Table ofContents

 

 

 

**United States**

**Securities and ExchangeCommission**

**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 June 30,  2009** |
|                                                   |
| **OR**                                                 |
|                                                   |
| **o**                                                  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934** |

 

**Commission File Number 0-27517**

 

**GAIAM, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**833 WEST SOUTH BOULDER ROAD,**

**LOUISVILLE, COLORADO 80027**

(Address of principal executive offices)

 

**(303) 222-3600**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities and Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such 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 August 6, 2009** |
|----------------------------------------------|------------|-------------------------------------------------------|
| Class A Common Stock ($.0001 par value) |       |                                                  | 17,684,226 |   |
| Class B Common Stock ($.0001 par value) |       |                                                  | 5,400,000 |   |

 

 

 

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**GAIAM, INC.**

 

**FORM 10-Q**

 

**INDEX**

 
| **PART I.  FINANCIAL INFORMATION** | 3                                                                                                                              |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------|
| ** **                              | ** **                                                                                                                     | ** ** |
| **Item 1.**                             | **Financial  Statements (Unaudited):**                                                                                         | 3 |
|                                    | Condensed  consolidated balance sheets at June 30, 2009 and December 31, 2008                                        | 4 |
|                                    | Condensed  consolidated statements of operations for the Three and Six Months Ended June 30, 2009 and 2008 | 5 |
|                                    | Condensed  consolidated statements of cash flows for the Six Months Ended June 30,  2009 and 2008                    | 6 |
|                                    | Notes to interim condensed consolidated financial  statements                                                                  | 7 |
| ** **                              | ** **                                                                                                                     | ** ** |
| **Item 2.**                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                    | 11 |
| ** **                              | ** **                                                                                                                     | ** ** |
| **Item 3.**                             | Quantitative  and Qualitative Disclosures About Market Risk                                                                    | 16 |
| ** **                              | ** **                                                                                                                     | ** ** |
| **Item 4.**                             | Controls and  Procedures                                                                                                       | 16 |
| ** **                              | ** **                                                                                                                     | ** ** |
| **PART II. OTHER INFORMATION**     | 16                                                                                                                             |
| ** **                              | ** **                                                                                                                     | ** ** |
| **Item  1.**                            | Legal Proceedings                                                                                                              | 16 |
| ** **                              | ** **                                                                                                                     | ** ** |
| **Item  1A.**                           | Risk Factors                                                                                                                   | 16 |
| ** **                              | ** **                                                                                                                     | ** ** |
| **Item 2.**                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                   | 17 |
| ** **                              | ** **                                                                                                                     | ** ** |
| **Item 3**                              | Defaults  Upon Senior Securities                                                                                               | 17 |
| ** **                              | ** **                                                                                                                     | ** ** |
| **Item 4.**                             | Submission  of Matters to a Vote of Security Holders                                                                           | 17 |
| ** **                              | ** **                                                                                                                     | ** ** |
| **Item  5.**                            | Other Information                                                                                                              | 17 |
| ** **                              | ** **                                                                                                                     | ** ** |
| **Item 6.**                             | Exhibits                                                                                                                       | 17 |
| ** **                              | ** **                                                                                                                     | ** ** |
|                                    | SIGNATURES                                                                                                                     | 19 |

 

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**CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

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

# ** **

# **PART I.**               FINANCIAL INFORMATION

# ** **

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

 

# **UnauditedInterim Condensed Consolidated Financial Statements**

# ** **

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

 

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

 
| ** **                                                                                                                                                                                                                                | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(in thousands, except share and per share data)**                                                                                                                                                    | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                                                                                | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                                                                |       |              |       |                  |       |
| Current assets:                                                                                                                                                                                                                           |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                                 |       | $                 | 42,755     |                  | $          | 31,965 |   |
| Accounts receivable, net                                                                                                                                                                                                                  |       | 21,585            |       | 33,664                |       |
| Inventory, less allowances                                                                                                                                                                                                                |       | 28,251            |       | 40,782                |       |
| Deferred advertising costs                                                                                                                                                                                                                |       | 2,004             |       | 2,578                 |       |
| Receivable and deferred  tax assets                                                                                                                                                                                                       |       | 13,496            |       | 15,448                |       |
| Other current assets                                                                                                                                                                                                                      |       | 4,560             |       | 4,795                 |       |
| Total current assets                                                                                                                                                                                                                      |       | 112,651           |       | 129,232               |       |
|                                                                                                                                                                                                                                      |       |              |       |                  |       |
| Property and equipment,  net                                                                                                                                                                                                              |       | 28,216            |       | 27,381                |       |
| Media library, net                                                                                                                                                                                                                        |       | 12,056            |       | 12,102                |       |
| Deferred tax assets, net                                                                                                                                                                                                                  |       | 7,985             |       | 6,076                 |       |
| Goodwill                                                                                                                                                                                                                                  |       | 24,166            |       | 23,180                |       |
| Other intangibles, net                                                                                                                                                                                                                    |       | 771               |       | 880                   |       |
| Notes receivable and other  assets                                                                                                                                                                                                        |       | 3,211             |       | 3,247                 |       |
| Total assets                                                                                                                                                                                                                              |       | $                 | 189,056    |                  | $          | 202,098 |   |
|                                                                                                                                                                                                                                      |       |              |       |                  |       |
| **LIABILITIES AND EQUITY**                                                                                                                                                                                                                |       |              |       |                  |       |
| Current liabilities:                                                                                                                                                                                                                      |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                                                          |       | $                 | 21,026     |                  | $          | 26,567 |   |
| Accrued liabilities                                                                                                                                                                                                                       |       | 5,672             |       | 6,885                 |       |
| Total current liabilities                                                                                                                                                                                                                 |       | 26,698            |       | 33,452                |       |
|                                                                                                                                                                                                                                      |       |              |       |                  |       |
| Commitments and  contingencies                                                                                                                                                                                                            |       |              |       |                  |       |
|                                                                                                                                                                                                                                      |       |              |       |                  |       |
| Equity:                                                                                                                                                                                                                                   |       |              |       |                  |       |
| Gaiam, Inc.  shareholders’ equity:                                                                                                                                                                                              |       |              |       |                  |       |
| Class A common stock,  $.0001 par value, 150,000,000 shares  authorized, 17,684,226 and 18,541,201 shares issued and  outstanding at June 30, 2009 and December 31,  2008, respectively |       | 2                 |       | 2                     |       |
| Class B common stock,  $.0001 par value, 50,000,000 shares authorized, 5,400,000  shares issued  and outstanding at June 30, 2009 and December 31, 2008                                                               |       | 1                 |       | 1                     |       |
| Additional paid-in capital                                                                                                                                                                                                                |       | 161,998           |       | 163,652               |       |
| Accumulated other  comprehensive income                                                                                                                                                                                                   |       | 88                |       | 88                    |       |
| Accumulated deficit                                                                                                                                                                                                                       |       | (14,568           | )          | (10,275               | )          |
| Total Gaiam, Inc.  shareholders’ equity                                                                                                                                                                                         |       | 147,521           |       | 153,468               |       |
| Noncontrolling interest                                                                                                                                                                                                                   |       | 14,837            |       | 15,178                |       |
| Total equity                                                                                                                                                                                                                              |       | 162,358           |       | 168,646               |       |
| Total liabilities and  equity                                                                                                                                                                                                             |       | $                 | 189,056    |                  | $          | 202,098 |   |

