Table of Contents

 

 

 

**UnitedStates**

**Securitiesand Exchange Commission**

**Washington, D.C. 20549**

 

#### **Form 10-Q**

#### ** **

| **x**                                                       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE  ACT OF 1934**  |
|-------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|
|                                                        |
| **For the quarterly period ended  September 30, 2009** |
|                                                        |
| **OR**                                                      |
|                                                        |
| **o**                                                       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND  EXCHANGE ACT OF 1934** |

 

**Commission File Number 0-27517**

 

**GAIAM, INC.**

(Exact name of registrant as specified in its charter)

 

| **COLORADO**                    | ** ** | **84-1113527**      |
|---------------------------------|------------|---------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer    |
| incorporation or organization)  |       | Identification No.) |

 

**833 WEST SOUTH BOULDER ROAD,**

**LOUISVILLE, COLORADO 80027**

(Address of principal executive offices)

 

**(303) 222-3600**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities and Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days. YES x NO o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  YES o NO o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definitions of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the ExchangeAct.:

 

| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  YES o NO x

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date:

 
| **Class**                                    | ** ** | **Outstanding at November 5, 2009** |
|----------------------------------------------|------------|---------------------------------------------------------|
| Class A Common Stock ($.0001 par value) |       | 17,700,098                                              |
| Class B Common Stock ($.0001 par value) |       |   5,400,000                                        |

 

 

 

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**GAIAM, INC.**

 

**FORM 10-Q**

 

**INDEX**

 
| **PART I.  FINANCIAL INFORMATION** |                                                                                                              | 3          |
|-----------------------------------------|-------------------------------------------------------------------------------------------------------------------|------------|
|                                    |                                                                                                              |       |   |
| **Item 1.**                             | **Financial Statements  (Unaudited):**                                                                            |       | 3 |
|                                    | Condensed  consolidated balance sheets at September 30, 2009 and December 31,  2008                     |       | 4 |
|                                    | Condensed  consolidated statements of operations for the Three and Nine Months Ended  September 30, 2009 and 2008 |       | 5 |
|                                    | Condensed  consolidated statements of cash flows for the Nine Months Ended  September 30, 2009 and 2008 |       | 6 |
|                                    | Notes  to interim condensed consolidated financial statements                                                     |       | 7 |
| ** **                              | ** **                                                                                                        | ** ** | ** ** |
| **Item 2.**                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       |       | 11 |
| ** **                              | ** **                                                                                                        | ** ** | ** ** |
| **Item 3.**                             | Quantitative  and Qualitative Disclosures About Market Risk                                                       |       | 15 |
| ** **                              | ** **                                                                                                        | ** ** | ** ** |
| **Item 4.**                             | Controls and  Procedures                                                                                          |       | 15 |
|                                    |                                                                                                              |       |   |
| **PART II.  OTHER INFORMATION**    |                                                                                                              | 16         |
| ** **                              | ** **                                                                                                        | ** ** | ** ** |
| **Item 1.**                             | Legal Proceedings                                                                                                 |       | 16 |
| ** **                              | ** **                                                                                                        | ** ** | ** ** |
| **Item 1A.**                            | Risk Factors                                                                                                      |       | 16 |
| ** **                              | ** **                                                                                                        | ** ** | ** ** |
| **Item 2.**                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                                      |       | 16 |
| ** **                              | ** **                                                                                                        | ** ** | ** ** |
| **Item 3**                              | Defaults Upon  Senior Securities                                                                                  |       | 16 |
| ** **                              | ** **                                                                                                        | ** ** | ** ** |
| **Item 4.**                             | Submission of  Matters to a Vote of Security Holders                                                              |       | 16 |
| ** **                              | ** **                                                                                                        | ** ** | ** ** |
| **Item 5.**                             | Other Information                                                                                                 |       | 16 |
| ** **                              | ** **                                                                                                        | ** ** | ** ** |
| **Item 6.**                             | Exhibits                                                                                                          |       | 16 |
| ** **                              | ** **                                                                                                        | ** ** | ** ** |
|                                    | SIGNATURES                                                                                                        |       | 17 |

 

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

# **Thisreport may contain forward-looking statements that involve risks anduncertainties. The words “anticipate,” “believe,” “plan,” “estimate,” “expect,”“strive,” “future,” “intend” and similar expressions are intended to identifysuch forward-looking statements. Our actual results could differ materiallyfrom the results anticipated in these forward-looking statements as a result ofcertain factors set forth under “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” “Quantitative and QualitativeDisclosures about Market Risk” and elsewhere in this report. Risks anduncertainties that could cause actual results to differ include, withoutlimitation, general economic conditions, competition, loss of key personnel,pricing, brand reputation, consumer trends, acquisitions, new initiativesundertaken by us, security and information systems, legal liability for websitecontent, merchandise supply problems, failure of third parties to provideadequate service, our reliance on centralized customer service, overstocks andmerchandise returns, our reliance on a centralized fulfillment center,increases in postage and shipping costs, E-commerce trends, future Internetrelated taxes, our founder’s control of us, fluctuations in quarterly operatingresults, customer interest in our products, the effect of government regulationand other risks and uncertainties included in our filings with the Securitiesand Exchange Commission. We caution you that no forward-looking statement is aguarantee of future performance, and you should not place undue reliance onthese forward-looking statements which reflect our view only as of the date ofthis report. We undertake no obligation to update any forward-lookinginformation.**

# ** **

# **PART I.**              FINANCIAL INFORMATION

# ** **

**Item 1.****                    ****FinancialStatements (Unaudited)**

 

# **UnauditedInterim Condensed Consolidated Financial Statements**

# ** **

Wehave prepared our unaudited interim condensed consolidated financial statementsincluded herein pursuant to the rules and regulations of the United StatesSecurities and Exchange Commission. Certain information and note disclosuresnormally included in annual financial statements prepared in accordance withaccounting principles generally accepted in the United States have beencondensed or omitted pursuant to these rules and regulations, although webelieve that the disclosures made are adequate to make the information notmisleading. In our opinion, the unaudited interim condensed financialstatements contain all adjustments (consisting of only normal recurringadjustments) necessary to present fairly, in all material respects, ourconsolidated financial position as of September 30, 2009, the interimresults of operations for the three and nine months ended September 30,2009 and 2008, and cash flows for the nine months ended September 30, 2009and 2008. These interim statements have not been audited. The balance sheet asof December 31, 2008 was derived from our audited consolidated financialstatements included in our annual report on Form 10-K. The interimcondensed consolidated financial statements contained herein should be read inconjunction with our audited financial statements, including the notes thereto,for the year ended December 31, 2008.

