Gaiam, Inc. — Q1 2013 Form 10-Q
Business and period. Gaiam is a lifestyle media and products company selling through business and direct-to-consumer channels. This unaudited filing covers the three months ended March 31, 2013, compared with the same period in 2012. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial results and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $56.6 | $47.3; up 19.6% |
| Gross profit / margin | $32.2 / 56.9% | $27.1 / 57.3% |
| Operating income (loss) | $0.2 | $(1.3) |
| Net loss attributable to Gaiam | $(0.3); $(0.01) per share | $(1.2); $(0.05) per share |
| Operating cash flow | $6.2 | $(0.7) |
| Cash at period end | $7.1 | $9.9 at Dec. 31, 2012 |
Revenue growth came from the business segment, up 44.7% to $37.3 million, while direct-to-consumer revenue declined 10.3% to $19.4 million. Business-segment contribution income rose to $5.0 million from $0.5 million; direct-to-consumer contribution loss widened to $4.9 million from $1.8 million. Consolidated gross margin edged down 0.4 percentage point. Selling and operating costs were 49.8% of revenue versus 51.1%; corporate, general and administrative costs increased to 6.8% from 5.4%.
At March 31, 2013, total assets were $177.8 million and total current assets were $108.9 million, against current liabilities of $58.5 million. Revolver borrowings were $8.3 million, down from $16.2 million at year-end, at an average annual rate of about 3.07%; $11.1 million was reserved for letters of credit and other reserves. The credit facility has a stated maximum of $35 million, reduced to $26 million from April 1 through June 30, subject to borrowing-base limitations. Shareholders’ equity was $119.3 million.
Changes, outlook and risks
- Management attributed business-segment growth to approximately 21% internal revenue growth, strong fitness and media sales, and the addition of Gaiam Vivendi Entertainment (GVE), acquired in March 2012. GVE added $6.2 million of year-over-year revenue and margin; the prior-year quarter included $1.7 million of acquisition costs.
- Direct-to-consumer sales weakened, primarily due to lower direct-response marketing sales. Management was repositioning ecommerce and catalog offerings toward apparel and fitness and continued investment in Gaiam TV and digital subscriptions. Category and channel expansion of the Gaiam brand was anticipated to begin in late 2013.
- Management expected about $0.3 million of additional brand-repositioning costs in Q2 2013, after which corporate costs were expected to track more closely with the prior year. Estimated 2013 capital expenditures were about $2.3 million. No specific revenue or earnings guidance was provided. Sales and earnings are seasonal, with the fourth quarter typically strongest.
- Operating cash flow improvement reflected, among other items, a $13.8 million reduction in accounts receivable, partly offset by an $11.4 million reduction in participations payable. Cash declined by $2.7 million after $7.9 million of revolver repayment. Management believed available liquidity and potential funding sources would be sufficient for short- and long-term operations, while noting that needs could change.
- Gaiam held about 37.4% of Real Goods Solar (RSOL) and had two unsecured, subordinated loans to RSOL totaling $2.7 million at 10% interest; maturities were extended to April 2014. Gaiam’s equity investment carrying value was zero, so it recognized no share of RSOL’s Q1 2013 loss. The loans and investment involve RSOL credit and valuation risk.
- Contractual commitments reported were $14.9 million, including $12.2 million of media distribution advances. Other stated risks include competition, consumer trends, brand reputation, merchandise supply and returns, fulfillment and third-party service dependence, shipping costs, interest rates, foreign exchange, and founder control. A 1-percentage-point rate increase was estimated to raise annual interest expense by about $0.1 million at constant debt. The filing reported no material changes to risk factors, no believed material adverse effect from ordinary-course legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether business-segment growth and GVE synergies can offset continued direct-to-consumer weakness and the segment’s widening contribution loss.
- Whether working-capital-driven operating cash flow is repeatable, given the large quarterly movements in receivables and participations payable.
- Revolver availability under borrowing-base limits and seasonal capacity reduction, as well as the repayment and covenant terms.
- Collectability and recovery prospects for the $2.7 million RSOL loans, and the value and liquidity of Gaiam’s RSOL shareholding.
- Execution and cost of the brand repositioning, digital investments, and media distribution commitments.