 

See accompanying notes tothe interim condensed consolidated financial statements.

 

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**GAIAM, INC.**

**Condensed consolidated statements ofoperations**

 
| ** **                                                                         | ** ** | **For the Three Months Ended  June 30,** | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **(in thousands, except per share data)**                 | ** ** | **2009**                                                          | ** ** | **2008**                                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                         | ** ** | ** (unaudited)**                                             | ** ** | **(unaudited)**                                                 |       |
| Net revenue                                                                        |       | $                                                                 | 60,475     |                                                            | $          | 57,217 |   | $ | 116,398 |   | $ | 122,390 |   |
| Cost of goods sold                                                                 |       | 29,029                                                            |       | 21,064                                                          |       | 53,966 |   | 45,259 |   |
| Gross profit                                                                       |       | 31,446                                                            |       | 36,153                                                          |       | 62,432 |   | 77,131 |   |
|                                                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Expenses:                                                                          |       |                                                              |       |                                                            |       |   |   |   |   |
| Selling and operating                                                              |       | 30,685                                                            |       | 33,704                                                          |       | 64,628 |   | 68,637 |   |
| Corporate, general and  administration                                             |       | 2,937                                                             |       | 3,096                                                           |       | 6,206 |   | 6,475 |   |
| Other general income and  expense                                                  |       | —                                                            |       | 26,708                                                          |       | — |   | 26,708 |   |
| Total expenses                                                                     |       | 33,622                                                            |       | 63,508                                                          |       | 70,834 |   | 101,820 |   |
|                                                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Loss from operations                                                               |       | (2,176                                                            | )          | (27,355                                                         | )          | (8,402 | ) | (24,689 | ) |
|                                                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Gain from issuance of  subsidiary stock                                            |       | —                                                            |       | 31,270                                                          |       | — |   | 31,270 |   |
| Interest and other income                                                          |       | 61                                                                |       | 269                                                             |       | 135 |   | 738 |   |
|                                                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Income (loss) before  income taxes and noncontrolling interest                     |       | (2,115                                                            | )          | 4,184                                                           |       | (8,267 | ) | 7,319 |   |
|                                                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Income tax expense  (benefit)                                                      |       | (838                                                              | )          | 1,653                                                           |       | (3,087 | ) | 2,891 |   |
|                                                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Net income (loss)                                                                  |       | (1,277                                                            | )          | 2,531                                                           |       | (5,180 | ) | 4,428 |   |
|                                                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Net loss attributable to  noncontrolling interest                                  |       | 268                                                               |       | 50                                                              |       | 1,081 |   | 366 |   |
|                                                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Net income (loss)  attributable to Gaiam, Inc.                                |       | $                                                                 | (1,009     | )                                                               | $          | 2,581 |   | $ | (4,099 | ) | $ | 4,794 |   |
|                                                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Net income (loss) per  share attributable to Gaiam, Inc. common shareholders: |       |                                                              |       |                                                            |       |   |   |   |   |
| Basic                                                                              |       | $                                                                 | (0.04)     |                                                            | $          | 0.10 |   | $ | (0.17) |   | $ | 0.19 |   |
| Diluted                                                                            |       | $                                                                 | (0.04)     |                                                            | $          | 0.10 |   | $ | (0.17) |   | $ | 0.19 |   |
| Weighted-average shares  outstanding:                                              |       |                                                              |       |                                                            |       |   |   |   |   |
| Basic                                                                              |       | 23,076                                                            |       | 24,707                                                          |       | 23,514 |   | 24,895 |   |
| Diluted                                                                            |       | 23,076                                                            |       | 24,895                                                          |       | 23,514 |   | 25,120 |   |

 

See accompanying notes tothe interim condensed consolidated financial statements.

 

