10-K 1 d630884d10k.htm 10-K 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

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

For the fiscal year ended December 31, 2013

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 000-27517

 

 

GAIAM, INC.

(Exact name of registrant as specified in its charter)

 

 

 

COLORADO   84-1113527

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

833 WEST SOUTH BOULDER ROAD

LOUISVILLE, CO 80027

(Address of principal executive offices, including zip code)

(303) 222-3600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Class A Common Stock, $.0001 par value   NASDAQ Stock Market LLC

Securities registered pursuant to section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨    NO  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨    NO  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

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

 

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

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

The aggregate market value of the voting common equity held by non-affiliates of the registrant was approximately $70,643,220 as of June 30, 2013, based upon the closing price on the NASDAQ Global Market on that date. The registrant does not have non-voting common equity.

As of March 5, 2014, 18,602,803 shares of the registrant’s Class A common stock and 5,400,000 shares of the registrant’s Class B common stock were outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or portions thereof) are incorporated by reference into the Parts of this Form 10-K noted:

Part III incorporates by reference from the definitive proxy statement for the registrant’s 2014 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form.

 

 

 


Table of Contents

GAIAM, INC.

Annual Report on Form 10-K

For the Fiscal Year Ended December 31, 2013

INDEX

 

          Page
Number
 

PART I

     3   

Item 1.

   Business      3   

Item 1A.

   Risk Factors      9   

Item 1B.

   Unresolved Staff Comments      13   

Item 2.

   Properties      14   

Item 3.

   Legal Proceedings      14   

Item 4.

   Mine Safety Disclosures      14   

PART II

     14   

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      14   

Item 6.

   Selected Financial Data      16   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      18   

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      29   

Item 8.

   Financial Statements and Supplementary Data      30   

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      57   

Item 9A.

   Controls and Procedures      57   

Item 9B.

   Other Information      57   

PART III

     58   

Item 10.

   Directors, Executive Officers and Corporate Governance      58   

Item 11.

   Executive Compensation      60   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      68   

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      70   

Item 14.

   Principal Accounting Fees and Services      70   

PART IV

     71   

Item 15.

   Exhibits and Financial Statement Schedules      71   

SIGNATURES

     74   

 

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PART I

 

Item 1. Business

Our Business

We are a leader in the design, creation, and marketing of products and media for consumers who are interested in yoga, fitness, and wellbeing. Additionally, we operate a subscription video on-demand service, Gaiam TV, which is dedicated to creating, acquiring, and delivering conscious media. Through our business activities, we seek to position our brand as a trusted source for information and products that are relevant to our consumers’ active lifestyles and transformational journeys. Our broad distribution network includes retail, online, and digital channels. At the end of 2013, our brands were carried by over 38,000 retail stores worldwide. Our business is vertically integrated from product design and content creation through product development and sourcing, to customer service and distribution. This efficient supply chain enables us to provide quality products at competitive prices for all of our channels.

We intend to build upon our authenticity and heritage in the yoga, fitness, wellbeing, and conscious media sectors. We believe that the size of our end markets is growing as a result of growth in yoga participation, greater awareness of health and wellness, and the success of our retail and online partners. We intend to leverage our product development, supply chain, and retail relationships to continue to expand and innovate our brand’s offerings enabling us to capitalize on the growth in our end markets.

Discontinued Operations

In the fourth quarter of 2013, we sold our non-branded entertainment media distribution operations (“GVE”) and discontinued our direct response television marketing operations (“DRTV”). We now report these businesses as discontinued operations, and, accordingly, we have reclassified their financial results for all periods presented to reflect them as such. Unless otherwise noted, discussions in this Form 10-K pertain to our continuing operations.

Our Products

Our products are marketed primarily under the brands Gaiam and SPRI. Gaiam’s products include yoga mats, blocks, and other yoga accessories, restorative products such as foam rollers and massage sticks, balance balls and rubber resistance products. Our professional brand, SPRI, encompasses a full line of fitness accessories including our newest line SPRI Cross Train that targets the rapidly growing high-intensity training market. These products are marketed through both our direct and business segments. We also own or license other brands that are utilized on a smaller scale within our business segment to provide retailers with additional choices of brands and price points. Although we remain focused on our brands, offering multiple brands enables us to capture incremental market share within our existing customers and to build strong single-vendor relationships with retailers seeking greater operational efficiencies. We believe that our expertise and product offerings make us a valued partner to retailers. In addition, through market and consumer research, we have learned that our brands still have significant expansion opportunity into adjacent categories such as apparel.

Our Media Content

Our media business model revolves around content production and acquisition. We have an “in-house” production studio and team which produces programming that has earned 134 Telly awards and several medals at the International New York Film Festival. We own a media production studio and authoring and editing facilities that enable us to create our own high-definition content on-site at low incremental cost. We utilize this facility to create yoga, fitness, and wellbeing content as well as a large slate of original programming for Gaiam TV. In addition to creating content, we also license rights to content primarily for use on Gaiam TV. At the end of 2013, we owned or licensed over 6,000 titles. Our content management systems allow us to deliver content to nearly any internet connected device, giving us access to growing audiences anytime, anywhere. We own all rights to the majority of our titles allowing us to continue to expand our reach as content moves into the digital age.

Gaiam TV creates and digitally delivers an extensive library of acquired, licensed, and self-produced conscious media titles on demand. Gaiam TV is a global business with subscribers in over 100 countries. Over 90% of its titles are available for streaming exclusively on our platform, and over two thirds of streaming activity is generated by content we have produced in-house.

Our Sales and Marketing Segments

We conduct our business across two segments. Our business segment customers are primarily national retailers, corporate accounts and digital media marketers. We conduct our direct to consumer business through our digital streaming, e-commerce, and catalog channels.

 

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Business Segment

Our business segment encompasses both wholesale trade relationships as well digital content sales through third parties.

