Gaiam, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparative figures are for the same periods in 2013. The interim financial statements are unaudited. Gaiam sells fitness, wellness and media products through business-to-business and direct-to-consumer channels, including its Gaiam TV subscription service. The 2013 sale of its non-branded entertainment business and discontinuation of direct-response TV are presented as discontinued operations.
Key financial results
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Revenue | $32.5m | $31.9m | $70.1m | $68.6m |
| Gross profit / margin | $15.5m / 47.7% | $13.3m / 41.7% | $32.5m / 46.4% | $29.1m / 42.4% |
| Operating loss | $3.2m | $4.0m | $5.6m | $7.2m |
| Net income (loss) attributable to Gaiam | $(2.4)m | $7.8m | $(4.5)m | $7.6m |
| Basic and diluted EPS | $(0.10) | $0.35 | $(0.19) | $0.33 |
- Segment revenue: Q2 business revenue was $20.0m, down 1.2%; direct-to-consumer revenue was $12.4m, up 6.8%. H1 business revenue was $44.5m, down 2.6%; direct-to-consumer revenue was $25.6m, up 11.7%.
- Cash and liquidity: Cash was $30.9m at June 30, 2014, versus $32.2m at year-end 2013. Current assets were $88.4m and current liabilities $29.8m. No debt balance is presented on the balance sheet; the filing does not provide a clear current borrowing balance.
- Cash flow, H1: Operating cash flow was $(2.9)m, including $(2.1)m from continuing operations and $(0.8)m from discontinued operations. Investing activities provided $0.2m; financing activities provided $1.2m. Cash declined $1.4m.
- Other balance-sheet items: Total assets were $132.6m and total equity $102.8m. Contractual obligations totaled $9.2m, comprising $2.2m of operating leases and $7.0m of media distribution advances.
Changes versus the prior period
- Revenue rose modestly, while gross margin improved. Management attributed margin improvement to product mix, the shift in the media category-management business from a licensed inventory model to a distribution model, and higher subscription sales. The model change reduces reported revenue without affecting gross profit.
- Operating losses narrowed, but the company remained loss-making from continuing operations. Higher selling and operating costs reflected investment in digital subscriptions and staffing for the planned apparel launch.
- Reported earnings deteriorated sharply from 2013 because the prior-year periods included a $16.4m gain on Real Goods Solar stock sales. H1 2014 included $1.5m of investment-sale gains. Gaiam recorded no tax benefit on its 2014 losses because it maintained a full valuation allowance on deferred tax assets.
- Business-segment revenue faced declines at the largest retailer and from the distribution-model transition. Direct-to-consumer growth was driven in part by Gaiam TV subscriptions; some travel revenue shifted to Q3.
Outlook, risks and unusual items
- The board approved a potential separation of the subscription business from the Gaiam-branded business, expected to take the form of a tax-free spin-off. The transaction was not completed; management said it could materially change future operations and liquidity needs. Q2 included $0.6m of legal and audit costs related to the potential separation.
- Management estimated 2014 capital expenditures of approximately $6.0m, including investment in Gaiam TV. It planned further digital, e-commerce and product investment and anticipated launching an apparel line in spring 2015. No earnings or revenue guidance was provided.
- Management cited seasonal strength in Q4. It believed available cash, operating cash generation, potential equity issuance and borrowing capacity would be sufficient for short- and long-term needs, while noting capital needs may change. The company had a shelf registration for 5m Class A shares, with none issued under it as of the filing.
- Risks include competition, consumer trends, retailer and supplier dependence, merchandise returns and inventory, fulfillment and customer-service concentration, shipping costs, foreign-currency exposure, legal and regulatory matters, and execution of new initiatives or the proposed separation. Management reported no material market-risk exposure at June 30 and no material changes to previously disclosed risk factors.
- The $51.7m sale of GVE in October 2013 included a post-closing working-capital adjustment that remained under negotiation. The company said it did not believe its ordinary-course legal proceedings would have a material adverse effect.
Investor facts to verify
- Whether the proposed subscription-business spin-off proceeds, on what terms, and with what effect on each company’s liquidity and costs.
- Whether direct-to-consumer growth, particularly Gaiam TV, can offset business-channel pressure and support operating profitability.
- Whether continuing operations can generate positive operating cash flow, given H1 cash use and planned investment.
- The final GVE working-capital adjustment and any remaining obligations or cash flows from discontinued operations.
- How much of reported earnings in comparable periods reflects investment-sale gains rather than recurring operations.