Table of Contents

 

 

 

**UnitedStatesSecurities and 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 March 31, 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 principalexecutive offices)

 

**(303) 222-3600**(Registrant’stelephone number, including area code)

 

Indicateby check mark whether the registrant:  (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Securities andExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90days.  YES  x    NO  o

 

Indicate bycheck mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  YES  o    NO  o

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See definitionsof “large accelerated filer,” “accelerated filer,” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act.:

 

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

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date:

 

| **Class**                                    | ** ** | **Outstanding at May 8, 2009** |
|----------------------------------------------|------------|----------------------------------------------------|
| Class A Common Stock ($.0001 par value) |       | 17,617,890                                         |
| Class B Common Stock ($.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, 2009 and December 31, 2008                                | 3 |
|                                   | Condensed consolidated statements of operations for  the Three Months Ended March 31, 2009 and 2008 | 4 |
|                                   | Condensed consolidated statements of cash flows for  the Three Months Ended March 31, 2009 and 2008           | 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                                                             | 13 |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item 4.**                            | Controls and  Procedures                                                                                                | 13 |
| ** **                             | ** **                                                                                                              | ** ** |
| **PART II. OTHER INFORMATION**    | 14                                                                                                                      |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item  1.**                           | Legal Proceedings                                                                                                       | 14 |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item  1A.**                          | Risk Factors                                                                                                            | 14 |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item 2.**                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                                            | 14 |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item 3**                             | Defaults  Upon Senior Securities                                                                                        | 14 |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item 4.**                            | Submission  of Matters to a Vote of Security Holders                                                                    | 14 |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item  5.**                           | Other Information                                                                                                       | 14 |
| ** **                             | ** **                                                                                                              | ** ** |
| **Item 6.**                            | Exhibits                                                                                                                | 14 |
| ** **                             | ** **                                                                                                              | ** ** |
|                                   | SIGNATURES                                                                                                              | 15 |

 

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

# **This report may containforward-looking statements that involve risks and uncertainties. The words “anticipate,”“believe,” “plan,” “estimate,” “expect,” “strive,” “future,” “intend” andsimilar expressions are intended to identify such forward-looking statements.Our actual results could differ materially from the results anticipated inthese forward-looking statements as a result of certain factors set forth under“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” “Quantitative and Qualitative Disclosures about Market Risk” andelsewhere in this report. Risks and uncertainties that could cause actualresults to differ include, without limitation, general economic conditions,competition, loss of key personnel, pricing, brand reputation, consumer trends,acquisitions, new initiatives undertaken by us, security and informationsystems, legal liability for website content, merchandise supply problems,failure of third parties to provide adequate service, our reliance oncentralized customer service, overstocks and merchandise returns, our relianceon a centralized fulfillment center, increases in postage and shipping costs,E-commerce trends, future Internet related taxes, our founder’s control of us,fluctuations in quarterly operating results, customer interest in our products,the effect of government regulation and other risks and uncertainties includedin our filings with the Securities and Exchange Commission. We caution you thatno forward-looking statement is a guarantee of future performance, and youshould not place undue reliance on these forward-looking statements whichreflect our view only as of the date of this report. We undertake no obligationto update any forward-looking information.**

# ** **

# **PART I. FINANCIAL INFORMATION**

# ** **

**Item 1.     FinancialStatements (Unaudited)**

 

# **Unaudited Interim Condensed Consolidated FinancialStatements**

# ** **

We have prepared our unauditedinterim condensed consolidated financial statements included herein pursuant tothe rules and regulations of the United States Securities and ExchangeCommission. Certain information and note disclosures normally included inannual financial statements prepared in accordance with accounting principlesgenerally accepted in the United States have been condensed or omitted pursuantto these rules and regulations, although we believe that the disclosuresmade are adequate to make the information not misleading. In our opinion, theunaudited interim condensed financial statements contain all adjustments(consisting of only normal recurring adjustments) necessary to present fairly,in all material respects, our consolidated financial position as of March 31,2009, the interim results of operations for the three months ended March 31,2009 and 2008, and cash flows for the three months ended March 31, 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**