 

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**GAIAM, INC.**

**Condensed consolidated balance sheets**

 
| ** **                                                                                                                                                                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(in thousands, except share and per share data)**                                                                                                           | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                                       | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                       |       |                   |       |                  |       |
| Current assets:                                                                                                                                                                                  |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                        |       | $                      | 44,437     |                  | $          | 31,965 |   |
| Accounts receivable, net                                                                                                                                                                         |       | 31,383                 |       | 33,664                |       |
| Inventory, less allowances                                                                                                                                                                       |       | 26,011                 |       | 40,782                |       |
| Deferred advertising costs                                                                                                                                                                       |       | 3,496                  |       | 2,578                 |       |
| Receivable and deferred  tax assets                                                                                                                                                              |       | 14,090                 |       | 15,448                |       |
| Other current assets                                                                                                                                                                             |       | 4,528                  |       | 4,795                 |       |
| Total current assets                                                                                                                                                                             |       | 123,945                |       | 129,232               |       |
|                                                                                                                                                                                             |       |                   |       |                  |       |
| Property and equipment,  net                                                                                                                                                                     |       | 28,341                 |       | 27,381                |       |
| Media library, net                                                                                                                                                                               |       | 12,541                 |       | 12,102                |       |
| Deferred tax assets, net                                                                                                                                                                         |       | 7,184                  |       | 6,076                 |       |
| Goodwill                                                                                                                                                                                         |       | 24,166                 |       | 23,180                |       |
| Other intangibles, net                                                                                                                                                                           |       | 714                    |       | 880                   |       |
| Notes receivable and other  assets                                                                                                                                                               |       | 3,193                  |       | 3,247                 |       |
| Total assets                                                                                                                                                                                     |       | $                      | 200,084    |                  | $          | 202,098 |   |
|                                                                                                                                                                                             |       |                   |       |                  |       |
| **LIABILITIES AND EQUITY**                                                                                                                                                                       |       |                   |       |                  |       |
| Current liabilities:                                                                                                                                                                             |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                 |       | $                      | 28,650     |                  | $          | 26,567 |   |
| Accrued liabilities                                                                                                                                                                              |       | 7,948                  |       | 6,885                 |       |
| Total current liabilities                                                                                                                                                                        |       | 36,598                 |       | 33,452                |       |
|                                                                                                                                                                                             |       |                   |       |                  |       |
| Commitments and  contingencies                                                                                                                                                                   |       |                   |       |                  |       |
|                                                                                                                                                                                             |       |                   |       |                  |       |
| Equity:                                                                                                                                                                                          |       |                   |       |                  |       |
| Gaiam, Inc.  shareholders’ equity:                                                                                                                                                     |       |                   |       |                  |       |
| Class A common stock,  $.0001 par value, 150,000,000 shares authorized, 17,700,098 and 18,541,201  shares issued and outstanding at September 30, 2009 and December 31, 2008,  respectively |       | 2                      |       | 2                     |       |
| Class B common stock,  $.0001 par value, 50,000,000 shares authorized, 5,400,000 shares issued and  outstanding at September 30, 2009 and December 31, 2008                       |       | 1                      |       | 1                     |       |
| Additional paid-in capital                                                                                                                                                                       |       | 162,445                |       | 163,652               |       |
| Accumulated other  comprehensive income                                                                                                                                                          |       | 88                     |       | 88                    |       |
| Accumulated deficit                                                                                                                                                                              |       | (14,009                | )          | (10,275               | )          |
| Total Gaiam, Inc.  shareholders’ equity                                                                                                                                                |       | 148,527                |       | 153,468               |       |
| Noncontrolling interest                                                                                                                                                                          |       | 14,959                 |       | 15,178                |       |
| Total equity                                                                                                                                                                                     |       | 163,486                |       | 168,646               |       |
| Total liabilities and  equity                                                                                                                                                                    |       | $                      | 200,084    |                  | $          | 202,098 |   |

 

See accompanying notes tothe interim condensed consolidated financial statements.

 

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**GAIAM, INC.**

**Condensed consolidated statements ofoperations**

 
| ** **                                                                         | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **(in thousands, except per share data)**                 | ** ** | **2009**                                                               | ** ** | **2008**                                                              | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**                                                        | ** ** | **(unaudited)**                                                       | ** ** |
| Net revenue                                                                        |       | $                                                                      | 74,439     |                                                                  | $          | 60,285 |   | $ | 190,837 |   | $ | 182,675 |   |
| Cost of goods sold                                                                 |       | 38,628                                                                 |       | 26,440                                                                |       | 92,594 |   | 71,699 |   |
| Gross profit                                                                       |       | 35,811                                                                 |       | 33,845                                                                |       | 98,243 |   | 110,976 |   |
|                                                                               |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Expenses:                                                                          |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Selling and operating                                                              |       | 31,641                                                                 |       | 34,049                                                                |       | 96,269 |   | 102,686 |   |
| Corporate, general and  administration                                             |       | 3,225                                                                  |       | 3,126                                                                 |       | 9,431 |   | 9,601 |   |
| Other general income and  expense                                                  |       | —                                                                 |       | 13,947                                                                |       | — |   | 40,655 |   |
| Total expenses                                                                     |       | 34,866                                                                 |       | 51,122                                                                |       | 105,700 |   | 152,942 |   |
|                                                                               |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income (loss) from  operations                                                     |       | 945                                                                    |       | (17,277                                                               | )          | (7,457 | ) | (41,966 | ) |
|                                                                               |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Gain from issuance of  subsidiary stock                                            |       | —                                                                 |       | 98                                                                    |       | — |   | 31,368 |   |
| Interest and other income                                                          |       | 86                                                                     |       | 257                                                                   |       | 221 |   | 995 |   |
|                                                                               |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income (loss) before  income taxes and noncontrolling interest                     |       | 1,031                                                                  |       | (16,922                                                               | )          | (7,236 | ) | (9,603 | ) |
|                                                                               |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Income tax expense  (benefit)                                                      |       | 388                                                                    |       | (6,922                                                                | )          | (2,699 | ) | (4,031 | ) |
|                                                                               |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net income (loss)                                                                  |       | 643                                                                    |       | (10,000                                                               | )          | (4,537 | ) | (5,572 | ) |
|                                                                               |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net (income) loss  attributable to noncontrolling interest                         |       | (278                                                                   | )          | (115                                                                  | )          | 803 |   | 251 |   |
|                                                                               |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net income (loss)  attributable to Gaiam, Inc.                                |       | $                                                                      | 365        |                                                                  | $          | (10,115 | ) | $ | (3,734 | ) | $ | (5,321 | ) |
|                                                                               |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net income (loss) per  share attributable to Gaiam, Inc. common shareholders: |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic                                                                              |       | $                                                                      | 0.02       |                                                                  | $          | (0.42 | ) | $ | (0.16 | ) | $ | (0.22 | ) |
| Diluted                                                                            |       | $                                                                      | 0.02       |                                                                  | $          | (0.42 | ) | $ | (0.16 | ) | $ | (0.22 | ) |
| Weighted-average shares  outstanding:                                              |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic                                                                              |       | 23,085                                                                 |       | 24,020                                                                |       | 23,370 |   | 24,611 |   |
| Diluted                                                                            |       | 23,167                                                                 |       | 24,020                                                                |       | 23,370 |   | 24,611 |   |

 

See accompanying notes tothe interim condensed consolidated financial statements.