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

 
| ** **                                                                                               | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| **(in thousands)**                                                                                  | ** ** | **2009**                               | ** ** | **2008** | ** ** |
| ** **                                                                                               | ** ** | **(unaudited)**                        | ** ** |
| **Operating activities**                                                                            | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Net income (loss)                                                                                        |       | $                                      | (4,099     | ) | $ | 4,794 |   |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating activities: |       |                                   |       |   |   |
| Depreciation                                                                                             |       | 1,559                                  |       | 1,552 |   |
| Amortization                                                                                             |       | 1,986                                  |       | 3,284 |   |
| Noncontrolling interest in  consolidated subsidiaries, net of tax                                        |       | (1,081                                 | )          | (366 | ) |
| Net gain on disposition of  investments and property                                                     |       | —                                 |       | (579 | ) |
| Share-based compensation  expense                                                                        |       | 993                                    |       | 671 |   |
| Deferred and stock option  income tax benefit                                                            |       | (2,943                                 | )          | (8,552 | ) |
| Gain on issuance of  subsidiary stock, net of tax                                                        |       | —                                 |       | (19,193 | ) |
| Impairment loss                                                                                          |       | —                                 |       | 25,879 |   |
| Changes in operating  assets and liabilities, net of effects from acquisitions:                          |       |                                   |       |   |   |
| Accounts receivable, net                                                                                 |       | 12,093                                 |       | 4,103 |   |
| Inventory, net                                                                                           |       | 12,531                                 |       | 2,479 |   |
| Deferred advertising costs                                                                               |       | (45                                    | )          | (1,161 | ) |
| Income taxes receivable                                                                                  |       | 2,731                                  |       | (3,467 | ) |
| Other current assets                                                                                     |       | 59                                     |       | 96 |   |
| Accounts payable                                                                                         |       | (5,477                                 | )          | (8,367 | ) |
| Accrued liabilities                                                                                      |       | (1,213                                 | )          | (4,602 | ) |
| Net cash provided by (used  in) operating activities                                                     |       | 17,094                                 |       | (3,429 | ) |
|                                                                                                     |       |                                   |       |   |   |
| **Investing activities**                                                                                 |       |                                   |       |   |   |
| Purchase of property,  equipment and media rights                                                        |       | (3,368                                 | )          | (22,813 | ) |
| Purchase of acquisitions  and note, net of cash acquired                                                 |       | —                                 |       | (7,274 | ) |
| Disposition of  investments, net                                                                         |       | —                                 |       | (1,381 | ) |
| Net cash used in investing  activities                                                                   |       | (3,368                                 | )          | (31,468 | ) |
|                                                                                                     |       |                                   |       |   |   |
| **Financing activities**                                                                                 |       |                                   |       |   |   |
| Proceeds from Real Goods  stock issuances                                                                |       | —                                 |       | 48,154 |   |
| Repurchase of Class A  common stock, including related costs                                        |       | (2,810                                 | )          | (18,086 | ) |
| Subsidiary’s payment of  dividends                                                                  |       | (194                                   | )          | — |   |
| Proceeds from issuance of  common stock and tax benefits from option exercises                           |       | 68                                     |       | 1,508 |   |
| Net cash (used in)  provided by financing activities                                                     |       | (2,936                                 | )          | 31,576 |   |
|                                                                                                     |       |                                   |       |   |   |
| Effects of exchange rates  on cash and cash equivalents                                                  |       | —                                 |       | (13 | ) |
|                                                                                                     |       |                                   |       |   |   |
| Net change in cash and  cash equivalents                                                                 |       | 10,790                                 |       | (3,334 | ) |
| Cash and cash equivalents  at beginning of period                                                        |       | 31,965                                 |       | 66,258 |   |
| Cash and cash equivalents  at end of period                                                              |       | $                                      | 42,755     |   | $ | 62,924 |   |
|                                                                                                     |       |                                   |       |   |   |
| **Supplemental cash flow  information**                                                                  |       |                                   |       |   |   |
| Interest paid                                                                                            |       | $                                      | 12         |   | $ | 39 |   |
| Income taxes paid                                                                                        |       | $                                      | 417        |   | $ | 2,708 |   |
| Common stock issued for  acquisitions                                                                    |       | $                                      | 796        |   | $ | 5,105 |   |

 

See accompanying notes tothe interim condensed consolidated financial statements

 

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**Notes to interim condensed consolidated 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**

 

Nochanges were made to our significant accounting policies during the three andsix months ended June 30, 2009, except for the adoption of FinancialAccounting Standards Board, or FASB, Statements No. 141(R), *Business*Combinations, No. 157, *Fair ValueMeasurements*, No. 160, *Noncontrolling Interestsin Consolidated Financial Statements — An Amendment of ARB No. 51*,and No. 161, *Disclosures about Derivatives and HedgingActivities — an Amendment of FASB Statement 133*.  SFAS 141(R) requires an entity torecognize all assets acquired and liabilities assumed in a transaction at theacquisition-date fair value with limited exceptions, and changes the accountingtreatment for certain specific items. SFAS 157 defines fair value, establishes a framework for measuring fairvalue in GAAP, and expands disclosures about fair value measurements.  SFAS 160 establishes new accounting andreporting standards for a noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary and directs that gains from the issuance ofsubsidiary stock must be recognized in additional paid-in capital.  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 three andsix months ended June 30, 2009.

 

In May 2009,the FASB issued SFAS No. 165 *SubsequentEvents* (“SFAS 165”), which defines further disclosure requirementsfor events which occur after the balance sheet date but before financialstatements are issued.  SFAS 165 was effective for us beginning on April 1,2009.  In accordance with SFAS 165, we have evaluated events subsequent toJune 30, 2009 through August 7, 2009, which is the issuance date ofthis report, and concluded no material event occurred in this period whichwould either impact the results reflected in this report or our results goingforward.

 

*Use ofEstimates and Reclassifications*

 

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

 

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

 

During the six monthsended June 30, 2009, we issued a total of 12,025 shares of our Class Acommon stock to our independent directors, in lieu of cash compensation, forservices rendered in 2009; issued 25,000 shares of our Class A commonstock as contingent consideration for a business acquired in 2007 (see Note 8.Mergers and Acquisitions); issued 25,000 shares of our Class A commonstock for consulting services; and issued 13,000 of our Class A commonstock upon exercise of options under our 1999 Long-Term Incentive Plan.

 

Additionally, during thefirst half of 2009, we repurchased 932,000 shares of our Class A commonstock for a total cost of $2.8 million. We recorded this repurchase of our shares in accordance with the costmethod of accounting for treasury stock. Since we have not yet decided the ultimate disposition of there-acquired shares, their cost is reflected in our condensed consolidatedbalance sheet at June 30, 2009 as a $2.8 million reduction to additionalpaid-in capital.

 

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Our subsidiary, RealGoods Solar, Inc. (“Real Goods”), issued 20,926 shares valued at$45,000 to compensate nonemployee board members for services rendered during2009 and issued 363,504 shares valued at $0.7 million as contingentconsideration for a business acquired in 2008 (see Note 8. Mergers andAcquisitions).  Following thesetransactions we owned 54.7% of Real Goods. The portion of our gain resulting from Real Goods selling new shares,$0.1 million net of tax, is reflected in additional paid-in capital on ourcondensed consolidated balance sheet at June 30, 2009.

 

Anothersubsidiary, which is 51.4% owned by us, paid its shareholders dividends fromearnings totaling $0.4 million and, as a result, the accumulated deficit on ourcondensed consolidated balance sheet at June 30, 2009 was decreased by$0.2 million.

