Table of Contents

 

 

 

**UnitedStatesSecurities and Exchange Commission**

**Washington, D.C. 20549**

 

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

#### ** **

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31,2010**

 

**OR**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13OR 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 May 6, 2010** |
|-----------------------------------------------|------------|----------------------------------------------------|
| Class A  Common Stock ($.0001 par value) |       | 17,836,681                                         |
| Class B  Common Stock ($.0001 par value) |       | 5,400,000                                          |

 

 

** **

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**GAIAM, INC.**

 

**FORM 10-Q**

 

**INDEX**

 
| **PART I. FINANCIAL INFORMATION** | 2                                                                                                                       |
|----------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
| ** **                             | ** **                                                                                                              | ** ** |
| **Item 1.**                            | **Financial Statements (Unaudited):**                                                                                   | 2 |
|                                   | Condensed consolidated balance sheets at  March 31, 2010 and December 31, 2009                                | 3 |
|                                   | Condensed consolidated statements of operations for  the Three Months Ended March 31, 2010 and 2009 | 4 |
|                                   | Condensed consolidated statements of cash flows for  the Three Months Ended March 31, 2010 and 2009           | 5 |
|                                   | Notes to  interim condensed consolidated financial statements                                                           | 6 |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item 2.**                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             | 9 |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item 3.**                            | Quantitative  and Qualitative Disclosures About Market Risk                                                             | 12 |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item 4.**                            | Controls and  Procedures                                                                                                | 13 |
| ** **                             | ** **                                                                                                              | ** ** |
| **PART II. OTHER INFORMATION**    | 13                                                                                                                      |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item 1.**                            | Legal Proceedings                                                                                                       | 13 |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item 1A.**                           | Risk  Factors                                                                                                           | 13 |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item 2.**                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                                            | 13 |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item 3**                             | Defaults Upon  Senior Securities                                                                                        | 13 |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item 4.**                            | Reserved                                                                                                                | 13 |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item 5.**                            | Other Information                                                                                                       | 13 |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item 6.**                            | Exhibits                                                                                                                | 14 |
| ** **                             | ** **                                                                                                              | ** ** |
|                                   | SIGNATURES                                                                                                              | 15 |

 

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**CAUTIONARYSTATEMENT 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 and uncertaintiesthat could cause actual results to differ include, without limitation, generaleconomic conditions, competition, loss of key personnel, pricing, brandreputation, consumer trends, acquisitions, new initiatives undertaken by us,security and information systems, legal liability for website content,merchandise supply problems, failure of third parties to provide adequateservice, 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.     Financial Statements (Unaudited)**

 

# **Unaudited InterimCondensed 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, our consolidatedfinancial position as of March 31, 2010, the interim results of operationsfor the three months ended March 31, 2010 and 2009, and cash flows for thethree months ended March 31, 2010 and 2009. These interim statements havenot been audited. The balance sheet as of December 31, 2009 was derivedfrom our audited consolidated financial statements included in our annualreport on Form 10-K. The interim condensed consolidated financialstatements contained herein should be read in conjunction with our auditedfinancial statements, including the notes thereto, for the year ended December 31,2009.

 

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**GAIAM, INC.Condensed consolidated balance sheets**

