Target was the largest customer, representing approximately 14.8% of revenue in both 2012 and 2011; Target and Walmart together represented 47.6% of year-end receivables.
- Other disclosed risks include competition and changing consumer preferences; inventory, returns, supplier and shipping exposure; dependence on centralized fulfillment and information systems; digital-transition execution; privacy, ecommerce regulation and potential sales taxes; media-rights disputes; litigation; and variable-rate debt.
- Debt covenants restrict additional borrowing, liens, investments, dividends, and mergers; defaults could accelerate repayment. A one-percentage-point increase in applicable rates was estimated to add approximately $0.2 million to annual interest expense at constant debt levels.
- Contractual obligations included $3.2 million of operating lease payments and $10.3 million of media distribution advances, totaling $13.5 million. Gaiam also noted that approximately $10.0 million of royalties related to acquired and produced media content were anticipated during 2013.
- The 2011 comparison included a $22.5 million noncash goodwill impairment and a $4.5 million noncash loss on RSOL deconsolidation. The 2012 RSOL equity-method loss included RSOL’s substantial noncash impairment charges.
The independent auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of December 31, 2012. Gaiam reported no material legal proceedings, but stated it is involved in ordinary-course legal matters.
Important facts for investors to verify
- Reconcile GAAP reported results with the RSOL-excluded pro forma comparison and the company’s non-GAAP measures.
- Track whether Gaiam Vivendi Entertainment delivers the expected integration savings, margins, and cash contribution.
- Assess the scale and profitability of digital subscriptions, including Gaiam TV, against the disclosed operating losses and investment.
- Monitor cash conversion, receivables and participations payable, borrowing-base availability, debt covenants, and the impact of RSOL’s zero carrying value.
- Review the forthcoming RSOL audited financial statements referenced in the filing as to be submitted by amendment, and assess customer concentration and media-advance commitments.