 

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**GAIAM, INC.**

**Condensed consolidated statements ofcash flows**

 
| ** **                                                                                      | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands)**                                                                         | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| ** **                                                                                      | ** ** | **(unaudited)**                                   | ** ** |
| **Operating activities**                                                                   | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net loss                                                                                        |       | $                                                 | (3,734     | ) | $ | (5,321 | ) |
| Adjustments to reconcile  net loss to net cash provided by (used in) operating activities: |       |                                              |       |   |   |
| Depreciation                                                                                    |       | 2,400                                             |       | 2,373 |   |
| Amortization                                                                                    |       | 3,083                                             |       | 4,601 |   |
| Noncontrolling interest in  consolidated subsidiaries, net of tax                               |       | (803                                              | )          | (251 | ) |
| Net gain on disposition of  investments and property                                            |       | —                                            |       | (579 | ) |
| Share-based compensation  expense                                                               |       | 1,421                                             |       | 1,063 |   |
| Deferred and stock option  income tax benefit                                                   |       | (2,747                                            | )          | (14,726 | ) |
| Gain on issuance of  subsidiary stock, net of tax                                               |       | —                                            |       | (19,254 | ) |
| Impairment loss                                                                                 |       | —                                            |       | 37,785 |   |
| Changes in operating  assets and liabilities, net of effects from acquisitions:                 |       |                                              |       |   |   |
| Accounts receivable, net                                                                        |       | 2,295                                             |       | 4,637 |   |
| Inventory, net                                                                                  |       | 14,771                                            |       | (1,976 | ) |
| Deferred advertising costs                                                                      |       | (1,662                                            | )          | (2,368 | ) |
| Income taxes receivable                                                                         |       | 2,713                                             |       | (5,111 | ) |
| Other current assets                                                                            |       | (11                                               | )          | 1,051 |   |
| Accounts payable                                                                                |       | 2,146                                             |       | (7,232 | ) |
| Accrued liabilities                                                                             |       | 1,063                                             |       | (4,549 | ) |
| Net cash provided by (used  in) operating activities                                            |       | 20,935                                            |       | (9,857 | ) |
|                                                                                            |       |                                              |       |   |   |
| **Investing activities**                                                                        |       |                                              |       |   |   |
| Purchase of property,  equipment and media rights                                               |       | (5,613                                            | )          | (26,285 | ) |
| Purchase of acquisitions  and note, net of cash acquired                                        |       | —                                            |       | (10,029 | ) |
| Disposition of  investments, net                                                                |       | —                                            |       | (1,381 | ) |
| Net cash used in investing  activities                                                          |       | (5,613                                            | )          | (37,695 | ) |
|                                                                                            |       |                                              |       |   |   |
| **Financing activities**                                                                        |       |                                              |       |   |   |
| Proceeds from Real Goods  stock issuances                                                       |       | —                                            |       | 48,154 |   |
| Repurchase of Class A  common stock, including related costs                               |       | (2,810                                            | )          | (18,086 | ) |
| Subsidiary’s payment of  dividends to noncontrolling interests                             |       | (194                                              | )          | — |   |
| Proceeds from issuance of  common stock and tax benefits from option exercises                  |       | 154                                               |       | 1,556 |   |
| Net cash (used in)  provided by financing activities                                            |       | (2,850                                            | )          | 31,624 |   |
|                                                                                            |       |                                              |       |   |   |
| Effects of exchange rates  on cash and cash equivalents                                         |       | —                                            |       | (13 | ) |
|                                                                                            |       |                                              |       |   |   |
| Net change in cash and  cash equivalents                                                        |       | 12,472                                            |       | (15,941 | ) |
| Cash and cash equivalents  at beginning of period                                               |       | 31,965                                            |       | 66,258 |   |
| Cash and cash equivalents  at end of period                                                     |       | $                                                 | 44,437     |   | $ | 50,317 |   |
|                                                                                            |       |                                              |       |   |   |
| **Supplemental cash flow information**                                                          |       |                                              |       |   |   |
| Interest paid                                                                                   |       | $                                                 | 50         |   | $ | 42 |   |
| Income taxes paid                                                                               |       | $                                                 | 423        |   | $ | 2,902 |   |
| Common stock issued for  acquisitions                                                           |       | $                                                 | 796        |   | $ | 7,281 |   |

 

See accompanying notes tothe interim condensed consolidated financial statements

 

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**Notes to interim condensed consolidated financialstatements**

 

**1.     Organization,Nature of Operations, and Principles of Consolidation**

 

References in this reportto “we”, “us”, “our” or “Gaiam” refer to Gaiam, Inc. and its consolidatedsubsidiaries, unless we indicate otherwise. We are a lifestyle media companyproviding a broad selection of information, media, products and services tocustomers who value personal development, wellness, ecological lifestyles,responsible media and conscious community. We were incorporated under the lawsof the State of Colorado on July 7, 1988.

 

We have prepared theaccompanying unaudited interim condensed consolidated financial statements inaccordance with accounting principles generally accepted in the United States,or GAAP, and they include our accounts and those of our subsidiaries.  Intercompany transactions and balances havebeen eliminated.

 

The unaudited condensedconsolidated financial position, results of operations and cash flows for theinterim periods disclosed in this report are not necessarily indicative offuture financial results.

 

**2.     Significant Accounting Policies**

 

Nochanges were made to our significant accounting policies during the three andnine months ended September 30, 2009, except for the adoption of theFinancial Accounting Standards Board, or FASB, Accounting StandardsCodification, which doesn’t change any existing accounting principles, alongwith new pronouncements related to business combinations, fair valuemeasurements, noncontrolling interests in consolidated financial statements,and disclosures about derivatives and hedging activities.  The business combination changes requirean entity to recognize all assets acquired and liabilities assumed in atransaction at the acquisition-date fair value with limited exceptions, andchanges the accounting treatment for certain specific items.  The fair value measurement guidance definesfair value, establishes a framework for measuring fair value in GAAP, andexpands disclosures about fair value measurements.  The noncontrolling interests guidanceestablishes new accounting and reporting standards for a noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary anddirects that gains from the issuance of subsidiary stock must be recognized inadditional paid-in capital.  Thederivatives guidance enhances required disclosures regarding derivatives andhedging activities.  We have applied thenoncontrolling interests guidance by reclassifying amounts formerly referred toas minority interests in our condensed consolidated balance sheets andcondensed consolidated statements of operations.  Aside from this presentation change, theimplementation of these pronouncements did not have a material impact on ourunaudited interim condensed consolidated financial statements for the three andnine months ended September 30, 2009 and 2008.

 

In May 2009,the FASB issued subsequent eventsguidance, which defines further disclosure requirements for events which occurafter the balance sheet date but before financial statements are issued. This was effective for us beginning on April 1, 2009.  We haveevaluated events subsequent to September 30, 2009 through November 6,2009, which is the issuance date of this report, and concluded no materialevent occurred in this period which would either impact the results reflectedin this report or our results going forward.

 

*Use ofEstimates and Reclassifications*

 

The preparation offinancial statements in accordance with GAAP requires us to make estimates andassumptions that affect the amounts reported in the accompanying financialstatements and disclosures. Although we base these estimates on our bestknowledge of current events and actions that we may undertake in the future,actual results may be different from the estimates. We have made certainreclassifications to prior period amounts to conform to the current periodpresentations.

 

**3.****             ****Equity**

 

During the nine monthsended September 30, 2009, we issued a total of 12,097 shares of our Class Acommon stock to our independent directors, in lieu of cash compensation, forservices rendered in 2009; issued 25,000 shares of our Class A commonstock as contingent consideration for a business acquired in 2007 (see Note 8.Mergers and Acquisitions); issued 25,000 shares of our Class A commonstock for consulting services; and issued 28,800 of our Class A commonstock upon exercise of options under our 1999 Long-Term Incentive Plan and our2009 Long-Term Incentive Plan.

 

Additionally, during2009, we repurchased 932,000 shares of our Class A common stock for atotal cost of $2.8 million.  We recordedthis repurchase of our shares in accordance with the cost method of accountingfor treasury stock.  Since we have notyet decided the ultimate disposition of the re-acquired shares, their cost isreflected in our condensed consolidated balance sheet at September 30,2009 as a $2.8 million reduction to additional paid-in capital.