 
| ** **                                                                                                                                                                                                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(in thousands, except share and per share data)**                                                                                                                                | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                                                                                            | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                            |       |               |       |                  |       |
| Current assets:                                                                                                                                                                                                       |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                             |       | $                  | 48,141     |                  | $          | 48,325 |   |
| Accounts receivable, net                                                                                                                                                                                              |       | 39,342             |       | 46,266                |       |
| Inventory, less allowances                                                                                                                                                                                            |       | 23,775             |       | 26,872                |       |
| Deferred advertising costs                                                                                                                                                                                            |       | 2,037              |       | 1,909                 |       |
| Receivable and deferred tax assets                                                                                                                                                                                    |       | 8,952              |       | 10,179                |       |
| Other current assets                                                                                                                                                                                                  |       | 4,184              |       | 5,681                 |       |
| Total current assets                                                                                                                                                                                                  |       | 126,431            |       | 139,232               |       |
|                                                                                                                                                                                                                  |       |               |       |                  |       |
| Property and equipment, net                                                                                                                                                                                           |       | 27,905             |       | 28,217                |       |
| Media library, net                                                                                                                                                                                                    |       | 14,868             |       | 12,354                |       |
| Deferred tax assets, net                                                                                                                                                                                              |       | 5,729              |       | 4,414                 |       |
| Goodwill                                                                                                                                                                                                              |       | 24,166             |       | 24,166                |       |
| Other intangibles, net                                                                                                                                                                                                |       | 595                |       | 652                   |       |
| Notes receivable and other assets                                                                                                                                                                                     |       | 3,155              |       | 3,178                 |       |
| Total assets                                                                                                                                                                                                          |       | $                  | 202,849    |                  | $          | 212,213 |   |
|                                                                                                                                                                                                                  |       |               |       |                  |       |
| **LIABILITIES AND EQUITY**                                                                                                                                                                                            |       |               |       |                  |       |
| Current liabilities:                                                                                                                                                                                                  |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                                                      |       | $                  | 25,583     |                  | $          | 33,261 |   |
| Accrued liabilities                                                                                                                                                                                                   |       | 12,458             |       | 11,061                |       |
| Total current liabilities                                                                                                                                                                                             |       | 38,041             |       | 44,322                |       |
|                                                                                                                                                                                                                  |       |               |       |                  |       |
| Commitments and contingencies                                                                                                                                                                                         |       |               |       |                  |       |
|                                                                                                                                                                                                                  |       |               |       |                  |       |
| Equity:                                                                                                                                                                                                               |       |               |       |                  |       |
| Gaiam, Inc. shareholders’ equity:                                                                                                                                                                           |       |               |       |                  |       |
| Class A common stock, $.0001 par value,  150,000,000 shares authorized, 17,811,663 and 17,721,212 shares issued and  outstanding at March 31, 2010 and December 31,  2009, respectively |       | 2                  |       | 2                     |       |
| Class B common stock, $.0001 par value,  50,000,000 shares authorized, 5,400,000 issued and outstanding at  March 31, 2010 and December 31, 2009                                                       |       | 1                  |       | 1                     |       |
| Additional paid-in capital                                                                                                                                                                                            |       | 159,733            |       | 162,532               |       |
| Accumulated other comprehensive income                                                                                                                                                                                |       | 85                 |       | 85                    |       |
| Accumulated deficit                                                                                                                                                                                                   |       | (10,229            | )          | (9,979                | )          |
| Total Gaiam, Inc. shareholders’ equity                                                                                                                                                                      |       | 149,592            |       | 152,641               |       |
| Noncontrolling interest                                                                                                                                                                                               |       | 15,216             |       | 15,250                |       |
| Total equity                                                                                                                                                                                                          |       | 164,808            |       | 167,891               |       |
| Total liabilities and equity                                                                                                                                                                                          |       | $                  | 202,849    |                  | $          | 212,213 |   |

 

See accompanying notes to the interimcondensed consolidated financial statements.

 

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**GAIAM, INC.Condensed consolidated statements of operations**

 
| ** **                                                                | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands, except per share data)**        | ** ** | **2010**                                                           | ** ** | **2009** | ** ** |
| ** **                                                                | ** ** | **(unaudited)**                                                    | ** ** |
| Net revenue                                                          |       | $                                                                  | 62,183     |   | $ | 55,923 |   |
| Cost of goods sold                                                        |       | 29,971                                                             |       | 24,937 |   |
| Gross profit                                                              |       | 32,212                                                             |       | 30,986 |   |
|                                                                      |       |                                                               |       |   |   |
| Expenses:                                                                 |       |                                                               |       |   |   |
| Selling and operating                                                     |       | 29,784                                                             |       | 33,943 |   |
| Corporate, general and administration                                     |       | 2,991                                                              |       | 3,269 |   |
| Total expenses                                                            |       | 32,775                                                             |       | 37,212 |   |
|                                                                      |       |                                                               |       |   |   |
| Loss from operations                                                      |       | (563                                                               | )          | (6,226 | ) |
|                                                                      |       |                                                               |       |   |   |
| Interest and other income                                                 |       | 67                                                                 |       | 74 |   |
|                                                                      |       |                                                               |       |   |   |
| Loss before income taxes and noncontrolling  interest                     |       | (496                                                               | )          | (6,152 | ) |
|                                                                      |       |                                                               |       |   |   |
| Income tax benefit                                                        |       | (177                                                               | )          | (2,249 | ) |
|                                                                      |       |                                                               |       |   |   |
| Net loss                                                                  |       | (319                                                               | )          | (3,903 | ) |
|                                                                      |       |                                                               |       |   |   |
| Net loss attributable to noncontrolling interest                          |       | 69                                                                 |       | 813 |   |
|                                                                      |       |                                                               |       |   |   |
| Net loss attributable to Gaiam, Inc.                                 |       | $                                                                  | (250       | ) | $ | (3,090 | ) |
|                                                                      |       |                                                               |       |   |   |
| Net loss per share attributable to  Gaiam, Inc. common shareholders: |       |                                                               |       |   |   |
| Basic                                                                     |       | $                                                                  | (0.01      | ) | $ | (0.13 | ) |
| Diluted                                                                   |       | $                                                                  | (0.01      | ) | $ | (0.13 | ) |
|                                                                      |       |                                                               |       |   |   |
| Weighted-average shares outstanding:                                      |       |                                                               |       |   |   |
| Basic                                                                     |       | 23,140                                                             |       | 23,957 |   |
| Diluted                                                                   |       | 23,140                                                             |       | 23,957 |   |