Since the inception of our retailer channel in 1998, we have increased our breadth and diversity. As of the end of 2013, our fitness accessories and media titles could be found in over 38,000 stores worldwide. We currently sell our proprietary media and other products across a variety of leading retailers, including mass merchants such as: Target, our largest customer, and Walmart; e-tailers such as Amazon.com and Drugstore.com; wholesale clubs such as Costco and Sam’s Club; media stores such as Best Buy; home furnishing stores such as Bed, Bath and Beyond; natural food stores such as Whole Foods Market; sporting goods stores such as Sports Authority and Dick’s Sporting Goods; and bookstores such as Barnes & Noble. Many of these retailers display our products in branded store-within-store lifestyle presentations that may include custom fixtures that we design. We implemented our first store-within-store concept late in 2000 and the concept had grown to approximately 14,500 stores by the end of 2013. Our branded products and yoga, fitness, and wellbeing media titles are distributed by our licensee in Canada, by our subsidiary Gaiam PTY in Australia, and directly by us, through a third-party logistics provider, in the United Kingdom.

We also distribute our digital media content over the Internet and on mobile devices, such as iPads and other tablets. Our media partners include Google, YouTube, Amazon, Vudu, and iTunes. All of our licensing arrangements require our branding to be prominent on the programming and are subject to royalty agreements with our performing artists. While licensing the rights to manufacture and distribute some of our media lowers recognized revenue, it also offers greater contribution margins.

We intend to continue seeking new licensees for our brands internationally as well as additional digital distribution partners.

Direct to Consumer Segment

We use e-commerce to sell our products and to provide information on LOHAS (lifestyles of health and sustainability). We promote our website through our visual media, catalogs, print publications, product packaging and Internet links. We provide customer support for e-commerce sales from our in-house call center, which is a key benefit for our e-commerce customers. Having an e-commerce presence and loyal customers is a competitive advantage as media continues to move more to digital download, streaming and subscription services. We offer a variety of LOHAS products directly to the consumer through our catalogs and through some consumer lifestyle publications. Our customer demographics are attractive as our customers have a median income of about $80,000 and most are college educated.

Gaiam TV is a global digital video streaming service with over 6,000 conscious media titles and subscribers in over 100 countries. Over 90% of its titles are available for streaming exclusively for Gaiam TV through almost any internet connected device.

Our Operations

Sales Channels, Product Development and Sourcing

We sell our branded products across various sales channels. Non-proprietary products are only available through our e-commerce and catalog channels. We use our e-commerce and catalog channels to test products before we develop them under our brand and distribute them through our other sales channels. Because we use a multi-channel approach to our business, we are able to leverage our media and product development costs across all channels of our business.

Our proprietary offerings are designed by our development team and sourced both domestically and internationally by our merchandisers through third party suppliers that produce these products to our specifications. We design our products to supply information, enhance customers’ lifestyles and experiences, and provide healthy, natural solutions while being eco-friendly and promoting a sustainable economy. We also screen the environmental and social responsibility of our suppliers. In order to minimize risk, we often identify an alternate supplier for our products in a separate location.

Customer Service

We focus on building and maintaining customer relationships that thrive on loyalty and trust. We maintain a “no-risk guarantee” policy, whereby we provide a customer a full refund for our products that are returned at any time, for any reason. We have established a “most valued customer” program, which extends added benefits to our most loyal e-commerce and catalog customers. Our in-house customer service department includes product specialists who have specific product knowledge and assist customers in selecting products and solutions that meet their needs. We employ telephone routing software that directs each call to the appropriate representative. Our policy is to ship orders no later than the next business day. We believe that by offering exceptional customer service we encourage repeat purchases by our customers, enhance our brand identity and reputation, and build stronger relationships with our customers.

 

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Established Infrastructure

We have a distribution center centrally located near Cincinnati, Ohio. This distribution center provides fulfillment for much of our current domestic business needs and has the capacity to support the growth of our business. The center’s central U.S. location allows us to achieve shipping cost efficiencies to most locations. The center is also located within 30 minutes of several major shipping company hubs. We use a supply chain management system that supports our entire operation, including fulfillment, inventory management, and customer service. Our fulfillment center is connected to our other facilities by a state-of-the art voice-over-Internet telecom network that allows us to maintain a high degree of connectivity within our organization.

Our Growth Strategies

Streamline and Focus Our Business

Having sold our non-branded entertainment media distribution operations in October 2013 and having discontinued our direct response television marketing operations, we are restructuring our business around our core yoga, fitness, and wellbeing operations as well as Gaiam TV. We expect that by divesting of non-core assets, we can deliver operational synergies from streamlining our organization and dedicating management oversight to each of the two core operating business segments. Gaiam TV continues to grow and we have built a highly skilled team that manages the Gaiam TV operations.

Expand our Media Content Offering

Proprietary and authentic content lies at the core of our business model. In the yoga, fitness, and wellbeing market, our media offerings help establish us as an authority and have given us the leading market share in the fitness media market according to Nielsen VideoScan. Our primary focus is on leveraging our content and branded lifestyle offerings through various channels, including traditional and digital media, catalogs, the Internet, and national retailers. We believe that within the market, our deep content library combines with our product offerings to provide lifestyle solutions to our consumers. Although the physical media market is in decline, our strong retail relationships, content creation capabilities, physical products, and digital distribution activities will enable us to maintain our leading market share in fitness media. Media consumption has shifted dramatically in recent years, and has led us to focus more on short-form content development, particularly in the yoga, fitness, and wellbeing market. This content is more readily adapted to digital distribution channels. In addition, short-form content can be complementary to our yoga and fitness accessories, and helps us deliver to our consumers a complete solution to their needs.