 

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

 
| ** **                                                                              | ** ** | ** ** | ** ** | ** **              | ** ** | **Gaiam, Inc. Shareholders** | ** ** | ** **                                    | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|-------------------------|------------|----------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                                                 | ** ** | **Total**  | ** ** | **Comprehensive  Loss** | ** ** | **Accumulated  Deficit**               | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | **Class A  and Class B  Common  Stock** | ** ** | **Paid-in  Capital** | ** ** | **Noncontrolling  Interest** | ** ** |
|                                                                                    |       |       |       |                    |       |                                   |       |                                          |       |   |   |   |   |   |   |
| Balance at December 31,  2008                                                           |       | $          | 168,646    |                    | $          | —                                 |       | $                                             | (10,275    | ) | $ | 88 |   | $ | 3 |   | $ | 163,652 |   | $ | 15,178 |   |
| Issuance of Gaiam, Inc.  common stock in conjunction with acquisitions and compensation |       | 1,032      |       | —                  |       | —                                 |       | —                                        |       | — |   | 1,032 |   | — |   |
| Issuance of subsidiary  common stock in conjunction with acquisitions and compensation  |       | 864        |       | —                  |       | —                                 |       | —                                        |       | — |   | 124 |   | 740 |   |
| Repurchase of stock                                                                     |       | (2,810     | )          | —                  |       | —                                 |       | —                                        |       | — |   | (2,810 | ) | — |   |
| Dividends                                                                               |       | (194       | )          | —                  |       | (194                                   | )          | —                                        |       | — |   | — |   | — |   |
| Comprehensive loss:                                                                     |       |       |       |                    |       |                                   |       |                                          |       |   |   |   |   |   |   |
| Net loss                                                                                |       | (5,180     | )          | (5,180                  | )          | (4,099                                 | )          | —                                        |       | — |   | — |   | (1,081 | ) |
| Comprehensive loss                                                                      |       | (5,180     | )          | $                       | (5,180     | )                                      | —     |                                          | —     |   | — |   | — |   | — |   |
| Balance at June 30,  2009                                                               |       | $          | 162,358    |                    |       |                                   | $          | (14,568                                       | )          | $ | 88 |   | $ | 3 |   | $ | 161,998 |   | $ | 14,837 |   |

 

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

 
| ** **                                                                                                                                                        | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                        | ** ** | **June 30,**              | ** ** |
| **(in thousands, except share data)**                                                                                                                        | ** ** | **2009**                       | ** ** | **2008** | ** ** |
|                                                                                                                                                              |       |                           |       |   |   |
| Net income (loss)  attributable to Gaiam, Inc.                                                                                                               |       | $                              | (4,099     | ) | $ | 4,794 |   |
| Transfers from the  noncontrolling interest:                                                                                                                      |       |                           |       |   |   |
| Increase in  Gaiam, Inc.’s paid-in capital for the issuance of 384,430 Real Goods  common shares in conjunction with acquisitions and compensation |       | 124                            |       | — |   |
| Increase in  Gaiam, Inc.’s paid-in capital in conjunction with Real Goods’ IPO and  compensation                                                   |       | —                         |       | 807 |   |
| Change from net income  (loss) attributable to Gaiam, Inc. and transfers from the noncontrolling  interest                                                   |       | $                              | (3,975     | ) | $ | 5,601 |   |

 

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

 

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

 

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| ** **                                                                                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                                                                      | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Net income (loss)                                                                                            |       | $                                               | (1,277     | )                                             | $          | 2,531 |   | $ | (5,180 | ) | $ | 4,428 |   |
| Other comprehensive loss,  foreign currency translation adjustment, net of reclassification and related  tax |       | —                                          |       | —                                        |       | — |   | (898 | ) |
| Comprehensive income  (loss)                                                                                 |       | (1,277                                          | )          | 2,531                                         |       | (5,180 | ) | 3,530 |   |
| Comprehensive loss attributable to the noncontrolling interest                                               |       | 268                                             |       | 50                                            |       | 1,081 |   | 366 |   |
| Comprehensive income  (loss) attributable to Gaiam, Inc.                                                |       | $                                               | (1,009     | )                                             | $          | 2,581 |   | $ | (4,099 | ) | $ | 3,896 |   |

 

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

 

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

 

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

 

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

 

In addition to the deemed new grants and cancellationsresulting from the exercise price modification explained above, during thefirst half of 2009, we granted 180,500 stock options to employees and cancelled45,100 stock options.  Total share-basedcompensation recognized was $0.4 million and $0.3 million for the three monthsended June 30, 2009 and 2008, respectively, and $1.0 million and $0.7million for the six months ended June 30, 2009 and 2008, respectively, andis shown in corporate, general and administration expenses on our condensedconsolidated statements of operations.

 

Also during the first half of 2009, Real Goodsgranted 449,500 new stock options and cancelled 149,000 stock options under theReal Goods 2008 Long-Term Incentive Plan. The cancelled options resultedprimarily from the nonattainment of the performance condition for 2008.  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, 2009. For these performance based stockoptions, the attainment of the performance condition was not probable as of June 30,2009 and, therefore, no compensation expense for these grants has beenrecorded.

 

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

 

Basicnet income (loss) per share attributable to Gaiam, Inc. commonshareholders excludes any dilutive effects of options. We compute basic netincome (loss) per share using the weighted average number of common sharesoutstanding during the period. We compute diluted net income (loss) per shareattributable to Gaiam, Inc. common shareholders using the weighted averagenumber of common and common stock equivalent shares outstanding during theperiod. We excluded common equivalent shares of 947,000 and 319,000 for thethree months ended June 30, 2009 and 2008, respectively, and 1,273,000 and205,000 for the six months ended June 30, 2009 and 2008, respectively,from the computation of diluted net income (loss) per share because theireffect was antidilutive.

