GAIAM, INC. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Interim financial statements are unaudited. Gaiam is a lifestyle media company with direct-to-consumer and business segments.
Financial performance and liquidity
| Metric | Q1 2012 | Comparison |
|---|---|---|
| Revenue | $47.3 million | Down 13.6% from reported Q1 2011; up 26.6% from pro forma Q1 2011 excluding Real Goods Solar |
| Gross profit / margin | $27.1 million / 57.3% | Pro forma Q1 2011 margin: 55.7%; reported Q1 2011: 47.2% |
| Operating loss | $1.3 million | Versus $1.6 million pro forma loss and $1.6 million reported loss in Q1 2011 |
| Net loss attributable to Gaiam | $1.2 million; $0.05 per share | Versus $1.0 million reported loss and $1.0 million pro forma loss in Q1 2011 |
| Operating cash flow | $(0.7) million | Versus $3.2 million provided in Q1 2011 |
| Cash | $13.8 million at March 31 | Down from $14.5 million at December 31, 2011 |
| Debt and credit line | $19.3 million seller note and $14.0 million revolver | $33.3 million combined; revolver had $0.5 million reserved for letters of credit |
| Current assets / current liabilities | $120.7 million / $72.5 million | At March 31, 2012 |
Investing activities used $14.0 million, mainly for the Vivendi Entertainment acquisition; financing provided $14.0 million from revolver borrowings. The operating cash outflow reflected, among other items, lower payables, higher inventory, and the net loss, partly offset by collections of receivables. Gaiam reported a $0.7 million loss from its equity-method investment in Real Goods Solar.
Material changes and acquisition
- Reported revenue fell year over year partly because Real Goods Solar was deconsolidated on December 31, 2011. On a pro forma basis excluding Solar from the prior-year period, revenue increased $9.9 million, or 26.6%.
- Business-segment revenue rose 32.6% to $25.8 million, driven chiefly by Gaiam’s media aggregator role with Target and improved retailer sales. Direct-to-consumer revenue increased 20.1% to $21.5 million, primarily from direct-response marketing.
- On March 28, Gaiam acquired Vivendi Entertainment for provisional consideration of approximately $32.7 million: $13.4 million cash and a $19.3 million non-interest-bearing note. The note is payable through collections of pre-closing receivables, with any remaining balance due 90 days after closing. The purchase-price allocation and working-capital amount remained provisional; Gaiam expected to complete the working-capital review by early June.
- The acquisition added distribution rights to more than 3,400 titles. Management said the combined platform would have rights to over 8,000 titles and expected cost savings in replication, fulfillment, post-production, and digital distribution. Only $0.3 million of post-acquisition revenue and $0.1 million of net income were included in Q1 results.
- Gaiam reported $1.7 million in acquisition-related costs. Management’s non-GAAP presentation excluded those costs and the equity-method investment loss, showing $0.6 million adjusted net income, or $0.03 per share; these measures are not GAAP results.
Outlook, risks, and other disclosures
- No specific revenue or earnings guidance was provided. Management planned to integrate Vivendi, pursue new distribution and licensing contracts, expand digital-provider sales, and develop Gaiam TV and new consumer products. Management described early sales of Jillian Michaels’ Body Revolution as strong.
- Management expected seasonal strength in the fourth quarter, associated with holiday spending and retailer fitness purchases. It said available cash, expected operating cash generation, borrowing capacity, and potential stock issuance should fund near- and long-term needs, while noting that needs could change.
- The existing revolver expires November 16, 2012, is capped at the lesser of $15 million or the borrowing base, and bears interest at prime subject to a 4.25% floor. Gaiam said it was in covenant compliance and was negotiating a larger replacement facility, expected by June 30, 2012.
- Risks include competition, economic conditions, consumer trends, pricing and brand reputation, acquisition integration, merchandise supply and returns, fulfillment and third-party service reliance, shipping costs, information systems, founder control, and interest-rate and foreign-currency exposure. Management said unfavorable interest-rate changes could materially affect results or cash flows.
- Operating lease commitments totaled $4.4 million. The company said routine legal proceedings were not expected to have a material adverse effect; it reported no material change in risk factors. Disclosure controls were assessed as effective, with no material internal-control changes during the quarter.
Important facts for investors to verify
- Final Vivendi working-capital adjustment, purchase-price allocation, identifiable intangibles, and any resulting goodwill.
- Repayment and cash-collection mechanics for the $19.3 million seller note, and refinancing of the revolver before its expiration.
- Whether management’s anticipated acquisition synergies and growth in digital and retail distribution are realized, given the limited post-acquisition results included in Q1.
- Comparable-period performance: reported Q1 2011 included consolidated Real Goods Solar, while pro forma comparisons remove it; assess the basis used for any year-over-year comparison.
- Cash conversion and working-capital trends, including receivables, inventory, advances, and payables, alongside continued operating losses.