We will continue to develop authentic content that caters to the conscious media lifestyle and distribute it primarily in digital formats, and also to accelerate our efforts in the international and online categories. During 2013, we acquired My Yoga Online, the largest on-line yoga video streaming subscription business in Canada with a content library of over 1,000 video titles and an active on-line, international community.

We have expanded our visual media offerings internationally and plan to continue to grow this opportunity. We have also broadened the variety of formats we offer by making our content available online to our consumers in transactional purchase and subscription services.

Digital Delivery of Media Products

In order to capitalize on the shift from DVD to digital distribution, we have digitized our entire media library. We sell our media through digital distribution partners, such as Amazon, YouTube, Vudu, iTunes, and other major digital providers. Gaiam TV subscribers are able to browse and stream extensive conscious media content, as well as create customized yoga and fitness playlists based on level of expertise, instructors, interests or desired time commitment. The platform accommodates multiple consumer access points through virtually all Internet-connected devices.

We have invested in our in-house studios, digital asset management system and digital delivery platforms, to allow us to produce and distribute digital content at low incremental costs. To date, we made available over 6,000 titles that consumers may download through digital retailers or stream via Gaiam TV. We intend to use all of our current sales platforms to direct customers to our comprehensive digital offerings and clubs.

 

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Strengthen our Lifestyle Brand

Our goal is to maintain our brand as an authority in the LOHAS market, and focus on our core heritage in yoga, fitness, and wellness and conscious media. We plan to strengthen our brand by continuing to develop new and innovative products, growing our media, making our brand more prominent across our direct to consumer efforts, focusing on category management initiatives, increasing our store-within-store presence across national retailers, increasing our marketing and public relations efforts, and maintaining our high level of customer service.

Expand our Proprietary Products

Excluding our partially owned subsidiaries, our proprietary products, which we introduced in 1997, represented approximately 93% of our revenues in 2013. These products carry a higher margin, provide for branding opportunities, and distinguish us from our competitors. We currently support the LOHAS lifestyle with proprietary products in yoga and fitness, health and wellness, and conscious media. We have also expanded our media library to over 6,000 titles through acquisitions and internal development. We will continue to develop and market proprietary products across the LOHAS sectors. Today, our brands Gaiam and SPRI represent the majority of our proprietary offerings, and we will continue to seek opportunities to innovate within our existing brand portfolio as well as to extend these brands into adjacent markets. Our recent launch of SPRI CrossTrain fitness equipment targeted at the high-intensity exercise market represents the kind of innovation we seek to deliver through our existing channels. We are currently preparing to extend our brand into the active apparel market. We will also continue to look for additional library or business acquisitions as we expand our content across the conscious media market. We are strengthening our supply chain globally by sourcing a greater number of products offshore and leveraging our expanding media sales to obtain lower costs from our replicators. We leverage our product development costs over all sales channels.

Capitalize on our Market Share Positioning

According to Nielsen’s Videoscan, since 2004 we more than doubled our U.S. DVD market share in the fitness/wellness category to approximately 39% in 2013. At the end of 2013, we were ranked 1st in the U.S. in the fitness DVD category. We have secured a yoga and fitness category management role and effectively control such offerings at some of the largest retailers in the nation. We are now expanding this category management concept to other specialty channels. Assuming this category management role improved our revenues and profits and expanded our exposure in the yoga and fitness category. This category management program is currently in over 5,500 retail doors.

Capitalize on our Multi-channel Approach

Our multi-channel strategy affords us the broadest possible customer reach, as well as allowing our customers to buy from us “what they want, when they want, where they want.” This approach makes purchasing our LOHAS products convenient regardless of the channel that a customer prefers. It also allows us to exploit segments of our customer base across channels to develop deeper, longer-lasting relationships with them, and to convert them from purchasers of individual media products into subscribers to our online content on a recurring basis. Additionally, this diversified, strategic approach should provide for continued operational and business stability as we have the ability to cross-market lifestyle products and services regardless of the customer location or the channel to which we are marketing.

In our direct to consumer segment, we are open 24 hours a day, offering products on our Internet sites. Our direct businesses (e-commerce, catalog, and subscription) are better positioned to grow as a result of platform updates that promote more solutions-based (versus transaction-based) interactions, which deliver more engaging shopping experiences for our customers. As we increase the depth of media and functionality available to our consumers, our Internet presence will transform from being merely a place to “order” product to a place to “consume” it in real-time as digital downloads become more mainstream. This will allow our customers to both stream or download content, as well as buy products focused on these solution-based areas: yoga and fitness; health and wellness; personal development, inspiration and mediation, and meaningful documentaries.

In our business segment, we continue to expand our presence in national retailers and currently have placements in over 38,000 retail doors worldwide. We also continue to expand our store-within-store concept in a variety of stores, including Target, Sports Authority, Dick’s Sporting Goods, Whole Foods Market, Best Buy, REI, Barnes & Noble Bookstores, and other national retailers. We currently have over 14,500 stores within stores concepts. As digital has become more main stream, our strong relationships with retailers have allowed us to migrate our media and products to retailers’ Internet sales channels.

Improve our Profit Margins

We believe we can improve our profit margins with several distinct strategies. First, we will seek to focus and streamline our business having recently divested our entertainment media distribution operations and discontinued our DRTV operations. This process will include finding additional supply chain efficiencies as well as leveraging our growing scale in the yoga, fitness, and wellbeing marketplace. We will also continue to focus our sales strategy on media that carries high gross margins. We continue to establish ourselves as “the brand” in the yoga, fitness, and wellbeing markets, as well as in the conscious media market.

 

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We entered the subscription market in 2007 and have since expanded our presence with the launch of Gaiam TV. The subscription business carries over 85% gross margin and connects our media content directly to the consumer. We expect to continue to invest in this channel. We believe that with the widespread adoption of broadband Internet connectivity in the consumer marketplace, coupled with our specialized media library and loyal direct customer base, we have an opportunity for strong growth at high margins as digital downloads of media become more mainstream.