 
| ** **                                                                                                                                                                                                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(in thousands, except share and per share data)**                                                                                                                                         | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                                                                     | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                                     |       |               |       |                  |       |
| Current assets:                                                                                                                                                                                                                |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                      |       | $                  | 38,198     |                  | $          | 31,965 |   |
| Accounts receivable, net                                                                                                                                                                                                       |       | 23,013             |       | 33,664                |       |
| Inventory, less allowances                                                                                                                                                                                                     |       | 32,581             |       | 40,782                |       |
| Deferred advertising costs                                                                                                                                                                                                     |       | 2,569              |       | 2,578                 |       |
| Receivable and deferred tax assets                                                                                                                                                                                             |       | 13,249             |       | 15,448                |       |
| Other current assets                                                                                                                                                                                                           |       | 4,854              |       | 4,795                 |       |
| Total current assets                                                                                                                                                                                                           |       | 114,464            |       | 129,232               |       |
|                                                                                                                                                                                                                           |       |               |       |                  |       |
| Property and equipment, net                                                                                                                                                                                                    |       | 27,856             |       | 27,381                |       |
| Media library, net                                                                                                                                                                                                             |       | 12,157             |       | 12,102                |       |
| Deferred tax assets, net                                                                                                                                                                                                       |       | 7,416              |       | 6,076                 |       |
| Goodwill                                                                                                                                                                                                                       |       | 23,434             |       | 23,180                |       |
| Other intangibles, net                                                                                                                                                                                                         |       | 828                |       | 880                   |       |
| Notes receivable and other assets                                                                                                                                                                                              |       | 3,230              |       | 3,247                 |       |
| Total assets                                                                                                                                                                                                                   |       | $                  | 189,385    |                  | $          | 202,098 |   |
|                                                                                                                                                                                                                           |       |               |       |                  |       |
| **LIABILITIES AND EQUITY**                                                                                                                                                                                                     |       |               |       |                  |       |
| Current liabilities:                                                                                                                                                                                                           |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                                                               |       | $                  | 17,394     |                  | $          | 26,567 |   |
| Accrued liabilities                                                                                                                                                                                                            |       | 6,577              |       | 6,885                 |       |
| Total current liabilities                                                                                                                                                                                                      |       | 23,971             |       | 33,452                |       |
|                                                                                                                                                                                                                           |       |               |       |                  |       |
| Commitments and contingencies                                                                                                                                                                                                  |       |               |       |                  |       |
|                                                                                                                                                                                                                           |       |               |       |                  |       |
| Equity:                                                                                                                                                                                                                        |       |               |       |                  |       |
| Gaiam, Inc. shareholders’ equity:                                                                                                                                                                                    |       |               |       |                  |       |
| Class A common stock, $.0001 par value, 150,000,000 shares authorized, 18,599,890 and  18,541,201 shares issued and outstanding at March 31, 2009  and December 31, 2008, respectively |       | 2                  |       | 2                     |       |
| Class B common stock, $.0001 par value, 50,000,000 shares  authorized, 5,400,000 issued and outstanding at March 31, 2009 and December 31,  2008                                                           |       | 1                  |       | 1                     |       |
| Additional paid-in capital                                                                                                                                                                                                     |       | 164,275            |       | 163,652               |       |
| Accumulated other comprehensive income                                                                                                                                                                                         |       | 88                 |       | 88                    |       |
| Accumulated deficit                                                                                                                                                                                                            |       | (13,365            | )          | (10,275               | )          |
| Total Gaiam, Inc. shareholders’ equity                                                                                                                                                                               |       | 151,001            |       | 153,468               |       |
| Noncontrolling interest                                                                                                                                                                                                        |       | 14,413             |       | 15,178                |       |
| Total equity                                                                                                                                                                                                                   |       | 165,414            |       | 168,646               |       |
| Total liabilities and equity                                                                                                                                                                                                   |       | $                  | 189,385    |                  | $          | 202,098 |   |

 