 

See accompanying notes to the interimcondensed consolidated financial statements*.*

 

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**GAIAM, INC.Condensed consolidated statements of cash flows**

 
| ** **                                                                            | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **(in thousands)**                                                               | ** ** | **2010**                                                           | ** ** | **2009** | ** ** |
| ** **                                                                            | ** ** | **(unaudited)**                                                    | ** ** |
| **Operating activities**                                                         | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Net loss                                                                              |       | $                                                                  | (319       | ) | $ | (3,903 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |                                                               |       |   |   |
| Depreciation                                                                          |       | 776                                                                |       | 760 |   |
| Amortization                                                                          |       | 1,222                                                              |       | 857 |   |
| Share-based compensation expense                                                      |       | 380                                                                |       | 556 |   |
| Deferred and stock option income tax benefit                                          |       | (329                                                               | )          | (2,635 | ) |
| Changes in operating assets and liabilities:                                          |       |                                                               |       |   |   |
| Accounts receivable, net                                                              |       | 6,924                                                              |       | 10,651 |   |
| Inventory, net                                                                        |       | 3,447                                                              |       | 8,201 |   |
| Deferred advertising costs                                                            |       | (564                                                               | )          | (189 | ) |
| Income taxes receivable                                                               |       | 43                                                                 |       | 3,239 |   |
| Other current assets                                                                  |       | 1,393                                                              |       | (111 | ) |
| Accounts payable                                                                      |       | (11,156                                                            | )          | (9,109 | ) |
| Accrued liabilities                                                                   |       | 277                                                                |       | (308 | ) |
| Net cash provided by operating activities                                             |       | 2,094                                                              |       | 8,009 |   |
|                                                                                  |       |                                                               |       |   |   |
| **Investing activities**                                                              |       |                                                               |       |   |   |
| Purchase of property, equipment and media rights                                      |       | (2,816                                                             | )          | (1,776 | ) |
| Net cash used in investing activities                                                 |       | (2,816                                                             | )          | (1,776 | ) |
|                                                                                  |       |                                                               |       |   |   |
| **Financing activities**                                                              |       |                                                               |       |   |   |
| Net proceeds from issuance of common stock and tax  benefits from option exercises    |       | 538                                                                |       | — |   |
| Net cash provided by financing activities                                             |       | 538                                                                |       | — |   |
|                                                                                  |       |                                                               |       |   |   |
| Net change in cash and cash equivalents                                               |       | (184                                                               | )          | 6,233 |   |
| Cash and cash equivalents at beginning of period                                      |       | 48,325                                                             |       | 31,965 |   |
| Cash and cash equivalents at end of period                                            |       | $                                                                  | 48,141     |   | $ | 38,198 |   |
|                                                                                  |       |                                                               |       |   |   |
| **Supplemental cash flow information**                                                |       |                                                               |       |   |   |
| Income taxes paid                                                                     |       | $                                                                  | 171        |   | $ | 359 |   |
| Common stock issued for acquisitions                                                  |       | $                                                                  | —     |   | $ | 64 |   |

 

See accompanying notes to the interimcondensed consolidated financial statements

 

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**Notes to interim condensedconsolidated financial statements**

 

**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.     SignificantAccounting Policies**

 

No changes were made toour significant accounting policies during the three months ended March 31,2010, except that we adopted self-insurance accounting effective January 1,2010, which did not have a material impact on our condensed consolidatedfinancial statements.

 

*Use of Estimates andReclassifications*

 

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 best knowledgeof current events and actions that we may undertake in the future, actualresults may be different from the estimates. We have made certainreclassifications to prior period amounts to conform to the current periodpresentations.