With our state-of-the-art, in-house studios and post production facilities, we will continue to focus on producing lower cost yoga and fitness media, LOHAS content, and web downloads. In addition, we have, and will continue to optimize and focus our catalog circulation towards more fitness and apparel.

Complement our Existing Business with Selective Strategic Acquisitions

Our growth strategy is not dependent on acquisitions. However, we will consider strategic acquisitions that complement our existing business, increase our media and related product offerings, expand our geographical reach, extend our channel distribution, and/or add to our direct customer base. We especially focus on companies with media content, brand identity, and consumer bases that augment our existing operations. We often allow some of the acquired company’s management team to retain responsibility for front-end business functions, such as creative presentation and marketing, while consolidating operational functions under our existing infrastructure when we can realize economies of scale.

Our Reporting Segments

We have two reportable segments: the business segment, which includes sales to businesses, retailers, international licenses, corporate accounts and media outlets; and the direct to consumer segment, which includes e-commerce, catalogs, and digital subscription services.

During 2013, the business and direct to consumer segments represented 66.5% and 33.5% of our net revenues, respectively. Our business segment is dependent upon a few major customers for a significant portion of its revenues. See Note 11 to our consolidated financial statements for further information on our segments.

Our Intellectual Property

Our trade name, Gaiam, and various product and Internet domain names are subject to trademark or pending trademark applications of Gaiam or a Gaiam company. We believe these trademarks are significant assets to our business.

Our Competition

We believe that fragmented supplier and distribution networks continue to characterize the LOHAS market, and we are not aware of a dominant leader. According to Nielson’s VideoScan, we continue to be the leader in fitness/wellness media with a 39% market share. We believe the principal competitive factors in the LOHAS market are brand authenticity and recognition, unique content and distinctiveness of products and services, quality of product, price, and distribution capabilities. We believe we compete favorably on all these relevant factors. Because we use multi-channel distribution for our products, we compete with various producers of similar products and services. Our competitors in the accessories market are Icon Health and Fitness, GoFit, Sklz, Manduka, JadeYoga, and numerous other small, local and regional businesses, and product lines or items offered by large retailers. In the media market, our principal competitors include Anchor Bay Entertainment, Lions Gate Entertainment, and many smaller media producers.

Our Competitive Advantage

We believe we have a number of advantages over our competitors, including the following:

 

   

Brand Recognition and Authenticity. Our brand is readily recognized as a leader in our industry. We continue to develop authentic products and content for the LOHAS market, particularly in the categories of fitness/wellness and conscious media. With over 15 years in the yoga and well being market, our reputation and longevity in the LOHAS marketplace makes us the first choice for many consumers.

 

   

Unique Vertical Media Content Business Model. We believe we have a competitive advantage with our unique media content business model, which is vertically integrated from content production through digital distribution. With our in-house studios, post production facility, and digital asset management distribution system, we can produce new content at a very low incremental cost.

 

   

Multi-channel Distribution Capabilities. Our products are accessible by our customers when, where and how ever they want them. Customers may purchase and receive our products from retail stores, the Internet, catalogs, web subscriptions, or digital streaming. Our retail distribution currently reaches over 38,000 retail doors worldwide. In retailer locations, we are pairing our media content with our other product offerings to create a unique display and merchandising opportunity for our brand, which we call a store-within-store. We currently have over 14,500 of these displays across the country, allowing the consumer to find a Gaiam “home” where they shop.

 

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Market Share. We maintain a leading market share in yoga and fitness media at retail, which reflects the popularity of our content with consumers and the quality of our strategic partnerships with key retailers. We currently have a 39% market share in fitness according to Nielsen VideoScan. As a result of this leading market position, we have been successful in becoming the category manager for yoga and fitness media in over 5,500 retail doors. This role uniquely positions Gaiam as a close partner with retailers and provides us the opportunity to manage the entire fitness category at these locations.

 

   

Owned Content. As media content distribution continues to move to a digital online model, the fact that we own all rights to the majority of our titles will permit us to offer them through any channel of distribution. We have over 10 million customers that have purchased directly from Gaiam to whom we can market digital content as the online and mobile digital format becomes more mainstream.

 

   

Unique Products. Our in-house marketing and product development team leads our development of unique and innovative products unavailable under other brands. In the yoga category, we continually source new and different materials and patterns for our core yoga offerings. Our recent success in wellbeing has been driven by new rehabilitative products marketed under Restore by Gaiam and SPRI Dynamic Recovery. We continually research the trends in all of our markets, and believe that we can continue to develop innovative products and content that address the changing needs of our consumers.

Our Employees

As of February 28, 2014, we employed approximately 267 full-time and 10 part-time individuals. None of our employees are covered by a collective bargaining agreement.

Regulatory Matters

A number of existing and proposed laws restrict disclosure of consumers’ personal information, which may make it more difficult for us to generate additional names for our direct marketing, and restrict our ability to send unsolicited electronic mail or printed materials. Although we believe we are generally in compliance with current laws and regulations and that these laws and regulations have not had a significant impact on our business to date, it is possible that existing or future regulatory requirements will impose a significant burden on us.

We generally collect sales taxes only on sales to residents of states in which we have nexus. Currently, we collect sales taxes on certain sales to residents of Colorado, Illinois, New York, Ohio, and Texas. A number of legislative proposals have been made at the federal, state and local level, and by foreign governments, that would impose additional taxes on the sale of goods and services over the Internet, and certain states have taken measures to tax Internet-related activities. If legislation is enacted that requires us to collect sales taxes on sales to residents of other states or jurisdictions, sales in our direct to consumer businesses may be adversely affected. Our business is also subject to a number of other governmental regulations, including the Mail or Telephone Order Merchandise Rule and related regulations of the Federal Trade Commission. These regulations prohibit unfair methods of competition and unfair or deceptive acts or practices in connection with mail and telephone order sales and require sellers of mail and telephone order merchandise to conform to certain rules of conduct with respect to shipping dates and shipping delays. We are also subject to regulations of the U.S. Postal Service and various state and local consumer protection agencies relating to matters such as advertising, order solicitation, shipment deadlines and customer refunds and returns. In addition, merchandise that we import is subject to import and customs duties and, in some cases, import quotas.