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)**                 | ** ** | **2009**                                                           | ** ** | **2008** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**                                                    | ** ** |
| Net revenue                                                                   |       | $                                                                  | 55,923     |   | $ | 65,173 |   |
| Cost of goods sold                                                                 |       | 24,937                                                             |       | 24,195 |   |
| Gross profit                                                                       |       | 30,986                                                             |       | 40,978 |   |
|                                                                               |       |                                                               |       |   |   |
| Expenses:                                                                          |       |                                                               |       |   |   |
| Selling and operating                                                              |       | 33,943                                                             |       | 34,933 |   |
| Corporate, general and administration                                              |       | 3,269                                                              |       | 3,379 |   |
| Total expenses                                                                     |       | 37,212                                                             |       | 38,312 |   |
|                                                                               |       |                                                               |       |   |   |
| Income (loss) from operations                                                      |       | (6,226                                                             | )          | 2,666 |   |
|                                                                               |       |                                                               |       |   |   |
| Interest and other income                                                          |       | 74                                                                 |       | 469 |   |
|                                                                               |       |                                                               |       |   |   |
| Income (loss) before income taxes and noncontrolling interest                      |       | (6,152                                                             | )          | 3,135 |   |
|                                                                               |       |                                                               |       |   |   |
| Income tax expense (benefit)                                                       |       | (2,249                                                             | )          | 1,238 |   |
|                                                                               |       |                                                               |       |   |   |
| Net income (loss)                                                                  |       | (3,903                                                             | )          | 1,897 |   |
|                                                                               |       |                                                               |       |   |   |
| Net loss attributable to noncontrolling interest                                   |       | 813                                                                |       | 316 |   |
|                                                                               |       |                                                               |       |   |   |
| Net income (loss) attributable to Gaiam, Inc.                                 |       | $                                                                  | (3,090     | ) | $ | 2,213 |   |
|                                                                               |       |                                                               |       |   |   |
| Net income (loss) per share attributable to Gaiam, Inc. common  shareholders: |       |                                                               |       |   |   |
| Basic                                                                              |       | $                                                                  | (0.13      | ) | $ | 0.09 |   |
| Diluted                                                                            |       | $                                                                  | (0.13      | ) | $ | 0.09 |   |
|                                                                               |       |                                                               |       |   |   |
| Weighted-average shares outstanding:                                               |       |                                                               |       |   |   |
| Basic                                                                              |       | 23,957                                                             |       | 25,084 |   |
| Diluted                                                                            |       | 23,957                                                             |       | 25,352 |   |

 

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)**                                                                                  | ** ** | **2009**                                                           | ** ** | **2008** | ** ** |
| ** **                                                                                               | ** ** | **(unaudited)**                                                    | ** ** |
| **Operating activities**                                                                            | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                        |       | $                                                                  | (3,090     | ) | $ | 2,213 |   |
| Adjustments to reconcile net income (loss) to net cash provided by  (used in) operating activities: |       |                                                               |       |   |   |
| Depreciation                                                                                             |       | 760                                                                |       | 812 |   |
| Amortization                                                                                             |       | 857                                                                |       | 1,682 |   |
| Noncontrolling interest in consolidated subsidiaries                                                     |       | (813                                                               | )          | (316 | ) |
| Net gain on disposition of investments                                                                   |       | —                                                             |       | (175 | ) |
| Share-based compensation expense                                                                         |       | 556                                                                |       | 323 |   |
| Deferred and stock option income tax expense (benefit)                                                   |       | (2,635                                                             | )          | 2,035 |   |
| Changes in operating assets and liabilities, net of effects from  acquisitions:                          |       |                                                               |       |   |   |
| Accounts receivable, net                                                                                 |       | 10,651                                                             |       | 3,269 |   |
| Inventory, net                                                                                           |       | 8,201                                                              |       | 533 |   |
| Deferred advertising costs                                                                               |       | (189                                                               | )          | 56 |   |
| Income taxes receivable                                                                                  |       | 3,239                                                              |       | — |   |
| Other current assets                                                                                     |       | (111                                                               | )          | (145 | ) |
| Accounts payable                                                                                         |       | (9,109                                                             | )          | (9,424 | ) |
| Accrued liabilities                                                                                      |       | (308                                                               | )          | (2,225 | ) |
| Net cash provided by (used in) operating activities                                                      |       | 8,009                                                              |       | (1,362 | ) |
|                                                                                                     |       |                                                               |       |   |   |
| **Investing activities**                                                                                 |       |                                                               |       |   |   |
| Purchase of property, equipment and media rights                                                         |       | (1,776                                                             | )          | (6,515 | ) |
| Purchase of acquisitions and note, net of cash acquired                                                  |       | —                                                             |       | (7,504 | ) |
| Disposition of investments, net                                                                          |       | —                                                             |       | (1,381 | ) |
| Net cash used in investing activities                                                                    |       | (1,776                                                             | )          | (15,400 | ) |
|                                                                                                     |       |                                                               |       |   |   |
| **Financing activities**                                                                                 |       |                                                               |       |   |   |
| Repurchase of Class A common stock, including related costs                                         |       | —                                                             |       | (1,332 | ) |
| Net cash used in financing activities                                                                    |       | —                                                             |       | (1,332 | ) |
|                                                                                                     |       |                                                               |       |   |   |
| Effects of exchange rates on cash and cash equivalents                                                   |       | —                                                             |       | (13 | ) |
|                                                                                                     |       |                                                               |       |   |   |
| Net change in cash and cash equivalents                                                                  |       | 6,233                                                              |       | (18,107 | ) |
| Cash and cash equivalents at beginning of period                                                         |       | 31,965                                                             |       | 66,258 |   |
| Cash and cash equivalents at end of period                                                               |       | $                                                                  | 38,198     |   | $ | 48,151 |   |
|                                                                                                     |       |                                                               |       |   |   |
| **Supplemental cash flow information**                                                                   |       |                                                               |       |   |   |
| Interest paid                                                                                            |       | $                                                                  | 1          |   | $ | 29 |   |
| Income taxes paid                                                                                        |       | $                                                                  | 359        |   | $ | 62 |   |
| Common stock issued for acquisitions                                                                     |       | $                                                                  | 64         |   | $ | 5,105 |   |