 

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

 

During the first three months of 2010, we issued under our 2009Long-Term Incentive Plan a total of 2,109 of our Class A common shares toour independent directors, in lieu of cash compensation, for services renderedin 2010 and issued 88,342 of our Class A common shares upon exercise ofoptions under our 1999 Long-Term Incentive Plan.

 

On March 8, 2010, our board of directorsdeclared out of additional paid-in capital a cash dividend of $0.15 per sharefor our common shareholders of record on April 1, 2010, and, as a result,additional paid-in capital on our condensed consolidated balance sheet at March 31,2010 was decreased by $3.5 million.

 

Our subsidiary, Real Goods Solar, Inc. (“RealGoods Solar”), issued 4,693 of its Class A common shares valued at $16,000to compensate nonemployee board members for services rendered during the firstquarter of 2010.

 

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Thefollowing is a reconciliation at the beginning and the end of the first quarterof the carrying amount of total equity, equity attributable to Gaiam, Inc.,and equity attributable to the noncontrolling interest.

 
| ** **                                                                            | ** ** | ** ** | ** ** | ** **              | ** ** | **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, 2009                                                         |       | $          | 167,891    |                    | $          | —                                 |       | $                                             | (9,979     | ) | $ | 85 |   | $ | 3 |   | $ | 162,532 |   | $ | 15,250 |   |
| Issuance  of Gaiam, Inc. common stock in conjunction with compensation |       | 646        |       | —                  |       | —                                 |       | —                                        |       | — |   | 646 |   | — |   |
| Issuance  of subsidiary stock and share-based compensation                            |       | 68         |       | —                  |       | —                                 |       | —                                        |       | — |   | 33 |   | 35 |   |
| Declaration  of dividend                                                              |       | (3,478     | )          | —                  |       | —                                 |       | —                                        |       | — |   | (3,478 | ) | — |   |
| Comprehensive  loss:                                                                  |       |       |       |                    |       |                                   |       |                                          |       |   |   |   |   |   |   |
| Net  loss                                                                             |       | (319       | )          | (319                    | )          | (250                                   | )          | —                                        |       | — |   | — |   | (69 | ) |
| Comprehensive  loss                                                                   |       | (319       | )          | $                       | (319       | )                                      | —     |                                          | —     |   | — |   | — |   | — |   |
| Balance  at March 31, 2010                                                       |       | $          | 164,808    |                    |       |                                   | $          | (10,229                                       | )          | $ | 85 |   | $ | 3 |   | $ | 159,733 |   | $ | 15,216 |   |

 

The following schedule reflects the effect ofchanges in Gaiam, Inc.’s ownership interest in Real Goods Solar on Gaiam, Inc.’sequity.

 
| ** **                                                                                                                                                                                                                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands,  except share data)**                                                                                                                                                                                                         | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
|                                                                                                                                                                                                                                                |       |                                             |       |   |   |
| Net loss attributable to Gaiam, Inc.                                                                                                                                                                                                           |       | $                                                | (250       | ) | $ | (3,090 | ) |
| Increase in Gaiam, Inc.’s paid-in capital for  the issuance of 4,693 and 15,424 Real Goods Solar Class A  common shares and for share-based compensation for the three months  ended March 31, 2010 and 2009, respectively |       | 33                                               |       | 26 |   |
| Change from net loss attributable to Gaiam, Inc.  and transfers from the noncontrolling interest                                                                                                                                               |       | $                                                | (217       | ) | $ | (3,064 | ) |

 

**4.****              ****Comprehensive Loss**

 

Our comprehensive loss,net of related tax effects, was as follows:

 
| ** **                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                         | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
|                                                            |       |                                             |       |   |   |
| Net loss                                                        |       | $                                                | (319       | ) | $ | (3,903 | ) |
| Comprehensive loss attributable to the  noncontrolling interest |       | 69                                               |       | 813 |   |
| Comprehensive loss attributable to  Gaiam, Inc.            |       | $                                                | (250       | ) | $ | (3,090 | ) |

 

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

 

During the first quarter of 2010, we granted 64,000 stock options toemployees under our 2009 Long-Term Incentive Plan and cancelled 51,100 stockoptions previously issued under our 1999 Long-Term Incentive Plan. Totalshare-based compensation expense recognized was $0.4 million and $0.6 millionfor the three months ended March 31, 2010 and 2009, respectively, and isshown in corporate, general and administration expenses on our condensedconsolidated statements of operations.