 

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Our subsidiary, Real Goods Solar, Inc. (“RealGoods”), issued 31,237 shares valued at $0.1 million to compensate nonemployeeboard members for services rendered during 2009 and issued 363,504 sharesvalued at $0.7 million as contingent consideration for a business acquired in2008 (see Note 8.  Mergers and Acquisitions).  Following these transactions we owned 54.7%of Real Goods.  The portion of our gainresulting from Real Goods issuing new shares, $0.1 million net of tax, isreflected in additional paid-in capital on our condensed consolidated balancesheet at September 30, 2009.

 

Anothersubsidiary, which is 51.4% owned by us, paid its shareholders dividends fromearnings totaling $0.4 million and, as a result, the noncontrolling interestson our condensed consolidated balance sheet at September 30, 2009 wasdecreased by $0.2 million.

 

Thefollowing is a reconciliation of our carrying amount of total equity, equityattributable to Gaiam, Inc., and equity attributable to the noncontrollinginterest:

 
| ** **                                                                                   | ** ** | ** ** | ** ** | ** **              | ** ** | **Gaiam, Inc. Shareholders** | ** ** | ** **                                    | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------|------------|-------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                                                      | ** ** | **Total**  | ** ** | **Comprehensive  Loss** | ** ** | **Accumulated  Deficit**               | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Class A  and Class B  Common  Stock** | ** ** | **Paid-in  Capital** | ** ** | **Noncontrolling  Interest** | ** ** |
|                                                                                         |       |       |       |                    |       |                                   |       |                                          |       |   |   |   |   |   |   |
| Balance at December 31, 2008                                                            |       | $          | 168,646    |                    | $          | —                                 |       | $                                             | (10,275    | ) | $ | 88 |   | $ | 3 |   | $ | 163,652 |   | $ | 15,178 |   |
| Issuance of Gaiam, Inc. common stock in  conjunction with acquisitions and compensation |       | 1,472      |       | —                  |       | —                                 |       | —                                        |       | — |   | 1,472 |   | — |   |
| Issuance of subsidiary common stock in conjunction  with acquisitions and compensation       |       | 909        |       | —                  |       | —                                 |       | —                                        |       | — |   | 131 |   | 778 |   |
| Repurchase of stock                                                                          |       | (2,810     | )          | —                  |       | —                                 |       | —                                        |       | — |   | (2,810 | ) | — |   |
| Subsidiary dividends to noncontrolling interests                                             |       | (194       | )          | —                  |       | —                                 |       | —                                        |       | — |   | — |   | (194 | ) |
| Comprehensive loss:                                                                          |       |       |       |                    |       |                                   |       |                                          |       |   |   |   |   |   |   |
| Net loss                                                                                     |       | (4,537     | )          | (4,537                  | )          | (3,734                                 | )          | —                                        |       | — |   | — |   | (803 | ) |
| Comprehensive loss                                                                           |       | (4,537     | )          | $                       | (4,537     | )                                      | —     |                                          | —     |   | — |   | — |   | — |   |
| Balance at September 30, 2009                                                           |       | $          | 163,486    |                    |       |                                   | $          | (14,009                                       | )          | $ | 88 |   | $ | 3 |   | $ | 162,445 |   | $ | 14,959 |   |

 

Thefollowing schedule reflects the effect of changes in Gaiam, Inc.’sownership interest in Real Goods on Gaiam, Inc.’s equity:

 
| ** **                                                                                                                                                   | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                   | ** ** | **September 30,**          | ** ** |
| **(in thousands, except share data)**                                                                                                                   | ** ** | **2009**                        | ** ** | **2008** | ** ** |
|                                                                                                                                                         |       |                            |       |   |   |
| Net loss attributable to  Gaiam, Inc.                                                                                                                   |       | $                               | (3,734     | ) | $ | (5,321 | ) |
| Transfers from the  noncontrolling interest:                                                                                                                 |       |                            |       |   |   |
| Increase in  Gaiam, Inc.’s paid-in capital for the issuance of 394,741 Real Goods  common shares in conjunction with acquisitions and compensation |       | 131                             |       | — |   |
| Increase in  Gaiam, Inc.’s paid-in capital in conjunction with Real Goods’ IPO and  compensation                                              |       | —                          |       | 835 |   |
| Change from the net loss  attributable to Gaiam, Inc. and transfers from the noncontrolling  interest                                                   |       | $                               | (3,603     | ) | $ | (4,486 | ) |

 

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**4.****              ****Comprehensive Income (Loss)**

 

Our comprehensive income (loss), net of related taxeffects, was as follows:

 
| ** **                                                                                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                                                                                      | ** ** | **2009**                                             | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                                   | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  income (loss)                                                                                           |       | $                                                    | 643        |                                                | $          | (10,000 | ) | $ | (4,537 | ) | $ | (5,572 | ) |
| Other comprehensive loss,  foreign currency translation adjustment, net of reclassification and related  tax |       | —                                               |       | —                                              |       | — |   | (898 | ) |
| Comprehensive income  (loss)                                                                                 |       | 643                                                  |       | (10,000                                             | )          | (4,537 | ) | (6,470 | ) |
| Comprehensive (income)  loss attributable to the noncontrolling interest                                     |       | (278                                                 | )          | (115                                                | )          | 803 |   | 251 |   |
| Comprehensive income  (loss) attributable to Gaiam, Inc.                                                |       | $                                                    | 365        |                                                | $          | (10,115 | ) | $ | (3,734 | ) | $ | (6,219 | ) |

 

Disposition of our investment in our UK operationsduring the quarter ended March 31, 2008 resulted in a net loss whichlowered our net income for the nine months ended September 30, 2008.  The foreign currency translation amountattributable to that entity and accumulated in the translation adjustmentcomponent of equity was removed from the other comprehensive income componentof equity and reported as part of the loss on the sale of the investment.

 

**5.****    ****Share-Based****Payments**

 

Duringthe first quarter of 2009, for options previously granted to 49 employees, wereset the exercise price to $5.00 per share. The options shall continue to vest over their remaining original vestingperiods.  These modifications will resultin total incremental share-based compensation cost of approximately $212,000over the next 5 years.

 

In April 2009,we adopted a new plan, the Gaiam, Inc. 2009 Long-Term Incentive Plan (the “Plan”).  The purpose of this Plan is to advance ourinterests and those of our shareholders by providing incentives to certainpersons who contribute significantly to our strategic and long-term performanceobjectives and growth.  An aggregate ofnot more than 3 million of our Class A shares, subject to certainadjustments, may be issued under this Plan, and the Plan terminates no laterthan April 23, 2019.  We generallygrant options under our Plan with an exercise price equal to the closing marketprice of our stock at the date of the grant and the options normally vest andbecome exercisable at 2% per month for the 50 months beginning in the eleventhmonth after date of grant. We recognize the compensation expense related toshare-based payment awards on a straight-line basis over the requisite serviceperiods of the awards, which are generally five years for employee options andtwo years for Board members’ options. Grants typically expire seven years fromthe date of grant.

 

In addition to the deemed new grants and cancellationsresulting from the exercise price modification explained above, during 2009, wegranted 180,500 stock options to employees and cancelled 62,600 stockoptions.  Total share-based compensationrecognized was $0.4 million for both of the three month periods ended September 30,2009 and 2008, and $1.4 million and $1.1 million for the nine months ended September 30,2009 and 2008, respectively, and is shown in corporate, general andadministration expenses on our condensed consolidated statements of operations.