 

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Thefollowing table sets forth the computation of basic and diluted net income(loss) per share:

 
| ** **                                                                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands, except per share data)**                                     | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Numerator for basic and  diluted net income (loss) per share                                           |       | $                                               | (1,009     | )                                             | $          | 2,581 |   | $ | (4,099 | ) | $ | 4,794 |   |
| Denominator:                                                                                           |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average shares  for basic net income (loss) per share                                         |       | 23,076                                          |       | 24,707                                        |       | 23,514 |   | 24,895 |   |
| Effect of dilutive  securities:                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average of common  stock and stock options                                                    |       | —                                          |       | 188                                           |       | — |   | 225 |   |
| Denominators for diluted  net income (loss) per share                                                  |       | 23,076                                          |       | 24,895                                        |       | 23,514 |   | 25,120 |   |
|                                                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Net income (loss) per  share attributable to Gaiam, Inc. common shareholders - basic              |       | $                                               | (0.04      | )                                             | $          | 0.10 |   | $ | (0.17 | ) | $ | 0.19 |   |
| Net income (loss) per  share attributable to Gaiam, Inc. common shareholders  — diluted |       | $                                               | (0.04      | )                                             | $          | 0.10 |   | $ | (0.17 | ) | $ | 0.19 |   |

 

**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, 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  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                                                     | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net revenue:                                                                                |       |                                            |       |                                          |       |   |   |   |   |
| Direct to consumer                                                                          |       | $                                               | 27,013     |                                          | $          | 28,947 |   | $ | 54,702 |   | $ | 61,152 |   |
| Business                                                                                    |       | 20,749                                          |       | 19,429                                        |       | 39,452 |   | 45,829 |   |
| Solar                                                                                       |       | 12,713                                          |       | 8,841                                         |       | 22,244 |   | 15,409 |   |
| Consolidated net revenue                                                                    |       | 60,475                                          |       | 57,217                                        |       | 116,398 |   | 122,390 |   |
| Contribution margin  (loss):                                                                |       |                                            |       |                                          |       |   |   |   |   |
| Direct to consumer                                                                          |       | (1,369                                          | )          | (3,478                                        | )          | (4,949 | ) | (4,644 | ) |
| Business                                                                                    |       | 132                                             |       | (23,745                                       | )          | (262 | ) | (19,424 | ) |
| Solar                                                                                       |       | (939                                            | )          | (132                                          | )          | (3,191 | ) | (621 | ) |
| Consolidated contribution  loss                                                             |       | (2,176                                          | )          | (27,355                                       | )          | (8,402 | ) | (24,689 | ) |
| Reconciliation of  contribution loss to net income (loss) attributable to Gaiam, Inc.: |       |                                            |       |                                          |       |   |   |   |   |
| Gain from issuance of  subsidiary stock                                                     |       | —                                          |       | 31,270                                        |       | — |   | 31,270 |   |
| Interest and other income                                                                   |       | 61                                              |       | 269                                           |       | 135 |   | 738 |   |
| Income tax expense  (benefit)                                                               |       | (838                                            | )          | 1,653                                         |       | (3,087 | ) | 2,891 |   |
| Net loss attributable to  noncontrolling interest                                           |       | 268                                             |       | 50                                            |       | 1,081 |   | 366 |   |
| Net income (loss)  attributable to Gaiam, Inc.                                         |       | $                                               | (1,009     | )                                             | $          | 2,581 |   | $ | (4,099 | ) | $ | 4,794 |   |

# ** **

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

 

During the first half of2009, we issued 25,000 shares of our Class A common stock worth $64,000 ascontingent consideration for one of our 2007 business acquisitions.  Another of our acquisitions from 2007 stillhas additional consideration, payable in cash, contingent upon theachievement of a certain membership threshold by August 2009 or our saleof the acquired business or its assets. 

 

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Atthe time any of the remaining contingent consideration becomes determinable, wewill recognize it as additional purchase price and allocate it to goodwill.

 

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

 

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

# ** **

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

 

# **Overviewand Outlook**

# ** **

# **We are alifestyle media company providing a broad selection of information, media,products and services to customers who value personal development, wellness,ecological lifestyles, responsible media and conscious community.**Our media brand isbuilt around our ability to develop and offer media content, products,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, and catalog, as well as through national retailers and corporateaccounts.**

# ** **

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

# ** **

# **Ourbusiness segment sells to retailers and, as of June 30, 2009, our productswere carried in over 71,000 retail doors in the United States.  During the second quarter of 2009, thissegment generated revenue of $20.7 million, up from $19.4 million during thesecond quarter of 2008. During the quarter we expanded our store-within-storepresentations, which include custom fixtures that we design, to over 11,000locations, up from 10,500 in the first quarter of 2009 and 7,500 at the end ofthe second quarter of last year.  In2008, we launched a media category management role that is part of our longterm strategy and a key step in securing shelf space for media.  We have now expanded this strategy to over4,000 doors, up from 3,500 at the end 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, an online and off-line community, andcustomer feedback on us and the LOHAS industry’s focus and future. During thesecond quarter of 2009, this segment generated revenues of $27.0 million, downfrom $28.9 million during the second quarter of 2008.  This decrease reflects a planned reduction toour catalog circulation of 40%, partially offset by revenue growth from ourdirect response marketing programs.**

# ** **

Our solar segment offersresidential and small commercial solar energy integration services.  On May 13, 2008, our solar integrationbusiness consummated an initial public offering and has since been managed as aseparate segment.  Primarily, throughacquisitions, this business has grown its sales and expanded its marketterritories.  During the second quarterof 2009, this segment generated revenues of $12.7 million, up from $8.8 millionduring the second quarter of 2008.  RealGoods uses its IPO proceeds to fund its working capital needs and generalcorporate purposes, 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 services. We have increased our focus on fitnessmedia content creation and distribution, and media category management atretailers. Our recent licensing agreements will expand our distribution withinthe non-theatrical media category.

 

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We believe a number offactors are important to our long-term success, including building our brands,expanding category management into new retailers and genres, increasinginternational growth by expanding into new markets primarily through licensearrangements, extending our product lines and enhancing our multimedia platformcommunity through new media opportunities, new membership programs, initiativesand acquisitions.