 

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 31,2009, except for the adoption of Financial Accounting Standards Board, or FASB,Statements No. 141(R), *Business*Combinations,No. 157, *Fair Value Measurements*, No. 160,*Noncontrolling Interests in Consolidated FinancialStatements — An Amendment of ARB No. 51*, and No. 161, *Disclosures about Derivatives and Hedging Activities — an Amendment ofFASB Statement 133*.  SFAS 141(R) requiresan 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.  SFAS 157 defines fair value, establishes aframework for measuring fair value in GAAP, and expands disclosures about fairvalue measurements.  SFAS 160 establishesnew accounting and reporting standards for a noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary.  SFAS 161enhances required disclosuresregarding derivatives and hedging activities. We have applied SFAS 160 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 statements did not have a material impact on ourunaudited interim condensed consolidated financial statements for the quarterended March 31, 2009.

 

*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 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 first three months of 2009, we issued a total of 8,689shares of our Class A common stock to our independent directors, in lieuof cash compensation, for services rendered in 2009; issued 25,000 shares ofour Class A common stock as contingent consideration for a businessacquired in 2007 (see Note 8. Mergers and Acquisitions); and issued 25,000shares of our Class A common stock for consulting services.

 

Our subsidiary, Real Goods Solar, Inc. (“RealGoods”), issued 15,424 shares valued at $31,000 to compensate nonemployee boardmembers for services rendered during the first quarter of 2009.

 

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.

 

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| ** **                                                                                         | ** ** | ** ** | ** ** | ** **              | ** ** | **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 |       | 597        |       | —                  |       | —                                 |       | —                                        |       | — |   | 597 |   | — |   |
| Issuance of  subsidiary stock in conjunction with compensation                                     |       | 74         |       | —                  |       | —                                 |       | —                                        |       | — |   | 26 |   | 48 |   |
| Comprehensive  loss:                                                                               |       |       |       |                    |       |                                   |       |                                          |       |   |   |   |   |   |   |
| Net loss                                                                                           |       | (3,903     | )          | (3,903                  | )          | (3,090                                 | )          | —                                        |       | — |   | — |   | (813 | ) |
| Comprehensive  loss                                                                                |       | (3,903     | )          | $                       | (3,903     | )                                      | —     |                                          | —     |   | — |   | — |   | — |   |
| Balance at  March 31, 2009                                                                    |       | $          | 165,414    |                    |       |                                   | $          | (13,365                                       | )          | $ | 88 |   | $ | 3 |   | $ | 164,275 |   | $ | 14,413 |   |

 

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

 
| ** **                                                                                                                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands, except  share data)**                                                                                               | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                                                                                                                                      |       |                                             |       |   |   |
| Net income (loss) attributable to Gaiam, Inc.                                                                                        |       | $                                                | (3,090     | ) | $ | 2,213 |   |
| Increase in Gaiam, Inc.’s paid-in capital for the issuance of  15,424 Real Goods common shares in conjunction with compensation |       | 26                                               |       | — |   |
| Change from net income (loss) attributable to Gaiam, Inc. and  transfers from the noncontrolling interest                            |       | $                                                | (3,064     | ) | $ | 2,213 |   |

 

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

 

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

 
| ** **                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                                           | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                                                                              |       |                                             |       |   |   |
| Net income (loss)                                                                 |       | $                                                | (3,903     | ) | $ | 1,897 |   |
| Other comprehensive loss, net of tax:                                             |       |                                             |       |   |   |
| Foreign currency translation adjustment, net of reclassification and  related tax |       | —                                           |       | (898 | ) |
| Total other comprehensive loss, net of tax                                        |       | —                                           |       | (898 | ) |
| Comprehensive income (loss)                                                       |       | (3,903                                           | )          | 999 |   |
| Comprehensive loss attributable to the noncontrolling interest                    |       | 813                                              |       | 316 |   |
| Comprehensive income (loss) attributable to Gaiam, Inc.                      |       | $                                                | (3,090     | ) | $ | 1,315 |   |