Seasonality

See the “Quarterly and Seasonal Fluctuations” section of Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for information pertaining to the seasonal aspects of our business.

Available Information

Our corporate website at www.gaiam.com provides information about us, our history, goals and philosophy, as well as certain financial reports and corporate press releases. Our www.gaiam.com website also features a library of information and articles on personal development and healthy lifestyles, along with an extensive offering of media, products and services. We believe our website provides us with an opportunity to deepen our relationships with our customers and investors, educate them on a variety of issues, and improve our service. As part of this commitment, we have a link on our corporate website to our Securities and Exchange Commission filings, including our reports on Form 10-K, 10-Q and 8-K and amendments thereto. We make those reports available through our website, free of charge, as soon as reasonably practicable after these reports are filed with the Securities and Exchange Commission.

 

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We have included our website addresses only as inactive textual reference, and the information contained on our website is not incorporated by reference into this Form 10-K.

 

Item 1A. Risk Factors

We wish to caution you that there are risks and uncertainties that could cause our actual results to be materially different from those indicated by forward looking statements that we make from time to time in filings with the Securities and Exchange Commission, news releases, reports, proxy statements, registration statements and other written communications as well as oral forward looking statements made from time to time by our representatives. These risks and uncertainties include those risks described below of which we are presently aware. Historical results are not necessarily an indication of the future results. The risk factors below discuss important factors that could cause our business, financial condition, operating results and cash flows to be materially adversely affected.

Changes in general economic conditions could have a material impact on our business

Changes in overall economic conditions that impact consumer spending could impact our results of operations. Future economic conditions affecting disposable income such as employment levels, consumer confidence, credit availability, business conditions, stock market volatility, inflation, acts of terrorism, threats of war, and interest and tax rates could reduce consumer spending or cause consumers to shift their spending away from our products. If the economic conditions and performance of the retail and media environment worsen, we may experience material adverse impacts on our business, operating results and financial condition.

Increased competition could impact our financial results

We believe that the LOHAS market includes thousands of small, local and regional businesses. Some smaller businesses may be able to more effectively personalize their relationships with customers, thereby gaining a competitive advantage. Although we believe that we do not compete directly with any single company that offers our entire range of merchandise and services, within each category we have competitors and we may face competition from new entrants. Some of our competitors or our potential competitors may have greater financial and marketing resources and greater brand recognition. In addition, larger, well-established and well-financed entities may acquire, invest in or form joint ventures with our competitors. Increased competition from these or other competitors could negatively impact our business.

Changing consumer preferences may have an adverse effect on our business

We target consumers who assign high value to personal development, healthy lifestyles, responsible media, and the environment. A decrease of consumer interest in purchasing goods and services that promote the values we espouse would materially and adversely affect our customer base and sales revenues and, accordingly, our financial prospects. Further, consumer preferences and product trends are difficult to predict. Our future success depends in part on our ability to anticipate and respond to changes in consumer preferences and we may not respond in a timely or commercially appropriate manner to such changes. Failure to anticipate and respond to changing consumer preferences and product trends could lead to, among other things, lower sales of our products, increased merchandise returns and lower margins, which could have a material adverse effect on our business.

Our strategy of offering branded products could lead to inventory risk and higher costs

An important part of our strategy is to feature branded products. These products are sold under our brand names and are manufactured to our specifications. We expect our reliance on branded merchandise to increase. The use of branded merchandise requires us to incur costs and risks relating to the design and purchase of products, including submitting orders earlier and making longer initial purchase commitments.

In addition, the use of branded merchandise limits our ability to return unsold products to vendors, which can result in higher markdowns in order to sell excess inventory. Our commitment to customer service typically results in our keeping a high level of merchandise in stock so we can fill orders quickly. Consequently, we run the risk of having excess inventory, which may also contribute to higher markdowns. Our failure to successfully execute a branded merchandise strategy or to achieve anticipated profit margins on these goods, or a higher than anticipated level of overstocks, may materially adversely affect our revenues.

We offer our customers liberal merchandise return policies. Our consolidated financial statements include a reserve for anticipated merchandise returns, which is based on historical return rates. It is possible that actual returns may increase as a result of factors such as the introduction of new merchandise, changes in merchandise mix or other factors. Any increase in our merchandise returns will correspondingly reduce our revenues and profits.

 

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Acquisitions and new initiatives may harm our financial results

We have historically expanded our operations in part through strategic acquisitions and through new initiatives that we generate. We cannot accurately predict the timing, size and success of these efforts. Our acquisition and new initiative strategies involve significant risks that could inhibit our growth and negatively impact our operating results, including the following: our ability to identify suitable acquisition candidates or new initiatives at acceptable prices; our ability to complete the acquisitions of candidates that we identify or develop our new initiatives; our ability to compete effectively for available acquisition opportunities; increases in asking prices by acquisition candidates to levels beyond our financial capability or to levels that would not result in the returns required by our acquisition criteria; diversion of management’s attention to expansion efforts; unanticipated costs and contingent liabilities associated with acquisitions and new initiatives; failure of acquired businesses or new initiatives to achieve expected results; our failure to retain key customers or personnel of acquired businesses and difficulties entering markets in which we have no or limited experience. In addition, the size, timing and success of any future acquisitions and new initiatives may cause substantial fluctuations in our operating results from quarter to quarter. Consequently, our operating results for any quarter may not be indicative of the results that may be achieved for any subsequent quarter or for a full fiscal year. These fluctuations could adversely affect the market price of our Class A common stock.