 

**Resultsof Operations**

 

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

 
| ** **                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                          | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                |       |                                            |       |                                          |       |   |   |   |   |
| Net revenue                                         |       | 100.0                                           | %          | 100.0                                         | %          | 100.0 | % | 100.0 | % |
| Cost of goods sold                                  |       | 48.0                                            | %          | 36.8                                          | %          | 46.4 | % | 37.0 | % |
| Gross profit                                        |       | 52.0                                            | %          | 63.2                                          | %          | 53.6 | % | 63.0 | % |
|                                                |       |                                            |       |                                          |       |   |   |   |   |
| Expenses:                                           |       |                                            |       |                                          |       |   |   |   |   |
| Selling and operating                               |       | 50.7                                            | %          | 58.9                                          | %          | 55.5 | % | 56.1 | % |
| Corporate, general and  administration              |       | 4.9                                             | %          | 5.4                                           | %          | 5.3 | % | 5.3 | % |
| Other general income and  expense                   |       | —                                          | %          | 46.7                                          | %          | — | % | 21.8 | % |
| Total expenses                                      |       | 55.6                                            | %          | 111.0                                         | %          | 60.8 | % | 83.2 | % |
|                                                |       |                                            |       |                                          |       |   |   |   |   |
| Loss from operations                                |       | (3.6                                            | )%         | (47.8                                         | )%         | (7.2 | )% | (20.2 | )% |
|                                                |       |                                            |       |                                          |       |   |   |   |   |
| Gain from issuance of  subsidiary stock             |       | —                                          | %          | 54.6                                          | %          | — | % | 25.6 | % |
| Interest and other income                           |       | 0.1                                             | %          | 0.5                                           | %          | 0.1 | % | 0.6 | % |
| Income tax expense  (benefit)                       |       | (1.4                                            | )%         | 2.9                                           | %          | (2.7 | )% | 2.4 | % |
| Net loss attributable to  noncontrolling interest   |       | 0.4                                             | %          | 0.1                                           | %          | 0.9 | % | 0.3 | % |
| Net income (loss)  attributable to Gaiam, Inc. |       | (1.7                                            | )%         | 4.5                                           | %          | (3.5 | )% | 3.9 | % |

 

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

 

*Net revenue*. Net revenue increased $3.3 million, or 5.7%, to$60.5 million during the second quarter of 2009 from $57.2 million during thesecond quarter of 2008. Net revenue in our business segment increased $1.3million to $20.7 million during the second quarter of 2009 from $19.4 millionduring the second quarter of 2008, primarily reflected improvement in ourdomestic trade business, including increased store-within-store presentationsand our success as media category manager. Net revenue in our direct toconsumer segment decreased $1.9 million to $27.0 million during the secondquarter of 2009 from $28.9 million during the second quarter of 2008. Thisdecrease in the direct to consumer segment net revenue primarily reflectedoverall slower consumer spending and our decision to reduce catalog circulationby 40%, partially offset by revenue growth with our direct response marketingprograms.  Net revenue in our solar segmentincreased $3.9 million to $12.7 million during the second quarter of 2009 from$8.8 million during the second quarter of 2008, primarily reflecting theacquisitions of solar companies in 2008.

 

*Gross profit*. Gross profit decreased $4.7 million, or 13.0%, to$31.4 million during the second quarter of 2009 from $36.2 million during thesecond quarter of 2008. As a percentage of net revenue, gross profit decreasedto 52.0% during the second quarter of 2009 from 63.2% during the second quarterof 2008.  This decrease is due toincreased sales in our lower margin solar business, the expansion of ourcategory manager role in media at retailers, reduced prices to accelerate salesand lower inventory levels, and greater participation in retailer discountprograms and promotions.

 

*Selling and operating expenses*. Selling and operatingexpenses decreased $3.0 million, or 9.0%, to $30.7 million during the secondquarter of 2009 from $33.7 million during the second quarter of 2008.  This change is primarily a result of costcontrol initiatives 

 

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launched in late 2008 and early 2009 including reductionsin payroll and reduced catalog circulation. As a percentage of net revenue, selling and operating expenses decreasedto 50.7% during the second quarter of 2009 from 58.9% during the second quarterof 2008 reflecting the lower cost structure.

 

*Corporate, general and administration expenses*. Corporate, general and administrationexpenses decreased $0.2 million, or 5.1%, to $2.9 million during the secondquarter of 2009 from $3.1 million during the second quarter of 2008.  As of percentage of net revenue, corporate,general and administration expenses decreased to 4.9% during the second quarterof 2009 from 5.4% during the second quarter of 2008 reflecting cost controlmeasures.

 

*Interest and other income*. Interest and other incomedecreased $0.2 million to $0.1 million during the second quarter of 2009 from$0.3 million during the second quarter of 2008. The lower interest earnings reflect the decrease in prevailingshort-term interest rates and cash used to acquire our corporate facilities andrepurchase 2.3 million shares of our Class A common stock for $22.1million.

 

*Net loss attributable to noncontrolling interest*. Net lossattributable to noncontrolling interest increased to $0.3 million during thesecond quarter of 2009 from $0.1 million during the second 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 income (loss)attributable to Gaiam, Inc. decreased to a net loss of $1.0 million duringthe second quarter of 2009 from net income of $2.6 million during the secondquarter of 2008.  Net income (loss) pershare attributable to Gaiam, Inc. common shareholders decreased to a netloss per share of $0.04 during the second quarter of 2009 from net income pershare of $0.10 during the second quarter of 2008.  Our net income for the second quarter of 2008includes a gain on the issuance of Real Goods common stock, partially offset byimpairments of our media library and related assets.  Excluding these items, 2008 results would havebeen a loss of $0.1 million for the quarter. Refer to the Non-GAAP Financial Measures table below.

 

*SixMonths Ended June 30, 2009 Compared to Six Months Ended June 30, 2008*

 

*Net revenue*. Net revenue decreased $6.0 million, or 4.9%, to$116.4 million during the first half of 2009 from $122.4 million during thefirst half of 2008. Net revenue in our direct to consumer segment decreased$6.5 million to $54.7 million during the first half of 2009 from $61.2 millionduring the first half of 2008. This decrease in the direct to consumer segmentnet revenue primarily reflects overall slower consumer spending and ourdecision to reduce catalog circulation, partially offset by revenue growth withour direct response marketing programs. Net revenue in our business segment decreased $6.4 million to $39.5million during the first half of 2009 from $45.8 million during the first halfof 2008, primarily reflecting conservative buying by retailers in the firstquarter of 2009, higher deductions and allowances to retailers, and changes inour international reporting, namely the shift to licensing arrangements and thedisposition of our UK operations in the first quarter of 2008.  Net revenue in our solar segment increased$6.8 million to $22.2 million during the first half of 2009 from $15.4 millionduring the first half of 2008, primarily due to the acquisitions during 2008.