 

Disposition of our investment in our UK operations during the quarterended March 31, 2008 resulted in a net loss which lowered our netincome.  The foreign currency translationamount attributable to that entity and accumulated in the translationadjustment component of equity was removed from the other comprehensive incomecomponent of equity and reported as part of the loss on the sale of theinvestment.

 

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

 

During the first quarter of 2009, for options previously granted to 49employees, we reset the exercise price to $5.00 per share.  The options shall continue to vest over theirremaining original vesting periods. These modifications will result in total incremental share-basedcompensation cost of approximately $212,000 over the next 5 years.

 

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In addition to the deemed new grants and cancellations resulting fromthe exercise price modification explained above, during the first quarter of2009, we granted 75,500 stock options to employees and cancelled 32,260 stockoptions. Total share-based compensation recognized was $0.6 million and $0.3million for the three months ended March 31, 2009 and 2008, respectively,and is shown in corporate, general and administration expenses on our condensedconsolidated statements of operations.

 

Alsoduring the first quarter of 2009, Real Goods granted 449,500 new stock optionsand cancelled 122,000 stock options under the Real Goods 2008 Long-TermIncentive Plan. The cancelled options resulted primarily from the nonattainmentof the performance condition for 2008. The new stock options commence vesting 2% over 50 months only upon theattainment of a certain amount of pre-tax income for the year ending December 31,2009. For these performance based stock options, the attainment of theperformance condition was not probable as of March 31, 2009 and,therefore, no compensation expense for these grants has been recorded.

 

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

 

Basic net income (loss)per share attributable to Gaiam, Inc. common shareholders excludes anydilutive effects of options. We compute basic net income (loss) per share usingthe weighted average number of common shares outstanding during the period. Wecompute diluted net income (loss) per share attributable to Gaiam, Inc.common shareholders using the weighted average number of common and common stockequivalent shares outstanding during the period. We excluded common equivalentshares of 1,242,000 and 74,000 from the computation of diluted net income(loss) per share for the three months ended March 31, 2009 and 2008,respectively, because their effect was antidilutive.

 

The following table setsforth the computation of basic and diluted net income per share:

 
| ** **                                                                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands, except per share data)**                               | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                                                                                             |       |                                             |       |   |   |
| Numerator for basic and diluted net income (loss) per share                                      |       | $                                                | (3,090     | ) | $ | 2,213 |   |
| Denominator:                                                                                     |       |                                             |       |   |   |
| Weighted average share for basic net income (loss) per share                                     |       | 23,957                                           |       | 25,084 |   |
| Effect of dilutive securities:                                                                   |       |                                             |       |   |   |
| Weighted average of common stock and stock options                                               |       | —                                           |       | 268 |   |
| Denominator for diluted net income (loss) per share                                              |       | 23,957                                           |       | 25,352 |   |
|                                                                                             |       |                                             |       |   |   |
| Net income (loss) per share attributable to Gaiam, Inc. common  shareholders – basic   |       | $                                                | (0.13      | ) | $ | 0.09 |   |
| Net income (loss) per share attributable to Gaiam, Inc. common shareholders  – diluted |       | $                                                | (0.13      | ) | $ | 0.09 |   |

 

**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 comprisesretailers, media and corporate account channels, and the solar segment reflectssolar 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. 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  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                                                              | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Net revenue:                                                                                         |       |                                             |       |   |   |
| Direct to consumer                                                                                   |       | $                                                | 27,689     |   | $ | 32,205 |   |
| Business                                                                                             |       | 18,703                                           |       | 26,400 |   |
| Solar                                                                                                |       | 9,531                                            |       | 6,568 |   |
| Consolidated net revenue                                                                             |       | 55,923                                           |       | 65,173 |   |
| Contribution margin (loss):                                                                          |       |                                             |       |   |   |
| Direct to consumer                                                                                   |       | (3,580                                           | )          | (1,165 | ) |
| Business                                                                                             |       | (394                                             | )          | 4,320 |   |
| Solar                                                                                                |       | (2,252                                           | )          | (489 | ) |
| Consolidated contribution margin (loss)                                                              |       | (6,226                                           | )          | 2,666 |   |
| Reconciliation of contribution margin (loss) to net income (loss)  attributable to Gaiam, Inc.: |       |                                             |       |   |   |
| Interest and other income                                                                            |       | 74                                               |       | 469 |   |
| Income tax expense (benefit)                                                                         |       | (2,249                                           | )          | 1,238 |   |
| Net loss attributable to noncontrolling interest                                                     |       | 813                                              |       | 316 |   |
| Net income (loss) attributable to Gaiam, Inc.                                                   |       | $                                                | (3,090     | ) | $ | 2,213 |   |