The loss of the services of our key personnel could disrupt our business

We depend on the continued services and performance of our senior management and other key personnel, particularly Jirka Rysavy and Lynn Powers, who intends to retire once a replacement is identified and transitioned into Gaiam. A loss of one or more of the members of our senior management or key personnel, without suitable replacements, could severely and negatively impact our operations. Our strategy of allowing the management teams of some acquired companies to continue to exercise significant management responsibility for those companies makes it important that we retain key employees, particularly the sales and creative teams, of the companies we might acquire. Hiring qualified management is difficult due to the limited number of qualified professionals in the industry in which we operate. Failure to attract and retain personnel, particularly management personnel, could materially harm our business, financial condition, and results of operations.

Our founder and chairman Jirka Rysavy controls us

Mr. Rysavy holds 100% of our 5,400,000 outstanding shares of Class B common stock and also owns 648,682 shares of Class A common stock. The shares of Class B common stock are convertible into shares of Class A common stock at any time. Each share of Class B common stock has ten votes per share, and each share of Class A common stock has one vote per share. Consequently, Mr. Rysavy holds approximately 75% of our voting stock and, thus, is able to exert substantial influence over us and to control matters requiring approval by our shareholders, including the election of directors, increasing our authorized capital stock, or a merger or sale of substantially all of our assets. As a result of Mr. Rysavy’s control of us, no change of control can occur without Mr. Rysavy’s consent.

Our success depends on the value of our brand

Because of our reliance on sales of proprietary products, our success depends on our brand. Building and maintaining recognition of our brand are important for attracting and expanding our customer base. If the value of our brand were adversely affected, we cannot be certain that we will be able to attract new customers, retain existing customers or encourage repeat purchases, and if the value of our brand were to diminish, our revenues, results of operations and prospects would be adversely affected.

Our future cash flows may not be sufficient to meet our obligations and we may have difficulty obtaining financing

Our cash balance at December 31, 2013 was $32.2 million, primarily due to recent sales of certain investments. We presently do not have any financing arrangements in place to assist us in meeting our obligations. There can be no assurance in the future whether we will generate sufficient cash flow from operations to meet our obligations or whether we would be able to secure financing or other sources of funds, such as from the sale of our shelf registration stock or investments in Real Goods Solar, Inc., and Cinedigm Corp. Class A common stock, should the need arise.

Disputes concerning media content and intellectual property may adversely affect us

Most of our media content is subject to arrangements with third parties pursuant to which we have licensed certain rights to use and distribute media content owned by third parties or have licensed to third parties certain rights to use and distribute media content that we own. In addition, we have a number of agreements with third parties concerning the use of our media content and intellectual property, including agreements regarding royalties, distribution, duplication, etc. Allegations that our rights to use media content are incomplete or other disputes arising from such arrangements may be costly and may have a material adverse impact on our results.

 

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Product liability claims against us could result in adverse publicity and potentially significant monetary damages

As a seller of consumer products, we may face product liability claims in the event that use of our products results in injuries. If such injuries or claims of injuries were to occur, we could incur monetary damages and our business could be adversely affected by any resulting negative publicity. The successful assertion of product liability claims against us also could result in potentially significant monetary damages and, if our insurance protection is inadequate to cover these claims, could require us to make significant payments from our own resources.

We are dependent on third party suppliers for the success of our proprietary products

We are dependent on the success of our proprietary products, and we rely on a select group of manufacturers to provide us with sufficient quantities to meet our customers’ demands in a timely manner, produce these products in a humane and safe environment for both their workers and the planet, maintain quality standards consistent with our brand, and meet certain pricing guarantees. Our overseas sourcing arrangements carry risks associated with products manufactured outside of the U.S., including political unrest and trade restrictions, currency fluctuations, transportation difficulties, work stoppages, and other uncertainties. In addition, a number of our suppliers are small companies, and some of these vendors may not have sufficient capital, resources or personnel to maintain or increase their sales to us or to meet our needs for commitments from them. The failure of our suppliers to provide sufficient quantities of our proprietary products could decrease our revenues, increase our costs, and damage our customer service reputation.

We rely on communications and shipping networks to deliver our products

Given our emphasis on customer service, the efficient and uninterrupted operation of order-processing and fulfillment functions is critical to our business. To maintain a high level of customer service, we rely heavily on a number of different outside service providers, such as printers, telecommunications companies and delivery companies. Any interruption in services from our principal outside service providers, including delays or disruptions resulting from labor disputes, power outages, human error, adverse weather conditions or natural disasters, could materially adversely affect our business. In addition, freight carriers must ship products that we source overseas to our distribution center, and a work stoppage or political unrest could adversely affect our ability to fulfill our customer orders.

Information systems upgrades or integrations may disrupt our operations or financial reporting

We continually evaluate and upgrade our management information systems, which are critical to our business. These systems assist in processing orders, managing inventory, purchasing and shipping merchandise on a timely basis, responding to customer service inquiries, and gathering and analyzing operating data by business segment, customer, and stock keeping unit (a specific identifier for each different product). We are required to continually update these systems. Furthermore, if we acquire other companies, we will need to integrate the acquired companies’ systems with ours, a process that could be time-consuming and costly. If our systems cannot accommodate our growth or if they fail, we could incur substantial expenses and our business could be adversely affected.

Additionally, success in e-commerce depends upon our ability to provide a compelling and satisfying shopping experience. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our online technology, and if we are unable to do this, our business could be adversely affected.