 

Also during the first nine months of 2009, RealGoods granted 499,500 new stock options and cancelled 192,000 stock optionsunder the Real Goods 2008 Long-Term Incentive Plan. The cancelled optionsresulted primarily from the nonattainment of the performance condition for2008.  The new stock options commencevesting 2% over 50 months only upon the attainment of a certain amount ofpre-tax income for the year ending December 31, 2009. For theseperformance based stock options, the attainment of the performance conditionwas not probable as of September 30, 2009 and, therefore, no compensationexpense for these grants has been recorded.

 

**6.****              ****Net****Income****(Loss) Per ShareAttributable To Gaiam, Inc. Common Shareholders**

 

Basicnet income (loss) per share attributable to Gaiam, Inc. commonshareholders excludes any dilutive effects of options. We compute basic netincome (loss) per share using the weighted average number of common sharesoutstanding during the period. We compute diluted net income (loss) per shareattributable to Gaiam, Inc. common shareholders using the weighted averagenumber of common and common stock equivalent shares outstanding during theperiod. We excluded common equivalent shares of 897,000 and 715,000 for thethree months ended September 30, 2009 and 2008, respectively, and1,285,000 and 482,000 for the nine months ended September 30, 2009 and2008, respectively, from the computation of diluted net loss per share becausetheir effect was antidilutive.

 

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The following table sets forth the computation ofbasic and diluted net income (loss) per share:

 
| ** **                                                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands, except per share data)**                          | ** ** | **2009**                                             | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Numerator  for basic and diluted net income (loss) per share                                |       | $                                                    | 365        |                                                | $          | (10,115 | ) | $ | (3,734 | ) | $ | (5,321 | ) |
| Denominator:                                                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average shares  for basic net income (loss) per share                              |       | 23,085                                               |       | 24,020                                              |       | 23,370 |   | 24,611 |   |
| Effect of dilutive  securities:                                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average of common  stock and stock options                                         |       | 82                                                   |       | —                                              |       | — |   | — |   |
| Denominators for diluted  net income (loss) per share                                       |       | 23,167                                               |       | 24,020                                              |       | 23,370 |   | 24,611 |   |
|                                                                                        |       |                                                 |       |                                                |       |   |   |   |   |
| Net income (loss) per  share attributable to Gaiam, Inc. common shareholders - basic   |       | $                                                    | 0.02       |                                                | $          | (0.42 | ) | $ | (0.16 | ) | $ | (0.22 | ) |
| Net income (loss) per  share attributable to Gaiam, Inc. common shareholders - diluted |       | $                                                    | 0.02       |                                                | $          | (0.42 | ) | $ | (0.16 | ) | $ | (0.22 | ) |

 

**7.****              ****Segment Information**

 

Wemanage our business and aggregate our operational and financial information inaccordance with three reportable segments. The direct to consumer segmentcontains direct response marketing programs, catalogs, Internet, andsubscription community sales channels, the business segment comprises retailers,media and corporate account channels, and the solar segment reflects solarenergy businesses.

 

Althoughwe are able to track revenues by sales channel, management, allocation ofresources and analysis and reporting of expenses is presented on a combinedbasis, at the reportable segment level. Prior period amounts have been recastto reflect the addition of our solar reporting segment.  Contribution margin is defined as net revenueless cost of goods sold and total operating expenses.

 

Financial information forour segments is as follows:

 
| ** **                                                                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                                                                               | ** ** | **2009**                                             | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net revenue:                                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Direct to consumer                                                                                    |       | $                                                    | 30,971     |                                                | $          | 34,231 |   | $ | 85,673 |   | $ | 95,383 |   |
| Business                                                                                              |       | 20,502                                               |       | 16,514                                              |       | 59,954 |   | 62,343 |   |
| Solar                                                                                                 |       | 22,966                                               |       | 9,540                                               |       | 45,210 |   | 24,949 |   |
| Consolidated net revenue                                                                              |       | 74,439                                               |       | 60,285                                              |       | 190,837 |   | 182,675 |   |
| Contribution margin  (loss):                                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Direct to consumer                                                                                    |       | (279                                                 | )          | (6,155                                              | )          | (5,228 | ) | (10,799 | ) |
| Business                                                                                              |       | 966                                                  |       | (10,447                                             | )          | 704 |   | (29,871 | ) |
| Solar                                                                                                 |       | 258                                                  |       | (675                                                | )          | (2,933 | ) | (1,296 | ) |
| Consolidated contribution  margin (loss)                                                              |       | 945                                                  |       | (17,277                                             | )          | (7,457 | ) | (41,966 | ) |
| Reconciliation of  contribution margin (loss) to net income (loss) attributable to  Gaiam, Inc.: |       |                                                 |       |                                                |       |   |   |   |   |
| Gain from issuance of  subsidiary stock                                                               |       | —                                               |       | 98                                                  |       | — |   | 31,368 |   |
| Interest and other income                                                                             |       | 86                                                   |       | 257                                                 |       | 221 |   | 995 |   |
| Income tax expense  (benefit)                                                                         |       | 388                                                  |       | (6,922                                              | )          | (2,699 | ) | (4,031 | ) |
| Net (income) loss  attributable to noncontrolling interest                                            |       | (278                                                 | )          | (115                                                | )          | 803 |   | 251 |   |
| Net income (loss)  attributable to Gaiam, Inc.                                                   |       | $                                                    | 365        |                                                | $          | (10,115 | ) | $ | (3,734 | ) | $ | (5,321 | ) |

# ** **

**8.****              ****Mergers****and Acquisitions**

 

During the first ninemonths of 2009, we issued 25,000 shares of our Class A common stock worth$64,000 as contingent consideration for one of our 2007 businessacquisitions.  Another of ouracquisitions from 2007 still has additional consideration, payable incash, contingent upon the attainment of a certain membership threshold, theachievement of which has not yet been determined beyond a reasonable doubt. Atthe time any of the remaining contingent consideration becomes determinable, wewill 

 

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recognizeit as additional purchase price and allocate it to goodwill.

 

As contingentconsideration related to one of its 2008 business acquisitions, Real Goodsissued 363,504 shares its Class A common stock with an estimated fairvalue of $0.7 million and allocated the additional consideration to goodwill,which is not expected to be tax deductible. Real Goods used a periodbeginning two days before and two days after the date that the considerationbecame payable in determining the estimated fair value of the securitiesissued.  Real Goods is still in theprocess of finalizing its assessment of the estimated fair value of the netassets related to a business acquisition during the fourth quarter of 2008 and,thus, the amount of its goodwill and other intangibles is subject torefinement.

 

# **Item 2.**                     Management’s discussion and analysis offinancial condition and results of operations

# ** **

You should read thefollowing discussion and analysis of our financial condition and results ofoperations in conjunction with the condensed consolidated financial statementsand related notes included elsewhere in this document.**Thissection is designed to provide information that will assist inunderstanding our condensed consolidated financial statements, changes incertain items in those statements from period to period, the primary factorsthat caused those changes and how certain accounting principles, policies andestimates affect the condensed consolidated financial statements.

 

# **Overviewand Outlook**

# ** **

# **We are alifestyle media company providing a broad selection of information, media,products and services to customers who value personal development, wellness,ecological lifestyles, responsible media and conscious community.**Our media brand isbuilt around our ability to develop and offer media content, products, lifestylesolutions and community to consumers in the LOHAS market.