 

Alsoduring the first quarter of 2010, Real Goods Solar granted 519,000 new stockoptions under the Real Goods Solar 2009 Long-Term Incentive Plan.  The new stock options commence vesting 2%over 50 months only upon the attainment of a certain amount of pre-tax incomefor the year ending December 31, 2010. For these performance based stockoptions, the attainment of the performance condition was not probable as of March 31,2010 and, therefore, no compensation expense for these grants has beenrecorded.

 

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

 

Basic net loss per shareattributable to Gaiam, Inc. common shareholders excludes any dilutiveeffects of options. We compute basic net loss per share attributable to Gaiam, Inc.common shareholders using the weighted average number of common sharesoutstanding during the period. We compute diluted net loss per shareattributable to Gaiam, Inc. common shareholders using the weighted averagenumber of common shares and common stock equivalents outstanding during theperiod. We excluded common stock equivalents of 596,000 and 1,242,000 from thecomputation of diluted net loss per share attributable to Gaiam, Inc.common shareholders for the three months ended March 31, 2010 and 2009,respectively, because their effect was antidilutive.

 

The following table setsforth the computation of basic and diluted net loss per share attributable toGaiam, Inc. common shareholders:

 
| ** **                                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands, except per share data)**                      | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
|                                                                                    |       |                                             |       |   |   |
| Numerator for basic and diluted net loss per share                                      |       | $                                                | (250       | ) | $ | (3,090 | ) |
| Denominator:                                                                            |       |                                             |       |   |   |
| Weighted average share for basic net loss per  share                                    |       | 23,140                                           |       | 23,957 |   |
| Effect of dilutive securities:                                                          |       |                                             |       |   |   |
| Weighted average of common stock and stock options                                      |       | —                                           |       | — |   |
| Denominator for diluted net loss per share                                              |       | 23,140                                           |       | 23,957 |   |
|                                                                                    |       |                                             |       |   |   |
| Net loss per share attributable to  Gaiam, Inc. common shareholders — basic   |       | $                                                | (0.01      | ) | $ | (0.13 | ) |
| Net loss per share attributable to  Gaiam, Inc. common shareholders — diluted |       | $                                                | (0.01      | ) | $ | (0.13 | ) |

 

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

 

We manage our business andaggregate our operational and financial information in accordance with threereportable segments. The direct to consumer segment contains direct responsemarketing programs, catalogs, Internet, and subscription community saleschannels; the business segment comprises retailers, media and corporate accountchannels; and the solar segment reflects solar energy businesses.

 

Althoughwe are able to track revenues by sales channel, the management, allocation ofresources and analysis and reporting of expenses is presented on a combinedbasis, at the reportable segment level. Contribution margin is defined as net revenue less cost of goods soldand total operating expenses.

 

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Financial information forour segments is as follows:

 
| ** **                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                                            | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
| Net revenue:                                                                       |       |                                             |       |   |   |
| Direct to consumer                                                                 |       | $                                                | 24,610     |   | $ | 27,689 |   |
| Business                                                                           |       | 22,568                                           |       | 18,703 |   |
| Solar                                                                              |       | 15,005                                           |       | 9,531 |   |
| Consolidated net revenue                                                           |       | 62,183                                           |       | 55,923 |   |
| Contribution margin (loss):                                                        |       |                                             |       |   |   |
| Direct to consumer                                                                 |       | (2,157                                           | )          | (3,580 | ) |
| Business                                                                           |       | 1,566                                            |       | (394 | ) |
| Solar                                                                              |       | 28                                               |       | (2,252 | ) |
| Consolidated contribution loss                                                     |       | (563                                             | )          | (6,226 | ) |
| Reconciliation of contribution loss to net loss  attributable to Gaiam, Inc.: |       |                                             |       |   |   |
| Interest and other income                                                          |       | 67                                               |       | 74 |   |
| Income tax benefit                                                                 |       | (177                                             | )          | (2,249 | ) |
| Net loss attributable to noncontrolling interest                                   |       | 69                                               |       | 813 |   |
| Net loss attributable to Gaiam, Inc.                                          |       | $                                                | (250       | ) | $ | (3,090 | ) |

# ** **

# **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.

 