A material security breach could cause us to lose sales, damage our reputation or result in liability to us

Our computer servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. We may need to expend significant additional capital and other resources to protect against a security breach or to alleviate problems caused by any breaches. Our relationships with our customers may be adversely affected if the security measures that we use to protect personal information such as credit card numbers are ineffective. We currently rely on security and authentication technology that we license from third parties. We may not succeed in preventing all security breaches and our failure to do so could adversely affect our business.

Our systems may fail or limit user traffic, which would cause us to lose sales

We support a portion of our business through our call center in Louisville, Colorado. Even though we have back up arrangements, we are dependent on our ability to maintain our computer and telecommunications equipment in this center in effective working order and to protect against damage from fire, natural disaster, power loss, telecommunications failure or similar events. In addition, growth of our customer base may strain or exceed the capacity of our computer and telecommunications systems and lead to degradations in performance or systems failure. We have experienced capacity constraints and failure of information systems in the past that have resulted in decreased levels of service delivery or interruptions in service to customers for limited periods of time. Although we continually review and consider upgrades to our technical infrastructure and provide for system redundancies and backup power to limit the likelihood of systems overload or failure, substantial damage to our systems or a systems failure that causes interruptions for a number of days could adversely affect our business. Additionally, if we are unsuccessful in updating and expanding our infrastructure, including our call center, our ability to grow may be constrained.

 

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Government regulation of the Internet and E-commerce is evolving and unfavorable changes could harm our business

We are subject to general business regulations and laws, as well as regulations and laws specifically governing the Internet and E-commerce. Such existing and future laws and regulations may impede the growth of the Internet or other online services. These regulations and laws may cover taxation, user privacy, pricing, content, copyrights, distribution, consumer protection, the provision of online payment services and quality of products and services. Many of the fundamental statutes and regulations applicable to our business were established before the adoption and growth of the Internet and e-commerce. There is lack of clarity on how existing laws and regulations governing issues such as property ownership, sales and other taxes and personal privacy apply to the Internet and E-commerce. Unfavorable resolution of these issues may harm our business.

Specifically, the application of indirect taxes (such as sales and use tax, value-added tax (VAT), goods and services tax, business tax and gross receipt tax) to e-commerce businesses such as ours and our customers is a complex and evolving issue. In many cases, it is not clear how existing tax laws and regulations apply to the Internet and E-commerce. In addition, governments are increasingly looking for ways to increase revenues, which has resulted in discussions about tax reform and other legislative action to increase tax revenues, including through indirect taxes. We generally collect sales taxes only on sales to residents of states in which we have nexus. Currently, we collect sales taxes on certain sales to residents of Colorado, Illinois, New York, Ohio, and Texas. A number of legislative proposals have been made at the federal, state and local level, and by foreign governments, that would impose additional taxes on the sale of goods and services over the Internet and certain states and other jurisdictions have taken measures to tax Internet-related activities. If legislation is enacted that requires us to collect taxes on sales to residents of other states or jurisdictions, sales in our direct to consumer businesses may be adversely affected. Further, a successful assertion by one or more states or other jurisdictions requiring us to collect taxes where we do not do so could result in substantial tax liabilities, including for past sales, as well as penalties and interest.

 

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We may face legal liability for the content contained on our websites

We could face legal liability for defamation, negligence, copyright, patent or trademark infringement, personal injury or other claims based on the nature and content of materials that we publish or distribute on our websites. If we are held liable for damages for the content on our websites, our business may suffer. Further, one of our goals is for our websites to be trustworthy and dependable providers of information and services. Allegations of impropriety, even if unfounded, could therefore have a material adverse effect on our reputation and our business.

We may be subject to litigation which, if adversely determined, could cause us to incur substantial losses.

From time to time during the normal course of operating our businesses, we are subject to various litigation claims and legal disputes. Some of the litigation claims may not be covered under our insurance policies, or our insurance carriers may seek to deny coverage. As a result, we might also be required to incur significant legal fees, which may have a material adverse effect on our financial position. In addition, because we cannot accurately predict the outcome of any action, it is possible that, as a result of current and/or future litigation, we will be subject to adverse judgments or settlements that could significantly reduce our earnings or result in losses.

Relying on our centralized fulfillment center could expose us to losing revenue

Prompt and efficient fulfillment of our customers’ orders is critical to our business. Our facility in Cincinnati, Ohio handles a portion of our fulfillment functions and some customer-service related operations, such as returns processing. Many of our orders are filled and shipped from the Cincinnati facility. The balance is shipped by third party fulfillment centers or directly from suppliers. Because we rely on a centralized fulfillment center, our fulfillment functions could be severely impaired in the event of fire, extended adverse weather conditions, transportation difficulties or natural disasters. Because we recognize revenue only when we ship orders, interruption of our shipping could diminish our revenues.

We may face quarterly and seasonal fluctuations that could harm our business

Our revenue and results of operations have fluctuated and will continue to fluctuate on a quarterly basis as a result of a number of factors, including the timing of catalog offerings, timing of orders from retailers, recognition of costs or net sales contributed by new merchandise, fluctuations in response rates, fluctuations in paper, production and postage costs and expenses, merchandise returns, adverse weather conditions that affect distribution or shipping, shifts in the timing of holidays and changes in our merchandise mix. In particular, our net sales and profits have historically been higher during the fourth quarter holiday season. We believe that this seasonality will continue in the future.

Postage and shipping costs may increase and therefore increase our expenses

We ship our products, catalogs, and lifestyle publications to consumers and the cost of shipping is a material expenditure. Postage and shipping prices increase periodically and can be expected to increase in the future. Any inability to secure suitable or commercially favorable prices or other terms for the delivery of our merchandise and catalogs could have a material adverse effect on our financial condition and results of operations.

Our business is subject to reporting requirements that continue to evolve and change, which could continue to require significant compliance effort and resources

Because our Class A common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the SEC and the NASDAQ, periodically issue new requirements and regulations and legislative bodies also review and revise applicable laws. As interpretation and implementation of these laws and rules and promulgation of new regulations continues, we will continue to be required to commit significant financial and managerial resources and incur additional expenses.