 

*Gross profit*. Gross profit decreased $14.7 million, or 19.1%, to$62.4 million during the first half of 2009 from $77.1 million during the firsthalf of 2008. As a percentage of net revenue, gross profit decreased to 53.6%during the first half of 2009 from 63.0% during the first half of 2008.  This decrease is due to increased sales inour lower margin solar business, the expansion of our category manager role inmedia at retailers, reduced prices to accelerate sales and lower inventorylevels, and greater participation in retailer discount programs and promotions.

 

*Selling and operating expenses*. Selling and operatingexpenses decreased $4.0 million, or 5.8%, to $64.6 million during the firsthalf of 2009 from $68.6 million during the first half of 2008.  This change is primarily a result of reducedcatalog circulation and cost control measures implemented in late 2008 andearly 2009.  As a percentage of netrevenue, selling and operating expenses decreased to 55.5% during the firsthalf of 2009 from 56.1% during the first half of 2008 reflecting the lower coststructure.

 

*Corporate, general and administration expenses*. Corporate,general and administration expenses decreased $0.3 million, or 4.2%, to $6.2million during the first half of 2009 from $6.5 million during the first halfof 2008.  As of percentage of netrevenue, corporate, general and administration expenses remained constant at5.3% during the first halves of 2009 and 2008.

 

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*Interest and other income*. Interest and other incomedecreased $0.6 million to $0.1 million during the first half of 2009 from $0.7million during the first half of 2008. The lower interest earnings reflect the decrease in prevailingshort-term interest rates and cash used to acquire our corporate facilities andrepurchase 2.3 million shares of our Class A common stock for $22.1million. 

 

*Net loss attributable to noncontrolling interest*. Net lossattributable to noncontrolling interest increased to $1.1 million during thefirst half of 2009 from $0.4 million during the first half of 2008 primarily asa result of the losses in our solar segment.

 

*Net income (loss) attributable to Gaiam, Inc.*  As a result of the above factors, net income(loss) attributable to Gaiam, Inc. decreased to a net loss of $4.1 millionduring the first half of 2009 from net income of $4.8 million during the firsthalf of 2008.  Net income (loss) pershare attributable to Gaiam, Inc. common shareholders decreased to a netloss per share of $0.17 during the first half of 2009 from net income per shareof $0.19 during the first half of 2008. Our net income for the first half of 2008 includes a gain on theissuance of Real Goods common stock, partially offset by impairments of ourmedia library and related assets. Excluding these items, prior year’s results would have been net incomeof $2.1 million for the six month period of 2008.  Refer to the Non-GAAP Financial Measurestable below.

 

**Non-GAAP Financial Measures**

 

We have utilized thenon-GAAP information set forth below as an additional device to aid inunderstanding and analyzing our financial results for the three and six monthsended June 30, 2008. We believe that these non-GAAP measures will allowfor a better evaluation of the operating performance of our business andfacilitate meaningful comparison of the results in the current period to thosein prior period and future periods. Reference to these non-GAAP measures shouldnot be considered a substitute for results that are presented in a mannerconsistent with GAAP.

 

Areconciliation of our GAAP net income to our non-GAAP net income (loss) for thethree and six months ended June 30, 2008 is set forth below (in millionsexcept share and per share data):

 
| ** **                                                               | ** ** | **Three Months**  | ** ** | **Six Months**    | ** ** |
|--------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                               | ** ** | **Ended**         | ** ** | **Ended**         | ** ** |
| ** **                                                               | ** ** | **June 30, 2008** | ** ** | **June 30, 2008** | ** ** |
|                                                                     |       |              |       |              |       |
| **Net income**                                                           | ** ** | **$**             | **2.6**    | ** **        | **$**      | **4.8** | ** ** |
|                                                                     |       |              |       |              |       |
| Exclusion of non-cash gain on issuance  of Real Goods Solar stock        |       | (19.2             | )          | (19.2             | )          |
|                                                                     |       |              |       |              |       |
| Exclusion of non-cash impairment of  goodwill and intangible assets      |       | 16.5              |       | 16.5              |       |
|                                                                     |       |              |       |              |       |
| **Non-GAAP net income  (loss)**                                          | ** ** | **$**             | **(0.1**   | **)**             | **$**      | **2.1** | ** ** |
|                                                                     |       |              |       |              |       |
| Non-GAAP weighted average shares used in  earnings per share calculation |       | 24,707,000        |       | 24,895,000        |       |
|                                                                     |       |              |       |              |       |
| **Non-GAAP earnings  (loss) per share**                                  | ** ** | **$**             | **(0.00**  | **)**             | **$**      | **0.08** | ** ** |

 

**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 

 

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businesses,products and technologies, and increase our sales and marketing programs andbrand promotions as needed.

 

At June 30, 2009, the majorityof our cash was in short-term treasuries.  We have a revolving line of credit agreementwith a financial institution that expires on October 22, 2009.  The credit agreement permits borrowings up tothe lesser of $15 million or our borrowing base which is calculated based uponthe collateral value of our accounts receivable, inventory, and certainproperty and equipment. Borrowings under this agreement bear interest at thelower of prime rate less 75 basis points or LIBOR plus 275 basis points. Borrowingsare secured by a pledge of certain of our assets, and the agreement containsvarious financial covenants, including those requiring compliance with certainfinancial ratios. At June 30, 2009, we had no amounts outstanding underthis agreement; however, $0.6 million was reserved for outstanding letters ofcredit.  We believe we have complied withall of the financial covenants under this credit agreement.

 

***CashFlows***

 

Thefollowing table summarizes our primary sources (uses) of cash during theperiods presented:

 
| ** **                                              | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                 | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| Net cash provided by (used  in):                        |       |                                          |       |   |   |
| Operating activities                                    |       | $                                             | 17,094     |   | $ | (3,429 | ) |
| Investing activities                                    |       | (3,368                                        | )          | (31,468 | ) |
| Financing activities                                    |       | (2,936                                        | )          | 31,576 |   |
| Effects of exchange rates  on cash and cash equivalents |       | —                                        |       | (13 | ) |
| Net change in cash and  cash equivalents                |       | $                                             | 10,790     |   | $ | (3,334 | ) |

 

*Operatingactivities*. Ouroperating activities provided net cash of $17.1 million during the first halfof 2009 and used net cash of $3.4 million during the first half of 2008. Ournet cash provided by operating activities during the first half of 2009 wasprimarily attributable to decreased accounts receivable and inventory of $24.6million and refunded income taxes of $3.2 million, partially offset bydecreased accounts payable and accrued liabilities of $6.7 million and net lossof $4.1 million. The reduction in accounts payable reflects payments forinventory purchases of holiday and fitness season shipments.  Our net cash used in operating activitiesduring the first half of 2008 was primarily attributable to noncash gain fromthe issuance of Real Goods stock of $19.2 million, net of tax, decreasedaccounts payable and accrued liabilities of $12.9 million, increased deferredadvertising costs and prepaid income taxes of $4.6 million, and other noncashadjustments to net income of $4.0 million, partially offset by the noncashimpairment loss of $25.9 million, reductions in accounts receivable andinventory of $6.6 million, and net income of $4.8 million.