# ** **

# **8**

# ****

# **Table of Contents**

# ** **

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

# ** **

During the first quarterof 2009, we issued 25,000 shares of our Class A common stock worth $64,000as contingent consideration for one of our 2007 business acquisitions.  Two of our acquisitions still have contingentconsideration arrangements for which the amounts are not yet determinable.  One calls for additionalconsideration, payable in cash, contingent upon the achievement of a certainmembership threshold by August 2009 or our sale of the acquired businessor its assets.  The other, Real Goods’acquisition, has contingent share consideration up to a maximum of 800,000shares of Real Goods’ Class A common stock, based on the acquired business’revenue and earnings performance over the twelve months ending September 30,2009, but in no event will total consideration paid exceed one times thetrailing twelve months revenues as of September 30, 2009.  At the time any of the remaining contingentconsideration becomes determinable, we will recognize it as additional purchaseprice and allocate it to goodwill and other intangibles.

 

Weare still in the process of finalizing our assessment of the estimated fairvalue of the net assets acquired during the latter half of 2008 and, thus, theamount of goodwill and other intangibles is subject to refinement.

 

# **9.**               Subsequent Events

# ** **

On April 6, 2009, werepurchased 932,000 shares of our Class A common stock at a price of $3.00per share. The purchase was a negotiated transaction.

 

# **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, responsible media and conscious community.**Our media brand isbuilt around our ability to develop and offer media content, products,lifestyle solutions 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, catalog, 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.**

# ** **

# **9**

# ****

# **Table of Contents**

# ** **

# **Ourbusiness segment sells to retailers, with our products available inapproximately 72,000 retail doors in the United States, up from 71,000 a yearago. During the first quarter of 2009, this segment generated revenue of $18.7million, down from $26.4 million during the first quarter of 2008. Excludinginternational revenues, which were effected by the transition from productsales to licensing arrangements and the disposition of our UK subsidiary, thebusiness segment revenue decreased 20%. Domestic gross revenue, which is gross sales to retailers (and does notinclude deductions and allowances), was down 5%. During the quarter we expandedour store-within-store presentations, which include customer fixtures that wedesign, to over 10,500 locations, up from 7,100 at the end of March 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, a growing online and off-line community, andcustomer feedback on us and the LOHAS industry’s focus and future. During thefirst quarter of 2009, this segment generated revenues of $27.7 million, downfrom $32.2 million during the first quarter of 2008.  This decrease reflects a planned reduction toour catalog circulation of 39% and the overall economic environment, partiallyoffset by revenue growth with our direct 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.  Through recentacquisitions, this business has grown its sales and expanded its market territories.  During the first quarter of 2009, thissegment generated revenues of $9.5 million, up from $6.6 million during thefirst quarter of 2008.  Real Goods usesits IPO proceeds to fund their working capital needs and general corporatepurposes, which may include future acquisitions of businesses.

 

We believe our growthwill be driven by media content, products, and online community offeringsdelivered to the consumer via Internet, retailers, licensing, electronicdownloads and subscription systems. We have increased our focus on our mediacontent creation and distribution, which strategically provides increasedbranding opportunities, higher operating contribution and greater mainstreampenetration.

 

