GAIAM, INC. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet amounts are as of March 31, 2015. The interim financial statements are unaudited. Gaiam sells yoga, fitness and wellness products and operates Gaiam TV, a subscription video service.
Financial performance and position
- Revenue: $37.638 million, essentially unchanged from $37.611 million in Q1 2014. Gaiam Brand revenue declined 2.2% to $34.532 million; Gaiam TV revenue grew 35.3% to $3.106 million.
- Profitability: Gross profit was $17.247 million, with a 45.8% gross margin versus 45.3%. Operating loss widened to $2.868 million from $2.478 million. Continuing-operations loss was $3.418 million; net loss attributable to Gaiam was $3.892 million, or $0.16 per diluted share, compared with $2.134 million, or $0.09 per share.
- Cash flow: Continuing-operations operating cash flow was $4.840 million, compared with cash use of $2.445 million in Q1 2014. Total operating cash flow was $4.656 million. Investing activities used $2.540 million; financing activities used $0.353 million. Cash increased $1.122 million to $16.894 million.
- Liquidity and obligations: Current assets were $67.392 million and current liabilities $34.051 million. Total liabilities presented were current liabilities; the filing’s balance sheet does not show a separate debt balance. Contractual obligations totaled $6.488 million, including $5.438 million of minimum distribution payments.
- Other balance-sheet items: Total assets were $129.589 million and total equity was $95.538 million. Accounts receivable fell to $15.677 million from $30.266 million at year-end 2014.
Changes and drivers
- Brand revenue was pressured by port delays, inventory rebalancing at its largest customer, and planned catalog reductions; the new apparel line partly offset the decline. The company plans to reduce catalog circulation as sales shift online.
- Gaiam TV growth reflected subscriber gains and its January 2015 launch on Comcast, while management said reduced spending to pursue segment profitability constrained growth.
- Selling and operating expense rose to $16.681 million, primarily from Gaiam TV marketing and staffing for apparel. Corporate, general and administrative expense increased to $3.434 million, partly due to a new executive officer.
- Q1 2015 included $0.501 million of interest and other expense, primarily foreign-currency losses; Q1 2014 included $0.438 million gain on investment sales. Discontinued operations recorded a $0.466 million loss in 2015, including legal costs tied to the GVE sale dispute; the comparable 2014 period had $0.026 million of income.
Outlook, significant matters and risks
- The board approved a proposed tax-free spin-off of Gaiam TV, which filed a Form 10 in February 2015. Completion remained subject to conditions, and the board could abandon the transaction. The company rescheduled its 2015 annual meeting to November 5 to accommodate anticipated spin-off timing.
- Management estimated 2015 capital expenditures, including Gaiam TV, of approximately $6.0 million. It stated that cash, expected operating cash flow, potential shelf-stock proceeds, tax savings and borrowing capacity should be sufficient for short- and long-term needs, while noting requirements could change.
- Gaiam reported a major arbitration dispute with Cinedigm concerning the GVE sale. Cinedigm seeks more than $30 million, including an alleged $12.9 million working-capital adjustment. Gaiam disputes the claims, says it believes Cinedigm owes it more than $8 million under the adjustment, and is also pursuing an approximately $0.7 million transition-services claim. Outcome is uncertain. Gaiam had accrued a $3.0 million litigation-related reserve in Q4 2014 and expected substantial legal fees that could continue into 2016.
- Management cited seasonality, with strongest revenue and net income typically in Q4. Disclosed risks include competition, consumer preferences, inventory, foreign exchange and sourcing costs, litigation, the proposed separation, financing, suppliers, fulfillment and information systems. The filing reported no material changes to risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether the proposed Gaiam TV spin-off closed, on what terms, and how separation costs and ongoing shared services affected each business.
- Whether Gaiam TV subscriber and revenue growth translated into improved contribution results; its Q1 contribution loss was $2.327 million versus $2.208 million a year earlier.
- How the Cinedigm arbitration resolved, the adequacy of the $3.0 million reserve, and the ultimate legal costs or recovery.
- Whether positive Q1 operating cash flow is repeatable, given the large cash contribution from accounts-receivable collections, and whether the estimated $6.0 million capex and contractual payments affect liquidity.