# **Overview andOutlook**

# ** **

# **We are alifestyle media company providing a broad selection of information, media,products and services to customers who value personal development, wellness,ecological lifestyles, and responsible media.**Our media brand is built around ourability to develop and offer media content, products, and lifestyle solutionsto 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, subscriptions,catalogs, and through national retailers and corporate 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 directly to retailers, with our products available inapproximately 67,000 retail doors in the United States. During the firstquarter of 2010, this segment generated revenue of $22.6 million, up from $18.7million during the first quarter of 2009, an increase of 20.7%. During thefirst quarter of 2010, we expanded our store within store presentations, whichinclude custom fixtures that we design, to over 12,000 locations.  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 approximately 4,500 doors, up from 4,000 at theend of the first quarter of 2009.**

# ** **

# **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, a growing subscription base, and customerfeedback on us and the LOHAS industry’s focus and future. During the firstquarter of 2010, this segment generated revenues of $24.6 million, down from$27.7 million during the first quarter of 2009. This decrease reflects a planned reduction to our catalog circulation of21% and the closure of an unprofitable business.**

 

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# ** **

# **Our solarsegment offers residential and small commercial solar energy integrationservices.  On May 13, 2008, our solarenergy integration business consummated an initial public offering and hassince been managed as a separate segment. This business has grown its sales and expanded its market territories.During the first quarter of 2010, this segment generated revenues of $15.0million, up from $9.5 million during the first quarter of 2009.  We have and will continue to use the IPOproceeds to fund this segment’s working capital needs and general corporatepurposes, which may include future acquisitions of businesses.**

# ** **

# **Webelieve our growth will be driven by media content, products, and servicesdelivered to the consumer via Internet, retailers, licensing, electronicdownloads and subscriptions. We have increased our focus on media contentcreation and distribution, and media category management at retailers. Ourrecent licensing agreements will expand our distribution within thenon-theatrical media category.**

# ** **

# **Webelieve a number of factors are important to our long-term success, includingincreasing our branded store within a store presence, expanding categorymanagement into new retailers and genres, increasing international growth byexpanding into new markets primarily through license arrangements, extendingour product lines and enhancing our multimedia platform community through newmedia opportunities, new membership programs, initiatives and acquisitions.**

 

**Resultsof Operations**

 

The following table setsforth certain financial data as a percentage of revenue for the periodsindicated:

 
| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
|                                             |       |                                             |       |   |   |
| Net revenue                                      |       | 100.0                                            | %          | 100.0 | % |
| Cost of goods sold                               |       | 48.2                                             | %          | 44.6 | % |
| Gross profit                                     |       | 51.8                                             | %          | 55.4 | % |
|                                             |       |                                             |       |   |   |
| Expenses:                                        |       |                                             |       |   |   |
| Selling and operating                            |       | 47.9                                             | %          | 60.7 | % |
| Corporate, general and administration            |       | 4.8                                              | %          | 5.8 | % |
| Total expenses                                   |       | 52.7                                             | %          | 66.5 | % |
|                                             |       |                                             |       |   |   |
| Loss from operations                             |       | -0.9                                             | %          | -11.1 | % |
|                                             |       |                                             |       |   |   |
| Interest and other income                        |       | 0.1                                              | %          | 0.1 | % |
| Income tax benefit                               |       | -0.3                                             | %          | -4.0 | % |
| Net loss attributable to noncontrolling interest |       | 0.1                                              | %          | 1.5 | % |
| Net loss attributable to Gaiam, Inc.        |       | -0.4                                             | %          | -5.5 | % |

 

*ThreeMonths Ended March 31, 2010 Compared to Three Months Ended March 31,2009*

 

*Net revenue*. Net revenue increased $6.3 million, or 11.2%, to$62.2 million during the first quarter of 2010 from $55.9 million during thefirst quarter of 2009.  Net revenue inour business segment increased $3.9 million, or 20.7%, to $22.6 million duringthe first quarter of 2010 from $18.7 million during the first quarter of 2009,primarily reflecting improvement in our domestic business, including increasedstore within store presentations, our continued success as media categorymanager and the addition of several new media and accessory brands.  Net revenue in our direct to consumer segmentdecreased $3.1 million to $24.6 million during the first quarter of 2010 from$27.7 million during the first quarter of 2009. This 11.1% decrease in thedirect to consumer segment net revenue primarily reflects our decision tofurther reduce catalog circulation by 21% and the closure of an unprofitablebusiness.  Net revenue in our solar segmentincreased $5.5 million to $15.0 million during the first quarter of 2010 from$9.5 million during the first quarter of 2009, primarily due to organic growth.

