GAIAM, INC. — Second-Quarter 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; unaudited. Gaiam is a lifestyle media and products company operating in direct-to-consumer and business segments.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $44.5 million | $45.4 million | $101.2 million | $92.8 million |
| Gross profit / margin | $23.6 million / 53.1% | $28.0 million / 61.6% | $55.8 million / 55.2% | $55.1 million / 59.4% |
| Operating loss | $3.9 million | $2.0 million | $3.7 million | $3.3 million |
| Net income (loss) attributable to Gaiam | $7.8 million | $(2.1) million | $7.6 million | $(3.3) million |
| EPS, basic and diluted | $0.35 | $(0.09) | $0.33 | $(0.14) |
All figures are in U.S. dollars; financial-statement amounts are rounded from thousands. Net income in 2013 was driven by a $16.4 million gain on the sale of Real Goods Solar (RSOL) shares; operations remained loss-making. The Q2 revenue decline reflected unusually strong prior-year direct-response television (DRTV) sales. Excluding DRTV, revenue rose 10.8% in Q2 and 23.2% for the first half, including first-half internal growth of 14.7%.
- Segments: Q2 business-segment revenue increased 2.6% to $29.3 million; direct-to-consumer revenue including DRTV fell 9.8% to $15.3 million. Excluding DRTV, direct-to-consumer revenue rose 37.8% to $11.9 million. For the first half, business revenue grew 22.6% to $66.6 million, partly reflecting the Vivendi acquisition; direct-to-consumer revenue including DRTV declined 10.0% to $34.6 million.
- Cash flow: First-half operating cash use was $2.0 million, versus $17.4 million provided in 2012; the prior-year comparison included $18.7 million of acquired Vivendi working capital. Investing activities provided $14.2 million, primarily from RSOL share-sale proceeds; financing used $4.3 million, mainly to repay the revolving line. Cash increased $7.6 million to $17.5 million.
- Liquidity and debt: June 30 cash was $17.5 million, current assets $119.7 million, and current liabilities $56.6 million. Revolver borrowings were $12.0 million at an average rate of approximately 3.35%; the facility is subject to borrowing-base limits and had $9.4 million reserved for letters of credit and other reserves. The facility matures July 30, 2015, subject to the agreement’s terms.
- Balance sheet: Total assets were $183.8 million, compared with $193.9 million at year-end 2012. Total equity was $127.3 million. Participations payable declined to $17.8 million from $28.0 million.
Changes, outlook, and risks
Gross margin contracted in both comparison periods. Management attributed Q2 cost-of-goods pressure in the business segment to a sales mix shift toward higher-cost accessories, and in direct-to-consumer to lower DRTV sales, which carry lower associated costs. Lower television advertising reduced selling and operating expenses as a percentage of revenue, while investments in digital subscriptions and brand positioning increased.
Gaiam sold 6,017,500 RSOL shares on May 28, receiving approximately $16.4 million in net proceeds and recognizing a corresponding gain. It retained approximately 13.4% of RSOL at quarter-end and no longer had significant influence, changing its accounting from the equity method to the cost method. Gaiam also held two subordinated RSOL loans totaling $2.6 million, bearing 10% interest and due in April 2014.
No formal earnings or revenue guidance was provided. Management estimated 2013 capital expenditures of approximately $2.3 million and said available cash, expected operating cash, possible share-sale proceeds, remaining RSOL shares, tax attributes, and borrowing capacity should fund operations, while cautioning that needs may change. Plans included ramping catalog circulation in Q4, launching a fitness-only catalog and a Firm-brand infomercial, and continuing investment in Gaiam TV. Sales are seasonal, with the strongest revenue and net income generally in Q4.
Key disclosed risks include competition, economic conditions, consumer and product trends, brand reputation, merchandise supply and returns, shipping costs, reliance on centralized customer service and fulfillment, information-system security, acquisitions, and founder control. A 1-percentage-point increase in applicable borrowing rates was estimated to raise annual interest expense by approximately $0.1 million at constant debt. Management reported effective disclosure controls and no material change in internal controls; it reported no material change in risk factors and no known legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- How much of reported earnings is attributable to the nonrecurring RSOL sale gain, and whether core operations can reach profitability.
- Whether revenue growth excluding DRTV is sustainable and how product mix affects gross margins.
- Drivers of negative operating cash flow, including working-capital movements and payments of participations payable.
- Revolver availability after borrowing-base limits, letters of credit, reserves, covenants, and seasonal facility limits.
- Collectability and repayment of the $2.6 million RSOL loans, and the value and liquidity of Gaiam’s remaining RSOL investment.