 

*Investingactivities*. Ourinvesting activities used net cash of $3.4 million and $31.5 million during thefirst half of 2009 and 2008, respectively. The net cash used in investingactivities during the first half of 2009 was used primarily to acquire propertyand equipment for $2.4 million, of which $0.8 million was acquired to maintainnormal operations, and for media productions of $1.0 million. The net cash usedin investing activities during the first half of 2008 was used primarily toacquire our corporate headquarters property, businesses, equipment and otherinvestments for $27.3 million and purchased and produced media of $4.2 million.

 

*Financingactivities*. Ourfinancing activities used net cash of $2.9 million during the first half of 2009and provided net cash of $31.6 million during the first half of 2008.  Our net cash used in financing activitiesduring the first half of 2009 was used primarily to repurchase 932,000 sharesof our Class A common stock.  Ournet cash provided by financing activities during the first half of 2008primarily reflected net proceeds from the Real Goods IPO of $48.2 million andissuances of our common stock and related tax benefits of $1.5 million,partially offset by funds used to repurchase approximately 1.2 million sharesof our Class A common stock for $18.1 million.

 

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 and Conscious Media markets. For anyfuture investment, acquisition or joint venture opportunities, we may consider usingthen-available liquidity, issuing equity securities or incurring additionalindebtedness.

 

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**Contractual Obligations**

 

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

 
| **(in thousands)**      | ** ** | **Total** | ** ** | **< 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **> 5 years** | ** ** |
|------------------------------|------------|-----------|------------|---------------------------|------------|--------------------|------------|--------------------|------------|----------------------------|------------|
| Operating lease  obligations |       | $         | 8,478      |                      | $          | 2,629              |       | $                  | 2,775      |                       | $          | 2,313 |   | $ | 761 |   |
|                              |            |           |            |                           |            |                    |            |                    |            |                            |            |  |  |  |  |  |

 

**RiskFactors**

 

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

 

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

 

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

 

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

 

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

 

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

 

**Evaluation of Disclosure Controls andProcedures**

 

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

 

**Changes in Internal Control overFinancial Reporting**

 

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

 

No material changes.

 

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

 

We had no sales of unregistered securities during thequarter ended June 30, 2009.

 

We purchased shares of our Class A common stockas follows:

 

ISSUER PURCHASES OF EQUITY SECURITIES

 
| **Period**    | ** ** | **(a) Total Number of  Shares (or Units)  Purchased** | ** ** | **(b) Average Price Paid  per Share (or Unit)** | ** ** | **(c) Total Number of  Shares (or Units)  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **(d) Maximum Number  (or Approximate Dollar  Value) of Shares (or  Units) that May Yet Be  Purchased Under the  Plans or Programs** | ** ** |
|---------------|------------|--------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 4/6/2009  (1) |       | 932,000                                                                        |       | $                                                                             | 3.00       |                                                                                                                                                           | —     |                                                                                                                                                                                                            | —     |   |
|               |            |                                                                                |            |                                                                               |            |                                                                                                                                                                |            |                                                                                                                                                                                                                 |            |  |

 

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(1)  We repurchased these shares of our Class Acommon stock in a negotiated transaction.

 

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

 

None.

 

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

 

On April 23, 2009, Gaiam held an annual meetingof shareholders. The shareholders elected six directors to serve until the nextannual meeting of shareholders to be held in 2010 or until their successors areduly elected and qualified. The results of this vote follow:

 
| Jirka Rysavy        |   | For: | 64,607,484 |   | Withheld: | 4,649,434 |   |
|---------------------|--------|------|------------|--------|-----------|-----------|--------|
| Lynn Powers         |   | For: | 64,606,820 |   | Withheld: | 4,650,098 |   |
| James  Argyropoulos |   | For: | 68,536,859 |   | Withheld: | 720,059   |   |
| Barnet M.  Feinblum |   | For: | 67,665,695 |   | Withheld: | 1,591,223 |   |
| Barbara Mowry       |   | For: | 68,542,209 |   | Withheld: | 714,709   |   |
| Paul H. Ray         |   | For: | 68,553,989 |   | Withheld: | 702,929   |   |

 

Inaddition, the shareholders approved Gaiam’s 2009 Long-Term Incentive Plan by avote of 58,024,099 in favor, 8,949,372 opposed and 3,318 abstaining, and, by avote of 57,876,618 in favor, 9,093,630 opposed and 6,541 abstaining, approvedan amendment and restatement of Gaiam’s 1999 Long-Term Incentive Plan toexpressly permit repricing of options and other awards issued under the planand conform the provisions of the 1999 plan to the new 2009 Long-Term IncentivePlan for purposes of facilitating administration of the two plans.

 

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

 

None.

 

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

 

a)     Exhibits.

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                             |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | Gaiam, Inc.  2009 Long-Term Incentive Plan (incorporated by reference to Exhibit A of  Gaiam’s Proxy Statement for its annual shareholders’ meeting held on April 23,  2009).                      |
| 10.2                 |       | Amended  and Restated Gaiam, Inc. 1999 Long-Term Incentive Plan (incorporated by  reference to Exhibit B of Gaiam’s Proxy Statement for its annual  shareholders’ meeting held on April 23, 2009). |
| 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                                                                                                              |

 

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|   |   | Section 906  of the Sarbanes-Oxley Act of 2002 (furnished herewith).                                                                                                           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.2   |   | Certification  of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished  herewith). |

 

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### **Signatures**

### ** **

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

 
|   | Gaiam, Inc.     |
|--------|----------------------|
|   | (Registrant)         |
|   | August 7,  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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