We believe a number offactors are important to our long-term success, including building our brands,increasing international growth by expanding into new markets primarily throughlicense arrangements, extending our product lines into wellness, andedutainment, and enhancing our multimedia platform community through new mediaopportunities, 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,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                         | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                                               |       |                                             |       |   |   |
| Net revenue                                        |       | 100.0                                            | %          | 100.0 | % |
| Cost of goods sold                                 |       | 44.6                                             | %          | 37.1 | % |
| Gross profit                                       |       | 55.4                                             | %          | 62.9 | % |
|                                               |       |                                             |       |   |   |
| Expenses:                                          |       |                                             |       |   |   |
| Selling and operating                              |       | 60.7                                             | %          | 53.6 | % |
| Corporate, general and administration              |       | 5.8                                              | %          | 5.2 | % |
| Total expenses                                     |       | 66.5                                             | %          | 58.8 | % |
|                                               |       |                                             |       |   |   |
| Income (loss) from operations                      |       | -11.1                                            | %          | 4.1 | % |
|                                               |       |                                             |       |   |   |
| Interest and other income                          |       | 0.1                                              | %          | 0.7 | % |
| Income tax expense (benefit)                       |       | -4.0                                             | %          | 1.9 | % |
| Net loss attributable to noncontrolling interest   |       | 1.5                                              | %          | 0.5 | % |
| Net income (loss) attributable to Gaiam, Inc. |       | -5.5                                             | %          | 3.4 | % |

 

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*ThreeMonths Ended March 31, 2009 Compared to Three Months Ended March 31,2008*

 

*Net revenue*. Net revenue decreased $9.3 million, or 14.2%, to$55.9 million during the first quarter of 2009 from $65.2 million during thefirst quarter of 2008. Net revenue in our direct to consumer segment decreased$4.5 million to $27.7 million during the first quarter of 2009 from $32.2 millionduring the first quarter of 2008. This decrease in the direct to consumersegment net revenue primarily reflects overall slower consumer spending and ourdecision to reduce catalog circulation by 39%, partially offset by revenuegrowth with our direct response marketing programs.  Net revenue in our business segment decreased$7.7 million to $18.7 million during the first quarter of 2009 from $26.4million during the first quarter of 2008, primarily reflecting conservativeretail buying, higher deductions and allowances to retailers, and changes inour international reporting, which includes the shift to licensing arrangementsand the disposition of our UK operations. Domestic gross revenue, which isdomestic gross sales to retailers (and does not include deductions andallowances), was down 5.0%.  Net revenuein our solar segment increased $2.9 million to $9.5 million during the firstquarter of 2009 from $6.6 million during the first quarter of 2008, primarilydue to the acquisitions during 2008.

 

*Grossprofit*. Gross profit decreased $10.0 million, or 24.4%, to $31.0 millionduring the first quarter of 2009 from $41.0 million during the first quarter of2008. As a percentage of net revenue, gross profit decreased to 55.4% duringthe first quarter of 2009 from 62.9% during the first quarter of 2008.  Gross profit in our direct to consumersegment decreased $3.2 million, or 14.5%, to $19.3 million during the firstquarter of 2009 from $22.6 million during the first quarter of 2008 and, as apercentage of net revenue, decreased to 69.8% during the first quarter of 2009from 70.2% during the first quarter of 2008 reflecting lower revenues.  Grossprofit in our business segment decreased $7.2 million, or 43.4%, to $9.4million during the first quarter of 2009 from $16.5 million during the firstquarter of 2008 and, as a percentage of net revenue, decreased to 50.1% duringthe first quarter of 2009 from 62.6% during the first quarter of 2008,primarily reflecting the expansion of our category manager role in media atretailers (for which the setup requires higher deductions and allowances),expanding our distribution footprint by maintaining retail prices whileabsorbing cost increases from higher freight charges and the dollar decline,and greater participation in retailer discount programs and promotions.  Gross profit in our solar segment increased$0.5 million, or 25.3%, to $2.3 million during the first quarter of 2009 from$1.8 million during the first quarter of 2008 and, as a percentage of netrevenue, decreased to 24.2% during the first quarter of 2009 from 28.0% duringthe first quarter of 2008, primarily reflecting the acquisition of IndependentEnergy Systems and Regrid Power which have larger average installation sizesthat traditionally produce lower gross profit margins.

 

*Selling and operating expenses*. Selling and operatingexpenses decreased $1.0 million, or 2.8%, to $33.9 million during the firstquarter of 2009 from $34.9 million during the first quarter of 2008.  This change is primarily a result of reducedcatalog prospecting circulation, lower royalty payments, and less amortizationdue to the 2008 impairment of certain intangibles assets.    As a percentage of net revenue, selling andoperating expenses increased to 60.7% during the first quarter of 2009 from53.6% during the first quarter of 2008 reflecting lower revenues.

 

*Corporate,general and administration expenses*. Corporate, general and administration expensesdecreased $0.1 million, or 3.3%, to $3.3 million during the first quarter of 2009from $3.4 million during the first quarter of 2008.  As of percentage of net revenue, corporate,general and administration expenses increased to 5.8% during the first quarterof 2009 from 5.2% during the first quarter of 2008 as a result of lower revenue.