 

*Grossprofit*. Gross profit increased $1.2 million, or 4.0%, to $32.2 million duringthe first quarter of 2010 from $31.0 million during the first quarter of2009.  As a percentage of net revenue,gross profit decreased to 51.8% during the first quarter of 2010 from 55.4%during the first quarter of 2009.  Thedecrease in gross profit percentage primarily reflects increased revenue fromour lower margin solar segment and a higher mix of media category managementsales.

 

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*Selling and operating expenses*. Selling and operatingexpenses decreased $4.2 million, or 12.3%, to $29.8 million during the firstquarter of 2010 from $33.9 million during the first quarter of 2009.  As a percentage of net revenue, selling andoperating expenses decreased to 47.9% during the first quarter of 2010 from60.7% during the first quarter of 2009. This decrease is primarily a result of leveraging sales growth, reducingpayroll costs and optimizing catalog prospecting.

 

*Corporate,general and administration expenses*. Corporate, general and administration expensesdecreased $0.3 million, or 8.5%, to $3.0 million during the first quarter of2010 from $3.3 million during the first quarter of 2009.  As of percentage of net revenue, corporate,general and administration expenses decreased to 4.8% during the first quarterof 2010 from 5.8% during the first quarter of 2009 as a result of reductions inpayroll and related expenses.

 

*Net loss attributable to noncontrolling interest*. Net lossattributable to noncontrolling interest decreased to $0.1 million during thefirst quarter of 2010 from $0.8 million during the first quarter of 2009primarily as a result of the improved earnings in our solar segment.

 

*Net loss attributable to Gaiam, Inc.*  As a result of the above factors, net lossattributable to Gaiam, Inc. was $0.3 million during the first quarter of2010 compared to $3.1 million during the first quarter of 2009.  Net loss per share attributable to Gaiam, Inc.common shareholders was $0.01 per share during the first quarter of 2010compared to $0.13 per share during the first quarter of 2009.

 

**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.

 

**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 offerings, our abilityto expand our customer base, the cost of ongoing upgrades to our productofferings, the level of expenditures for sales and marketing, the level ofinvestment in distribution systems and facilities and other factors. The timingand amount of these capital requirements are variable and we cannot accuratelypredict them. Additionally, we will continue to pursue opportunities to expandour media libraries, evaluate possible investments in businesses, products andtechnologies, and increase our sales and marketing programs and brandpromotions as needed.

 

We have a revolving lineof credit agreement with a financial institution with a current expiration dateof June 19, 2010.  We are currentlyin negotiations to renew the line of credit agreement, which was recentlyextended pending the renewal negotiations. The credit agreement permitsborrowings up to the lesser of $15 million or our borrowing base which iscalculated based upon the collateral value of our accounts receivable,inventory, and certain property and equipment. Borrowings under this agreementbear interest at the lower of prime rate less 75 basis points or LIBOR plus 275basis points. Borrowings are secured by a pledge of certain of our assets, andthe agreement contains various financial covenants, including covenantsrequiring compliance with certain financial ratios. At March 31, 2010, wehad no amounts outstanding under this agreement; however, $0.5 million wasreserved for outstanding letters of credit. We believe we are in compliance with all of the financial covenantsunder this credit agreement.

 

***CashFlows***

 

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

 
| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                 | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
| Net cash provided by (used in):         |       |                                             |       |   |   |
| Operating activities                    |       | $                                                | 2,094      |   | $ | 8,009 |   |
| Investing activities                    |       | (2,816                                           | )          | (1,776 | ) |
| Financing activities                    |       | 538                                              |       | — |   |
| Net change in cash and cash equivalents |       | $                                                | (184       | ) | $ | 6,233 |   |

 

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*Operatingactivities*. Ouroperating activities provided net cash of $2.1 million and $8.0 million duringthe first quarters of 2010 and 2009, respectively. Our net cash provided byoperating activities during the first quarter of 2010 was primarilyattributable to decreased accounts receivable, inventory and other currentassets of $11.8 million and noncash adjustments of $2.1 million to our netloss, partially offset by decreased accounts payable of $11.2 million andincreased deferred advertising costs of $0.6 million. Accounts receivable didnot decline as much as in the comparable quarter of last year because a higherpercentage of our sales during the first quarter of 2010 were to large retaileraccounts which are on longer pay cycles. The reduction in accounts payablereflects payments for inventory purchases of holiday and fitness seasonshipments.  Our net cash provided byoperating activities during the first quarter of 2009 was primarilyattributable to decreased accounts receivable and inventory of $18.9 millionand refunded income taxes of $3.2 million, partially offset by decreasedaccounts payable and accrued liabilities of $9.4 million, net loss of $3.9million and noncash adjustments of $0.5 million to our net loss.