# ** **

# **Weoffer our customers the ability to make purchasing decisions and findresponsible content based on these values while providing quality offerings ata price comparable to mainstream alternatives. We market our media and productsthrough a multi-channel approach including traditional media channels, directto consumers via the Internet, direct response marketing, community,subscriptions, and catalogs, as well as through national retailers andcorporate accounts.**

# ** **

# **Ourcontent forms the basis of our proprietary offerings, which then drive demandfor parallel product and service offerings. Our operations are verticallyintegrated from content creation, through product development and sourcing, tocustomer service and distribution. We market our products and services acrossthree segments: business, direct to consumer, and solar. We distribute themajority of our products in our business and direct to consumer segments fromour fulfillment center or drop-ship products directly to customers.  We also utilize a third party replication andfulfillment center for media distribution in our business segment.**

# ** **

# **Ourbusiness segment sells to retailers and, as of September 30, 2009, ourproducts were carried in over 72,000 retail doors in the United States.  During the third quarter of 2009, thissegment generated revenue of $20.5 million, up from $16.5 million during thethird quarter of 2008. During 2009 we expanded our store-within-storepresentations, which include custom fixtures that we design, to over 11,000locations, up from 9,000 at the end of the third quarter of last year.  In 2008, we launched a media categorymanagement role that is part of our long term strategy and a key step insecuring shelf space for media.  We havenow expanded this strategy to over 4,000 doors, up from 2,000 at the end of thethird quarter of 2008.**

# ** **

# **Throughits diverse media reach, the direct to consumer segment provides an opportunityto launch and support new media releases, a sounding board for new producttesting, promotional opportunities, an online and off-line community, andcustomer feedback on us and the LOHAS industry’s focus and future. During thethird quarter of 2009, this segment generated revenues of $31.0 million, downfrom $34.2 million during the third quarter of 2008.  This decrease reflects a planned reduction toour catalog circulation of 40%, partially offset by revenue growth from ourdirect response marketing programs.**

# ** **

Our solar segment offersresidential and small commercial solar energy integration services.  On May 13, 2008, our solar integrationbusiness consummated an initial public offering and has since been managed as aseparate segment.  This business hasgrown its sales and expanded its market territories.  During the third quarter of 2009, thissegment generated revenues to external customers of $23.0 million, up from $9.5million during the third quarter of 2008. Real Goods uses its IPO proceeds to fund its working capital needs andgeneral corporate purposes, which may include future acquisitions ofbusinesses.

 

We believe our growthwill be driven by media content, products, and online community offeringsdelivered to the consumer via Internet, retailers, licensing, electronicdownloads and subscription services. We have increased our focus on fitnessmedia content creation and distribution, and media category management atretailers. Our recent licensing agreements will expand our distribution withinthe non-theatrical media category.

 

TheCompany is restructuring its finance department, generally dividing functionalresponsibilities between an accounting department (to be managed by theCompany’s controller, Steve Thomas, who will assume additional responsibilitiesin the newly-created position of Chief Accounting Officer) and a corporatefinance department, to be headed by Carole Buyers.  As a part of this departmental restructuring,the chief financial officer position will be eliminated as of November 9, 2009.

 

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We believe a number of factors are important to our long-term success,including building our brands, expanding category management into new retailersand genres, increasing international growth by expanding into new marketsprimarily through license arrangements, extending our product lines andenhancing our multimedia platform community through new media opportunities,new membership programs, initiatives and acquisitions.

 

**Resultsof Operations**

 

Thefollowing table sets forth certain financial data as a percentage of revenuefor the periods indicated:

 
| ** **                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                 | ** ** | **2009**                                             | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Net revenue                                                |       | 100.0                                                | %          | 100.0                                               | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                                         |       | 51.9                                                 | %          | 43.9                                                | %          | 48.5 | % | 39.2 | % |
| Gross profit                                               |       | 48.1                                                 | %          | 56.1                                                | %          | 51.5 | % | 60.8 | % |
|                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Expenses:                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Selling and operating                                      |       | 42.5                                                 | %          | 56.5                                                | %          | 50.5 | % | 56.2 | % |
| Corporate, general and  administration                     |       | 4.3                                                  | %          | 5.2                                                 | %          | 4.9 | % | 5.3 | % |
| Other general income and  expense                          |       | —                                               | %          | 23.1                                                | %          | — | % | 22.2 | % |
| Total expenses                                             |       | 46.8                                                 | %          | 84.8                                                | %          | 55.4 | % | 83.7 | % |
|                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Income (loss) from  operations                             |       | 1.3                                                  | %          | (28.7                                               | )%         | (3.9 | )% | (22.9 | )% |
|                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Gain from issuance of  subsidiary stock                    |       | —                                               | %          | 0.2                                                 | %          | — | % | 17.2 | % |
| Interest and other income                                  |       | 0.1                                                  | %          | 0.4                                                 | %          | 0.1 | % | 0.5 | % |
| Income tax expense  (benefit)                              |       | 0.5                                                  | %          | (11.5                                               | )%         | (1.4 | )% | (2.2 | )% |
| Net (income) loss  attributable to noncontrolling interest |       | (0.4                                                 | )%         | (0.2                                                | )%         | 0.4 | % | 0.1 | % |
| Net income (loss)  attributable to Gaiam, Inc.        |       | 0.5                                                  | %          | (16.8                                               | )%         | (2.0 | )% | (2.9 | )% |

 

*ThreeMonths Ended September 30, 2009 Compared to Three Months Ended September 30,2008*

 

*Net revenue*. Net revenue increased $14.2 million, or 23.5%, to$74.4 million during the third quarter of 2009 from $60.3 million during thethird quarter of 2008. Net revenue in our business segment increased $4.0million to $20.5 million during the third quarter of 2009 from $16.5 millionduring the third quarter of 2008, primarily reflecting improvement in ourdomestic trade business, including increased store-within-store presentationsand our success as media category manager. Net revenue in our direct toconsumer segment decreased $3.3 million to $31.0 million during the thirdquarter of 2009 from $34.2 million during the third quarter of 2008. Thisdecrease in the direct to consumer segment net revenue primarily reflected ourdecision to reduce catalog circulation by 40%, partially offset by revenuegrowth with our direct response marketing programs.  Net revenue to external customers in oursolar segment increased $13.4 million to $23.0 million during the third quarterof 2009 from $9.5 million during the third quarter of 2008, primarilyreflecting the acquisitions of solar companies in 2008 and organic growth.

 

*Gross profit*. Gross profit increased $2.0 million, or 5.8%, to$35.8 million during the third quarter of 2009 from $33.8 million during thethird quarter of 2008. As a percentage of net revenue, gross profit decreasedto 48.1% during the third quarter of 2009 from 56.1% during the third quarterof 2008.  This decrease was due toincreased sales in our lower margin solar business, the expansion of ourcategory manager role in media at retailers, and reduced prices to acceleratesales and lower inventory levels.

 

*Selling and operating expenses*. Selling and operatingexpenses decreased $2.4 million, or 7.1%, to $31.6 million during the thirdquarter of 2009 from $34.0 million during the third quarter of 2008.  As a percentage of net revenue, selling andoperating expenses decreased to 42.5% during the third quarter of 2009 from56.5% during the third quarter of 2008. This decrease is a result of our significant cost savings measures,including reducing payroll costs, optimizing the direct business throughreduced catalog prospecting and closing non-profitable businesses.

