GAIAM, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. The unaudited statements present continuing operations separately from the non-branded entertainment business and direct-response TV operations sold or discontinued in 2013.
Business context
Gaiam sells yoga, fitness and wellness products and media through business-to-business and direct-to-consumer channels. Direct-to-consumer includes Gaiam TV, online and catalog sales, and adventure travel. The company was evaluating a potential tax-free spin-off of its subscription business, including Gaiam TV.
Financial performance
Amounts below are in millions of dollars except per-share data; comparisons are with the corresponding 2013 period.
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | $41.3, up 14.2% | $111.3, up 6.3% |
| Gross profit / margin | $18.0 / 43.7% (prior: 40.7%) | $50.5 / 45.4% (prior: 41.8%) |
| Operating loss | $1.9 (prior: $2.6) | $7.6 (prior: $9.8) |
| Net income (loss) attributable to Gaiam | $(3.0), or $(0.12) per share (prior: $0.1 income) | $(7.5), or $(0.31) per share (prior: $7.7 income) |
| Cash from operating activities | Not presented quarterly | $(7.2) continuing operations; $(7.2) consolidated |
Quarterly direct-to-consumer revenue rose 38.3% to $17.7 million, while business-segment revenue increased 1.0% to $23.6 million. For the nine months, direct-to-consumer revenue rose 21.2% to $43.3 million; business revenue declined 1.4% to $68.0 million. Direct-to-consumer remained loss-making at the contribution level: $(3.2) million for the quarter and $(12.7) million for the nine months. Business contribution income was $1.3 million and $5.1 million, respectively.
Balance sheet, liquidity and cash flows
- Cash was $23.4 million at September 30, 2014, down from $32.2 million at December 31, 2013. Total current assets were $83.7 million and current liabilities $30.3 million.
- Total assets were $131.7 million; total equity was $101.4 million. The balance sheet reports no borrowings or debt balance.
- Nine-month consolidated operating cash use was $7.2 million; investing cash use was $3.0 million; financing provided $1.5 million, primarily from stock-option exercises. Cash decreased by $8.8 million.
- Management estimated 2014 capital expenditures, including investment in Gaiam TV, at approximately $6.0 million. Contractual obligations totaled $7.9 million, including $6.1 million of minimum distribution payments and $1.7 million of operating leases.
Management said available cash, anticipated operating cash flows, possible equity issuance and borrowing capacity should fund short- and long-term needs, while noting that requirements could change. No formal earnings guidance was provided.
Changes, outlook and notable items
- Revenue growth and improved gross margin did not translate into net income. Higher selling and operating expenses reflected investment in digital subscriptions and staffing for a planned spring 2015 yoga apparel launch.
- The prior-year nine-month results included an $18.4 million gain on investment sales, compared with $1.5 million in 2014. This was a major reason the prior period reported net income while 2014 reported a loss.
- Changes to media category-management contracts shifted certain arrangements to consignment and net revenue recognition. Management said this reduced revenue and cost of goods sold without significantly affecting gross profit, and expected a $1.4 million reduction in 2014 business-segment revenue.
- Management cited growth in Gaiam TV and adventure travel, but business revenue was affected by lower orders from its largest customer following a security breach at that customer. Planned investments included the SPRI commercial website, product expansion, digital offerings and the apparel launch.
- The proposed separation of the subscription unit was still under consideration; management said a completed spin-off could materially change subsequent operating results and liquidity needs. The company also expected its segment reporting to change as business groupings were finalized.
- Gaiam and Cinedigm were in arbitration over the post-sale working-capital adjustment. Cinedigm claimed approximately $12.9 million; Gaiam disputed the claim and asserted that Cinedigm owed it more than $5.0 million, plus a separate approximately $0.7 million transition-services claim. The outcome and ultimate liability could not be predicted.
- The company maintained a full valuation allowance against deferred tax assets and recorded no tax benefit on its 2014 losses. Management identified seasonality, with strongest revenue and net income typically in the fourth quarter. Management reported disclosure controls were effective and no material changes in internal control during the quarter.
Important facts for investors to verify
- Progress, timing, structure and separation costs of the proposed subscription-business spin-off, and its effects on liquidity and reported results.
- Outcome and potential financial impact of the Cinedigm arbitration and related counterclaims.
- Whether Gaiam TV and adventure-travel growth can improve direct-to-consumer contribution results, given continuing segment losses and increased operating investment.
- Effects of the largest customer’s security breach, category-management contract changes and planned apparel launch on sales, margins and working capital.
- Cash consumption, planned capital expenditures and the conversion of seasonal fourth-quarter activity into sustainable operating cash flow.