 

*Investingactivities*. Ourinvesting activities used net cash of $2.8 million and $1.8 million during thefirst quarters of 2010 and 2009, respectively. The net cash used in investingactivities during the first quarter of 2010 was used primarily to acquirelicensing rights for the Discovery Channel’s media catalog for $1.7 million,other media content for $0.7 million and property and equipment to maintainnormal operations for $0.4 million. The net cash used in investing activitiesduring the first quarter of 2009 was used primarily to acquire property andequipment for $1.3 million, of which $0.4 million was acquired to maintainnormal operations, and media content for $0.5 million.

 

*Financingactivities*. Ourfinancing activities provided net cash of $0.5 million during the first quarterof 2010 as a result of stock option exercise issuances and related taxbenefits.

 

On March 8,2010, we declared an annual cash dividend of $0.15 per share that, for 2010,totaled $3.5 million.  This dividend,which is intended to cover the cost of capital to our shareholders, was paidfor the first time to our shareholders of record on April 1, 2010.

 

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, ourprojected cash needs may change as a result of acquisitions, productdevelopment, 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 market. For any future investment,acquisition or joint venture opportunities, we may consider usingthen-available liquidity, issuing equity securities or incurring additionalindebtedness.

 

**Contractual Obligations**

 

We have commitments pursuant to lease agreements, but have nooutstanding commitments pursuant to purchase obligations. The following tableshows 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 |       | $         | 8,316      |                      | $          | 2,234              |       | $                  | 3,765      |                       | $          | 2,317 |   | $ | — |   |
|                             |            |           |            |                           |            |                    |            |                    |            |                            |            |  |  |  |  |  |

 

**RiskFactors**

 

We wish to caution you that there are risks and uncertainties thatcould cause our actual results to be materially different from those indicatedby forward looking statements that we make from time to time in filings withthe Securities and Exchange Commission, news releases, reports, proxystatements, registration statements and other written communications as well asoral forward looking statements made from time to time by our representatives.These risks and uncertainties include, but are not limited to, those riskslisted in our Annual Report on Form 10-K for the year ended December 31,2009. 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 andQualitative Disclosures About Market Risk**

 

Weare exposed to market risks, which include changes in U.S. interest rates andforeign exchange rates. We do not engage in financial transactions for tradingor speculative purposes, but do have forward contracts for foreign currencytransactions, the gains and losses from which historically have beenimmaterial.

 

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Any borrowings we might make under our bankcredit facility would bear interest at the lower of prime rate less 75 basispoints or LIBOR plus 275 basis points. We do not have any amounts outstandingunder our credit line, so any unfavorable change in interest rates would nothave a material impact on our results from operations or cash flows unless wemake borrowings in the future.

 

We purchase a significant amount of inventoryfrom vendors outside of the U.S. in transactions that are primarily U.S. dollardenominated transactions. A decline in the relative value of the U.S. dollar toother foreign currencies has and may continue to lead to increased purchasingcosts.

 

**Item4.    Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Our chief executiveofficer and chief accounting officer conducted an evaluation of theeffectiveness 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 March 31, 2010, theyhave concluded that those disclosure controls and procedures are effective.

 

**Changesin Internal Control over Financial Reporting**

 

No changes in ourinternal control over financial reporting occurred during the quarter ended March 31,2010 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

## ** **

## **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**

 

Nomaterial changes.

 

**Item 2.    Sales of Unregistered Securitiesand Use of Proceeds**

 

None.

 

**Item 3.    Defaults Upon Senior Securities**

 

None.

 

**Item 4.    Reserved**

 

None.

 

**Item 5.    Other Information**

 

None.

 

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**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 Accounting 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 Accounting 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**

### ** **

In accordance with therequirements of the Securities and Exchange Act, the registrant caused thisreport to be signed on its behalf, by the undersigned, thereunto dulyauthorized.

 
|   | Gaiam, Inc.  |
|--------|-------------------|
|   | (Registrant)      |
|   | May 10, 2010 |
|   |              |   |
|   | By:               | /s/ Lynn Powers |
|   |              | Lynn Powers |
|   |              | Chief Executive Officer  and President(principal  executive officer) |
|   |              |   |
|   | By:               | /s/ Stephen J. Thomas |
|   |              | Stephen J. Thomas |
|   |              | Chief Accounting  Officer |
|   |              | (principal financial  and accounting officer) |

 

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