 

*Corporate, general and administration expenses*. Corporate, general and administrationexpenses increased $0.1 million, or 3.2%, to $3.2 million during the thirdquarter of 2009 from $3.1 million during the third quarter of 2008.  As of percentage of net revenue, corporate,general and administration expenses decreased to 4.3% during the third quarterof 2009 from 5.2% during the third quarter of 2008 reflecting higher revenues.

 

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*Net income attributable to noncontrolling interest*. Net incomeattributable to noncontrolling interest increased to $0.3 million during thethird quarter of 2009 from $0.1 million during the third quarter of 2008reflecting profits in our travel business and solar segment.

 

*Net income (loss) attributable to Gaiam, Inc.*  As a result of the above factors, net incomeattributable to Gaiam, Inc. was $0.4 million during the third quarter of2009 compared to a net loss of $10.1 million during the third quarter of2008.  Net income per share attributableto Gaiam, Inc. common shareholders was $0.02 during the third quarter of2009 compared to a net loss per share of $0.42 during the third quarter of2008.

 

*NineMonths Ended September 30, 2009 Compared to Nine Months Ended September 30,2008*

 

*Net revenue*. Net revenue increased $8.2 million, or 4.5%, to$190.8 million during the nine months ended September 30, 2009 from $182.7million during the nine months ended September 30, 2008. Net revenue inour direct to consumer segment decreased $9.7 million to $85.7 million duringthe nine months ended September 30, 2009 from $95.4 million during thenine months ended September 30, 2008. This decrease in the direct toconsumer segment net revenue primarily reflects our decision to reduce catalogcirculation, partially offset by revenue growth with our direct responsemarketing programs.  Net revenue in ourbusiness segment decreased $2.3 million to $60.0 million during the nine monthsended September 30, 2009 from $62.3 million during the nine months ended September 30,2008, primarily reflecting conservative buying by retailers in the firstquarter of 2009, higher deductions and allowances to retailers, and thedisposition of our UK operations at the end of the first quarter of 2008.  Net revenue to external customers in oursolar segment increased $20.3 million to $45.2 million during the nine monthsended September 30, 2009 from $25.0 million during the nine months ended September 30,2008, primarily due to the acquisitions during 2008 and organic growth.

 

*Gross profit*. Gross profit decreased $12.7 million, or 11.5%, to$98.2 million during the nine months ended September 30, 2009 from $111.0million during the nine months ended September 30, 2008. As a percentageof net revenue, gross profit decreased to 51.5% during the nine months ended September 30,2009 from 60.8% during the nine months ended September 30, 2008.  This decrease is due to increased sales inour lower margin solar business, the expansion of our category manager role inmedia at retailers, reduced prices to accelerate sales and lower inventorylevels, and greater participation in retailer discount programs and promotions.

 

*Selling and operating expenses*. Selling and operatingexpenses decreased $6.4 million, or 6.2%, to $96.3 million during the ninemonths ended September 30, 2009 from $102.7 million during the nine monthsended September 30, 2008.  Thischange is primarily a result of reduced catalog circulation and cost controlmeasures implemented in late 2008 and early 2009.  As a percentage of net revenue, selling andoperating expenses decreased to 50.5% during the nine months ended September 30,2009 from 56.2% during the nine months ended September 30, 2008 reflectingthe lower cost structure and increased revenues.

 

*Corporate, general and administration expenses*. Corporate,general and administration expenses decreased $0.2 million, or 1.8%, to $9.4million during the nine months ended September 30, 2009 from $9.6 millionduring the nine months ended September 30, 2008.  As of percentage of net revenue, corporate,general and administration expenses decreased to 4.9% during the nine monthsended September 30, 209 from 5.3% during the nine months ended September 30,2008.

 

*Interest and other income*. Interest and other incomedecreased $0.8 million to $0.2 million during the nine months ended September 30,2009 from $1.0 million during the nine months ended September 30,2008.  The lower interest earningsreflect the decrease in prevailing short-term interest rates and cash used toacquire our corporate facilities and repurchase 2.3 million shares of our Class Acommon stock for $21.2 million since January 1, 2008.

 

*Net loss attributable to noncontrolling interest*. Net lossattributable to noncontrolling interest increased to $0.8 million during thenine months ended September 30, 2009 from $0.3 million during the ninemonths ended September 30, 2008 primarily as a result of the losses in oursolar segment during the first half of the year.

 

*Net loss attributable to Gaiam, Inc.*  As a result of the above factors, net lossattributable to Gaiam, Inc. was $3.7 million during the nine months ended September 30,2009 compared to $5.3 million during the nine months ended September 30,2008.  Net loss per share attributable toGaiam, Inc. common shareholders was $0.16 during the nine months ended September 30,2009 compared to $0.22 during the nine months ended September 30, 2008.

 

**Seasonality**

 

Our sales areaffected by seasonal influences. On an aggregate basis, we generate ourstrongest revenues and net income in the fourth quarter due to increasedholiday spending and retailer fitness purchases.

 

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**Liquidityand Capital Resources**

 

Our capital needsarise from working capital required to fund operations, capital expendituresrelated to acquisition and development of media content, development of ourInternet and community platforms and new products, acquisitions of newbusinesses, replacements, expansions and improvements to our infrastructure,and future growth. These capital requirements depend on numerous factors,including the rate of market acceptance of our product and service offerings,the ability to expand our customer base, the cost of ongoing upgrades to ourproduct offerings, the level of expenditures for sales and marketing, the levelof investment in distribution systems and facilities and other factors. Thetiming and amount of these capital requirements are variable and we cannotaccurately predict them. Additionally, we will continue to pursue opportunitiesto expand our media libraries, evaluate possible investments in businesses,products and technologies, and increase our sales and marketing programs andbrand promotions as needed.

 

At September 30,2009, the majority of our cash was in short-term treasuries.  We have a revolving line of credit agreementwith a financial institution with extended current expiration date of December 21,2009.  We are currently in negotiationsto renew the line of credit agreement, which was recently extended by twomonths pending the renewal negotiations. The credit agreement permits borrowings up to the lesser of $15 millionor our borrowing base which is calculated based upon the collateral value ofour accounts receivable, inventory, and certain property and equipment.Borrowings under this agreement bear interest at the lower of prime rate less75 basis points or LIBOR plus 275 basis points. Borrowings are secured by apledge of certain of our assets, and the agreement contains various financialcovenants, including those requiring compliance with certain financial ratios.At September 30, 2009, we had no amounts outstanding under this agreement;however, $0.6 million was reserved for outstanding letters of credit.  We believe we have complied with all of thefinancial covenants under this credit agreement.

 

***Cash Flows***

 

The following table summarizes our primary sources(uses) of cash during the periods presented:

 
| ** **                                              | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                                 | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
| Net  cash provided by (used in):                        |       |                                                |       |   |   |
| Operating activities                                    |       | $                                                   | 20,935     |   | $ | (9,857 | ) |
| Investing activities                                    |       | (5,613                                              | )          | (37,695 | ) |
| Financing activities                                    |       | (2,850                                              | )          | 31,624 |   |
| Effects of exchange rates  on cash and cash equivalents |       | —                                              |       | (13 | ) |
| Net change in cash and  cash equivalents                |       | $                                                   | 12,472     |   | $ | (15,941 | ) |

 

*Operatingactivities*. Ouroperating activities provided net cash of $20.9 million during the nine monthsended September 30, 2009 and used net cash of $9.9 million during the ninemonths ended September 30, 2008. Our net cash provided by operatingactivities during the nine months ended September 30, 2009 was primarilyattributable to decreased accounts receivable and inventory of $17.1 million,noncash adjustments to the net loss of $3.4 million, and increased accountspayable and accrued liabilities of $3.2 million and refunded income taxes of$3.2 million, partially offset by the net loss of $3.7 million and increaseddeferred advertising costs of $1.7 million. Our net cash used in operating activities during the nine months ended September 30,2008 was primarily attributable to decreased accounts payable and accruedliabilities of $11.8 million, a net loss of $5.3 million, increased current taxreceivable of $5.1 million, and increased deferred advertising costs andinventory of $2.4 million and $2.0 million, respectively, partially offset bythe noncash adjustments to the net loss of $11.0 million and reductions inaccounts receivable of $4.6 million.