 

*Interest and other income*. Interest and other incomedecreased $0.4 million to $0.1 million during the first quarter of 2009 from$0.5 million during the first quarter of 2008. The lower interest earnings reflect the decrease in prevailing short-terminterest rates and cash used to acquire our corporate facilities, acquirebusinesses and assets, and repurchase 1.3 million shares of our Class Acommon stock for $19.3 million. At March 31, 2009, the majority of ourcash was in short-term treasuries.

 

*Net loss attributable to noncontrolling interest*. Net lossattributable to noncontrolling interest increased to $0.8 million during thefirst quarter of 2009 from $0.3 million during the first quarter of 2008primarily as a result of the losses in our solar segment.

 

*Net income (loss) attributable to Gaiam, Inc.*  As a result of the above factors, net incomeattributable to Gaiam, Inc. decreased $5.3 million to a net loss of $3.1million during the first quarter of 2009 from net income of $2.2 million duringthe first quarter of 2008.  Net income(loss) per share attributable to Gaiam, Inc. common shareholders decreasedto a net loss of $0.13 per share during the first quarter of 2009 from netincome of $0.09 per share during the first quarter of 2008.

 

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**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 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.

 

We have a revolving lineof credit agreement with a financial institution that expires on October 22,2009.  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 those requiringcompliance with certain financial ratios. At March 31, 2009, we had noamounts outstanding under this agreement; however, $0.5 million was reservedfor outstanding letters of credit.  Webelieve we have complied with all of the financial covenants under this creditagreement.

 

***CashFlows***

 

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

 
| ** **                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Net cash provided by (used in):                        |       |                                             |       |   |   |
| Operating activities                                   |       | $                                                | 8,009      |   | $ | (1,362 | ) |
| Investing activities                                   |       | (1,776                                           | )          | (15,400 | ) |
| Financing activities                                   |       | —                                           |       | (1,332 | ) |
| Effects of exchange rates on cash and cash equivalents |       | —                                           |       | (13 | ) |
| Net change in cash and cash equivalents                |       | $                                                | 6,233      |   | $ | (18,107 | ) |

 

*Operatingactivities*. Ouroperating activities provided net cash of $8.0 million during the first quarterof 2009 and used net cash of $1.4 million during the first quarter of 2008. Ournet cash provided by operating activities during the first quarter of 2009 wasprimarily attributable to decreased accounts receivable and inventory of $18.9million and refunded income taxes of $3.2 million, partially offset bydecreased accounts payable and accrued liabilities of $9.4 million and net lossof $3.1 million. The reduction in accounts payable reflects payments forinventory purchases of holiday and fitness season shipments.  Our net cash used by operating activitiesduring the first quarter of 2008 was primarily attributable to decreasedaccounts payable and accrued liabilities of $11.6 million, partially offset bynoncash adjustments to net income of $4.4 million, reductions in accountsreceivable of $3.3 million, and net income of $2.2 million.

 

*Investingactivities*. Ourinvesting activities used net cash of $1.8 million and $15.4 million during thefirst quarters of 2009 and 2008, respectively. The net cash used in investingactivities during the first quarter of 2009 was used primarily to acquireproperty and equipment for $1.3 million, of which $0.4 million was acquired tomaintain normal operations, and purchase media for $0.5 million. Our net cashused in our investing activities during the first quarter of 2008 was usedprimarily to acquire businesses, property, equipment and other investments for$12.6 million and purchase media for $1.4 million.

 

*Financingactivities*. Ourfinancing activities used net cash of $1.3 million during the first quarter of2008 primarily to repurchase 75,800 shares of our Class A common stock.

 

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 

 

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projected cashneeds may change as a result of acquisitions, product development, unforeseenoperational 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.

 

**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 |       | $         | 9,195      |                      | $          | 2,734              |       | $                  | 3,082      |                       | $          | 2,364 |   | $ | 1,015 |   |
|                             |            |           |            |                           |            |                    |            |                    |            |                            |            |  |  |  |  |  |

 

**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 31,2008. 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 andQualitative Disclosures 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.

 

**Item4.    Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Our chief executiveofficer and chief financial 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, 2009, ourchief executive officer and chief financial officer have concluded that thosedisclosure 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 31,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial 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**

 

Nomaterial changes.

 

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

 

None.

 

**Item 3.    Defaults Upon Senior Securities**

 

None.

 

**Item 4.    Submission of Matters to a Vote ofSecurity 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**

### ** **

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 11, 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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