GAIAM, INC. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015. Unaudited. Unless noted otherwise, amounts below are in millions of dollars.
Business context
Gaiam sells yoga, fitness and wellness products through retail and online channels, and operates Gaiam TV, a subscription video service. Results are reported in Gaiam Brand and Gaiam TV segments. The company was pursuing a proposed tax-free spin-off of Gaiam TV; completion remained subject to conditions and could be abandoned by the board.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $41.1 | $32.5 | $78.8 | $70.1 |
| Gross profit / margin | $18.2 / 44.2% | $15.5 / 47.7% | $35.5 / 45.0% | $32.5 / 46.4% |
| Operating income (loss) | $0.02 | ($3.2) | ($2.9) | ($5.6) |
| Net income (loss) from continuing operations | $0.01 | ($2.2) | ($3.4) | ($4.3) |
| Net loss attributable to Gaiam | ($1.1) | ($2.4) | ($5.0) | ($4.5) |
| Net loss per share | ($0.05) | ($0.10) | ($0.20) | ($0.19) |
- Segment trends: Q2 Gaiam Brand revenue rose 26.1% to $37.9 million; Gaiam TV revenue rose 36.0% to $3.3 million. For the six months, revenue increased 10.8% and 35.7%, respectively. Gaiam Brand contribution income was $2.1 million in Q2 and $2.1 million for the first half; Gaiam TV recorded contribution losses of $1.1 million and $3.4 million, respectively.
- Cash flow: Six-month operating cash flow was $7.5 million, including $8.8 million from continuing operations and ($1.3) million from discontinued operations. Investing used $4.2 million; financing used $0.3 million. Cash increased $2.7 million to $18.4 million.
- Balance sheet: At June 30, cash was $18.4 million, current assets $71.5 million, current liabilities $38.5 million, and total assets $133.1 million. The balance sheet lists no borrowings. A $5.5 million revolving facility was entered into after quarter-end; it was secured by the company’s principal-office property and guaranteed by Gaiam and Gaiam TV. No amount was outstanding at June 30.
- Costs and obligations: Management estimated 2015 capital expenditures, including Gaiam TV, at approximately $7.0 million. Contractual operating lease and minimum distribution commitments totaled $5.4 million, mostly due within three years.
Material changes versus prior period
- Q2 revenue grew, but gross margin declined 3.5 percentage points; first-half gross margin declined 1.4 points. Management attributed the pressure to lower average margins on the new apparel line.
- Operating results improved substantially year over year, reflecting higher revenue and lower selling and operating expense, but the first-half operating loss persisted. Q2 net loss narrowed, while the first-half net loss widened, partly because 2014 included investment-sale gains ($1.5 million for the first half) that did not recur.
- First-half continuing-operations cash flow improved from a $2.1 million use to $8.8 million provided, primarily due to collections of receivables and lower payments of participations payable and other current liabilities, partly offset by higher accounts-payable payments.
- Discontinued operations generated a $1.6 million loss in the first half of 2015, primarily from legal costs related to the Cinedigm dispute; the comparable 2014 period recorded $0.03 million of income.
Outlook, risks and unusual items
- Management described growth plans in branded products, digital offerings and international Gaiam TV expansion, but provided no quantified revenue or earnings guidance. The stated goal of Gaiam TV profitability before June 30, 2015 was not reflected in reported segment results: the segment recorded losses in both Q2 and the first half.
- The proposed spin-off could change Gaiam’s funding needs: if completed, Gaiam would no longer fund Gaiam TV’s operating losses or capital expenditures. The filing cautions that the separation was not assured.
- Cinedigm sought more than $30 million in arbitration, including a disputed working-capital adjustment and other claims. Gaiam disputed the claims, asserted that Cinedigm owed it more than $8 million under the working-capital mechanism (recorded in other assets), and pursued a separate approximately $0.7 million claim. The outcome and timing were uncertain. Gaiam had accrued a $3.0 million litigation reserve in 2014; 2015 dispute costs were recorded in discontinued operations.
- Other risk factors include competition, consumer trends, inventory and supplier exposure, shipping costs, foreign exchange, legal disputes, reliance on third parties and potential difficulty obtaining financing. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether and when the Gaiam TV spin-off is completed, and the resulting allocation of assets, liabilities, costs and services.
- Progress toward Gaiam TV profitability and whether subscriber and revenue growth can continue without increased spending.
- The status, potential exposure and collectability of the Cinedigm arbitration claims and the disputed receivable recorded in other assets.
- Whether apparel growth can offset its lower margins, and the effect of reduced catalog activity and customer inventory rebalancing.
- Use and terms of the post-quarter $5.5 million secured revolving credit line, along with actual capital spending versus the $7.0 million estimate.