GAIAM, INC. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Gaiam operates direct-to-consumer, business, and solar segments; consolidated results include its 55.7%-owned Real Goods Solar subsidiary.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $73.3 million | $72.3 million | $178.9 million | $190.9 million |
| Gross profit / margin | $31.9 million / 43.5% | $33.2 million / 45.9% | $80.4 million / 44.9% | $94.3 million / 49.4% |
| Operating income (loss) | $(1.6) million | $1.1 million | $(10.4) million | $(0.6) million |
| Net income (loss) attributable to Gaiam | $(1.2) million | $0.9 million | $(6.4) million | $0.1 million |
| Basic and diluted EPS | $(0.05) | $0.04 | $(0.27) | $0.00 |
For the nine months, operating cash flow was $0.4 million, versus $2.0 million in 2010. Investing activities provided $3.3 million, primarily from cash acquired in the Alteris acquisition, note collection, and release of restricted cash; financing activities used $5.1 million. Cash at September 30 was $27.4 million, down from $28.8 million at year-end 2010.
At September 30, current assets were $125.9 million and current liabilities were $51.6 million. Total assets were $232.6 million and equity was $181.0 million. The balance sheet showed $1.1 million drawn on a subsidiary line of credit and $2.5 million of debt. Gaiam reported no borrowings under its own revolving facility, which allowed up to the lesser of $15 million or its borrowing base; $0.5 million was reserved for letters of credit.
Material changes versus prior periods
- Q3 revenue increased 1.4%, but nine-month revenue declined 6.3%. Solar revenue grew following the Alteris acquisition, while direct-to-consumer and business revenue fell.
- Gross margin declined in both comparison periods. The nine-month decrease reflected a higher cost-of-goods-sold ratio, while operating expenses also included $2.4 million of nine-month Alteris acquisition costs.
- Direct-to-consumer revenue fell $16.0 million for the nine months, primarily following reduced direct-response television advertising. Business revenue declined $7.9 million, reflecting retailer in-stock issues, the Borders liquidation, fewer As Seen On TV products, and disruption from a third-party fulfillment program.
- Solar revenue increased $11.8 million for the nine months, largely due to Alteris. Alteris contributed $15.5 million of revenue and $0.7 million of net loss from acquisition through September 30.
Outlook, commentary, risks, and unusual items
- No quantified earnings or revenue guidance was provided. Management said it believed available cash, expected operating cash generation, potential stock-sale proceeds, and borrowing capacity would fund operations in the short and long term, while noting needs could change with acquisitions, product development, and operating demands.
- Management cited the fourth quarter as typically strongest because of holiday spending and retailer fitness purchases. New initiatives included GaiamTV.com, a direct-response program, and an entertainment media aggregation role for a large retailer.
- Real Goods Solar’s Alteris acquisition had approximately $21.7 million of stated consideration. The company expected to pay approximately $7 million of Alteris debt, transaction fees, and related costs upon anticipated November 2011 closing, funded through credit, new financing, or cash. Alteris’s $7 million revolving facility matured November 30, 2011; Real Goods Solar hoped to amend or replace it.
- Gaiam committed up to $1.7 million in advances to Real Goods Solar through year-end 2011. If not repaid within one year, advances convert to a three-year subordinated loan at 10% interest.
- Goodwill and intangibles were tested for impairment with none recorded. The business goodwill reporting unit’s estimated fair value exceeded carrying value by only 3%, making the assessment sensitive to assumptions on growth, margins, discount rate, terminal value, and working capital.
- Other disclosed risks include economic and consumer trends, competition, brand reputation, inventory and fulfillment disruptions, shipping costs, foreign-currency and sourcing exposure, and reliance on key personnel and third parties. The filing reported no material market-risk exposure and no material change in risk factors. Disclosure controls were deemed effective; ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether Alteris’s anticipated closing and the associated approximately $7 million debt and transaction payments occurred as expected, and how they were financed.
- Whether Alteris’s credit facility was amended or replaced before its November 30, 2011 maturity, and the subsidiary’s capacity to meet debt and covenant obligations.
- Whether the deterioration in gross margin and operating results was temporary, and whether new digital, retail, and solar initiatives generated sustainable returns.
- Whether the key assumptions supporting the goodwill valuation remained reasonable, given the narrow 3% fair-value cushion.
- Cash conversion and working-capital trends, especially the reliance on receivable collections to produce positive operating cash flow.