 

*Investingactivities*. Ourinvesting activities used net cash of $5.6 million and $37.7 million during thenine months ended September 30, 2009 and 2008, respectively. The net cashused in investing activities during the nine months ended September 30,2009 was used primarily to acquire property and equipment for $3.4 million, ofwhich $1.5 million was acquired to maintain normal operations, and for mediaproductions of $2.2 million. The net cash used in investing activities duringthe nine months ended September 30, 2008 was used primarily to acquire ournew corporate headquarters property, businesses, equipment and otherinvestments for $30.9 million and purchase and produce media rights for $5.4million.

 

*Financingactivities*. Ourfinancing activities used net cash of $2.9 million during the nine months endedSeptember 30, 2009 and provided net cash of $31.6 million during the ninemonths ended September 30, 2008. Our net cash used in financing activities during the nine months ended September 30,2009 was used primarily to repurchase 932,000 shares of our Class A commonstock.  Our net cash provided byfinancing activities during the nine months ended September 30, 2008primarily reflected net proceeds from Real Goods’ IPO of $48.2 million andissuances of our common stock and related tax benefits of $1.5 million,partially offset by the use of funds to repurchase approximately 1.2 millionshares of our Class A common stock for $18.1 million.

 

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We believe ouravailable cash, cash expected to be generated from operations, cash generatedby the sale of our stock, and borrowing capabilities should be sufficient tofund our operations on both a short-term and long-term basis. However, our projectedcash needs may change as a result of acquisitions, product development,unforeseen operational difficulties or other factors.

 

In the normalcourse of our business, we investigate, evaluate and discuss acquisition, jointventure, minority investment, strategic relationship and other businesscombination opportunities in the LOHAS and conscious media markets. For anyfuture investment, acquisition or joint venture opportunities, we may considerusing then-available liquidity, issuing equity securities or incurringadditional indebtedness.

 

**ContractualObligations**

 

We have commitments pursuant to lease agreements, buthave no outstanding commitments pursuant to purchase obligations. The followingtable shows our commitments to make future payments under operating leases:

 
| **(in thousands)**      | ** ** | **Total** | ** ** | **< 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **> 5 years** | ** ** |
|------------------------------|------------|-----------|------------|---------------------------|------------|--------------------|------------|--------------------|------------|----------------------------|------------|
| Operating lease  obligations |       | $         | 9,330      |                      | $          | 2,392              |       | $                  | 3,755      |                       | $          | 2,675 |   | $ | 508 |   |
|                              |            |           |            |                           |            |                    |            |                    |            |                            |            |  |  |  |  |  |

 

**Risk Factors**

 

We wish to cautionyou that there are risks and uncertainties that could cause our actual resultsto be materially different from those indicated by forward looking statementsthat we make from time to time in filings with the Securities and ExchangeCommission, news releases, reports, proxy statements, registration statementsand other written communications as well as oral forward looking statementsmade from time to time by our representatives. These risks and uncertaintiesinclude, but are not limited to, those risks listed in our Annual Report on Form 10-Kfor the year ended December 31, 2008. Additional risks and uncertainties that we currently deem immaterial mayalso impair our business operations, and historical results are not necessarilyan indication of the future results. Except for the historical informationcontained herein, the matters discussed in this analysis are forward-lookingstatements that involve risk and uncertainties, including, but not limited to,general economic and business conditions, competition, pricing, brandreputation, consumer trends, and other factors which are often beyond ourcontrol. We do not undertake any obligation to update forward-lookingstatements except as required by law.

 

**Item 3.****                    ****Quantitative and QualitativeDisclosures About Market Risk**

 

We are exposed to marketrisks, which include changes in U.S. interest rates and foreign exchange rates.We do not engage in financial transactions for trading or speculative purposes.

 

Any borrowings we mightmake under our bank credit facility would bear interest at the lower of primerate less 75 basis points or LIBOR plus 275 basis points. We do not have anyamounts outstanding under our credit line, so any unfavorable change ininterest rates would not have a material impact on our results from operationsor cash flows unless we make borrowings in the future.

 

We purchase a significantamount of inventory from vendors outside of the U.S. in transactions that areprimarily U.S. dollar denominated transactions. A decline in the relative valueof the U.S. dollar to other foreign currencies has and may continue to lead toincreased purchasing costs.

 

**Item 4.****                    ****Controls and Procedures**

 

**Evaluation of Disclosure Controls andProcedures**

 

Ourchief executive officer and chief financial officer conducted an evaluation ofthe effectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) underthe Exchange Act. Based upon their evaluation as of September 30, 2009,our chief executive officer and chief financial officer have concluded thatthose disclosure controls and procedures are effective.

 

**Changes in Internal Control overFinancial Reporting**

 

Nochanges in our internal control over financial reporting occurred during thequarter and nine months ended September 30, 2009 that have materially affected,or are reasonably likely to materially affect, our internal control overfinancial reporting.

 

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## **PART II.  OTHER INFORMATION**

## ** **

**Item 1.****                    ****Legal Proceedings**

 

From time to time, we are involved in legalproceedings that we consider to be in the normal course of business. We do notbelieve that any of these proceedings will have a material adverse effect onour business.

 

**Item 1A.****           ****Risk Factors**

 

No material changes.

 

**Item 2.****                    ****Sales of UnregisteredSecurities and Use of Proceeds**

 

None.

 

**Item 3.****                    ****Defaults Upon SeniorSecurities**

 

None.

 

**Item 4.****                    ****Submission of Matters toa Vote of Security Holders**

 

None.

 

**Item 5.****                    ****Other Information**

 

None.

 

**Item 6.****                    ****Exhibits**

 

a)     Exhibits.

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                          |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                 |       | Certification of  the Chief Executive Officer pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934 (filed herewith).                                          |
| 31.2                 |       | Certification of  the Chief Financial Officer pursuant to Rule 13a-14(a) under the  Securities Exchange Act of 1934 (filed herewith).                                          |
| 32.1                 |       | Certification of  the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished  herewith). |
| 32.2                 |       | Certification of  the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (furnished herewith). |

 

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**Signatures**

 

Inaccordance with the requirements of the Securities and Exchange Act, theregistrant caused this report to be signed on its behalf, by the undersigned,thereunto duly authorized.

 
|   | Gaiam, Inc.       |
|--------|------------------------|
|   | (Registrant)           |
|   | November 6,  2009 |
|   |                   |   |
|   | By:                    | /s/ Lynn Powers |
|   |                   | Lynn Powers |
|   |                   | Chief Executive  Officer and President |
|   |                   |   |
|   | By:                    | /s/ Vilia  Valentine |
|   |                   | Vilia Valentine |
|   |                   | Chief Financial  Officer |
|   |                   | (principal  accounting officer) |

 

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