GAIAM, INC. — Q1 2016 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2016, compared with Q1 2015; balance-sheet figures are compared with December 31, 2015. Gaiam operated two segments: Gaiam Brand, covering yoga, fitness, wellness products and eco-travel, and Gaia, its subscription video service. Dollar amounts below are in millions unless stated otherwise.
Financial results and liquidity
- Revenue: $35.3, down 6.1% from $37.6. Gaiam Brand revenue fell 8.8% to $31.5; Gaia revenue rose 23.3% to $3.8.
- Profitability: Gross profit was $16.4, down from $17.2; gross margin improved to 46.4% from 45.8%. Operating loss widened to $8.2 from $2.9; operating margin was -23.2% versus -7.7%. Net loss attributable to Gaiam was $7.6, or $0.31 per share, versus $3.9, or $0.16 per share.
- Cash flow: Continuing-operations operating cash flow was $1.4, versus $4.8. Investing used $2.0 and financing used $1.9; cash declined $2.5 to $11.2.
- Liquidity and debt: Current assets were $55.4 and current liabilities $31.2 (current ratio approximately 1.8). No balance was outstanding on the $5.5 revolving credit facility at quarter-end; the company drew and repaid $2.0 during the quarter. The facility is secured by the headquarters property and guaranteed by Gaiam and Gaia.
- Other metrics: Total assets were $110.8 and total equity $79.5. The company estimated 2016 capital expenditures of approximately $10.0 and reported $5.4 of contractual obligations, principally leases and minimum media distribution payments.
Changes versus Q1 2015
- Revenue declined $2.3, reflecting a challenging retail environment, including Sports Authority’s bankruptcy, and the company’s decision to end private-label business with a customer. Gaia growth from subscriber gains partly offset the decline.
- Selling and operating expense rose 21.0% to $20.2, primarily due to increased Gaia marketing and customer-acquisition spending, bad-debt charges related to Sports Authority, and one-time Natural Habitat sale costs. Corporate, general and administrative expense increased 28.1% to $4.4, including one-time separation and sale costs.
- Interest and other income was $0.5 versus expense of $0.5, mainly reflecting a $0.9 gain on foreign-currency contracts. Q1 2015 included $0.5 of legal costs from Cinedigm disputes, which were settled in 2015; no comparable discontinued-operation charge occurred in Q1 2016.
Outlook, transactions and risks
- On May 10, 2016, Gaiam agreed to sell its Brand Business for $167.0. If completed, the remaining business would be Gaia; Gaiam expected to tender for up to 12 million Class A shares and vested options. The filing cautions that completion is not assured. If the sale does not proceed, the company expected to continue pursuing a tax-free Gaia spin-off, which the board could abandon.
- On May 4, 2016, Gaiam sold its interest in Natural Habitat for $12.85 cash. The filing’s pro forma information estimated $11.0 of net proceeds and a $9.0 gain after adjustments; actual amounts could differ.
- Management said cash on hand, expected operating cash flow, potential financing and other sources should fund operations, but noted that needs could change. It cited seasonal strength in Q4 and expected 2016 capital expenditures of approximately $10.0.
- Key risks include execution and conditions for the pending Brand Business sale or spin-off, continuing operating losses, consumer and retail conditions, competition, inventory and supplier exposure, legal matters, foreign-exchange movements, and the ability to obtain financing. Management stated that existing legal matters were reserved as appropriate or were not expected to materially affect the company, while acknowledging unfavorable outcomes remained possible.
- The company maintained a full valuation allowance against deferred tax assets; reported federal and state net operating losses were $86.3 and $16.4, respectively. A $0.4 noncash equity-method investment loss and currency-related gains affected reported results.
Important facts for investors to verify
- Whether the $167.0 Brand Business sale closed, its final proceeds and costs, and the status and terms of the proposed tender offer; the filing reports these as post-quarter plans, not completed transactions.
- Final Natural Habitat sale proceeds, gain, and the effect on continuing operations. The MD&A says the sale occurred May 4, 2015, while the subsequent-events note says May 4, 2016; the filing text contains this apparent date inconsistency.
- Whether Gaia’s subscriber growth and higher marketing investment translate into improved margins and cash generation, given the wider quarterly operating loss.
- Cash requirements against the estimated $10.0 of 2016 capital expenditures, current liquidity, and any future borrowing or facility use.
- Potential impacts of transaction-related costs, legal contingencies, foreign-currency exposures, and the full valuation allowance on future results.