 

Item 1B. Unresolved Staff Comments

None.

 

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Item 2. Properties

Our principal executive offices are located in Louisville, Colorado. Our fulfillment center is located in the Cincinnati, Ohio area. The following table sets forth certain information relating to our primary facilities:

 

Primary

Locations

  

Size

  

Use

  

Lease

Expiration

Louisville, CO

   149,044 sq. ft.    Headquarters and studios    Owned

Cincinnati, OH

   208,120 sq. ft.    Fulfillment center    June 2016

New York, NY

   12,700 sq. ft.    Closed (former entertainment media office)    March 2015

Libertyville, IL

   7,691 sq. ft.    Office    December 2014

We rent to third parties approximately 61,400 square feet of our building space located in Colorado. Our existing fulfillment center lease has renewal options permitting the extension of the lease for up to an additional three years. As a result of our divestiture of our non-branded entertainment media operations and our discontinuance of our DRTV operations, in the fourth quarter of 2013 we closed our office in New York, NY and recognized an expense representing the cumulative remaining obligation under that lease agreement, net of expected recoveries from sublease agreements. We believe our facilities are adequate to meet our current needs and that suitable additional facilities will be available for lease or purchase when, and as, we need them.

 

Item 3. Legal Proceedings

From time to time, we are involved in various legal proceedings that we consider to be in the normal course of business. We do not believe that any of these proceedings will have a material adverse effect on our business.

 

Item 4. Mine Safety Disclosures

Not applicable.

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Stock Price History

Our Class A common stock is listed on the NASDAQ Global Market under the symbol “GAIA”. On March 5, 2014, we had 4,209 shareholders of record and 18,602,803 shares of $.0001 par value Class A common stock outstanding, and we had 5,400,000 shares of $.0001 par value Class B common stock outstanding, held by one shareholder.

The following table sets forth certain sales price data for our Class A common stock for the period indicated:

 

     High      Low  

Fiscal 2013:

     

Fourth Quarter

   $ 6.74       $ 4.99   

Third Quarter

   $ 6.06       $ 4.45   

Second Quarter

   $ 4.94       $ 3.70   

First Quarter

   $ 4.54       $ 2.95   

Fiscal 2012:

     

Fourth Quarter

   $ 3.50       $ 2.23   

Third Quarter

   $ 4.02       $ 3.26   

Second Quarter

   $ 4.28       $ 3.65   

First Quarter

   $ 4.28       $ 3.03   

Issuer Purchases of Registered Equity Securities

None.

Dividend Policy

We paid the 2010 and 2011 declared dividends during 2010, and no dividends have since been declared or paid.

 

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Sales of Unregistered Securities

We issued 1,055,000 shares of our Class A common stock into escrow as partial payment of an acquisition we completed during 2013. The escrowed shares will be held by the escrow agent to secure the indemnification obligations and certain other obligation under the agreement. On April 30, 2014, the escrow agent will release the escrowed shares, less any shares released or held in connection with any indemnification claims under the agreement. Any shares not ultimately released to the seller will be released to us and cancelled.

The issuance of the securities described above was exempt from registration under Section 4(a)(2) of the Securities Act because (a) the seller represented in writing that it acquired the securities for its own accounts, for investment purposes only and not with a view to sell them, (b) the issuance was not effected through any general solicitation or general advertising, (c) the seller had such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in Gaiam, Inc., (d) a legend was placed on the stock certificates stating that the securities have not been registered under the Securities Act and cannot be sold or otherwise transferred without an effective registration or an exemption therefrom.

Equity Compensation Plan Information

The following table summarizes equity compensation plan information for our Class A common stock at December 31, 2013:

 

Plan Category

   Number of securities
to be issued upon
exercise of  outstanding
options, warrants and
rights
     Weighted average
exercise price of
outstanding options,
warrants  and rights
     Number of securities
remaining available for
future issuance  under
equity compensation
plans
 

Equity compensation plans approved by security holders

     1,662,450       $ 5.65         1,678,434   

Equity compensation plans not approved by security holders

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

     1,662,450       $ 5.65         1,678,434   
  

 

 

    

 

 

    

 

 

 

Stock Performance Graph

The graph below shows, for the five years ended December 31, 2013, the cumulative total return on an investment of $100 in our Class A common stock, assuming the investment was made on December 31, 2008, and also shows the relative stock performances of our Class A common stock commencing with Gaiam’s initial public offering on October 29, 1999 until December 31, 2008. The graph compares such return with that of comparable investments assumed to have been made on the same date in (a) the NASDAQ Stock Market (U.S. Companies) Index and (b) a media peer group, comprised of Martha Stewart Living Omnimedia, Inc.; The Walt Disney Company; and Lions Gate Entertainment Corp. Although total return for the assumed investment reflects a reinvestment of all dividends on December 31st of the year in which such dividends are paid, no cash dividends were paid on our common stock until the two dividends we paid in 2010. Our Class A common stock is quoted by The NASDAQ Stock Market’s Global Market under the trading symbol GAIA.

 

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LOGO

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

 

Item 6. Selected Financial Data

We derived the selected consolidated statement of operations data for the years ended December 31, 2013, 2012 and 2011 and consolidated balance sheet data as of December 31, 2013 and 2012 set forth below from our audited consolidated financial statements, which are included elsewhere in this Form 10-K. We derived the selected consolidated statement of operations data for the years ended December 31, 2010 and 2009 and consolidated balance sheet data as of December 31, 2011, 2010 and 2009 set forth below from our audited consolidated financial statements which are not included in this Form 10-K. During 2013, we sold our non-Gaiam branded entertainment media distribution operations and discontinued our DRTV operations. We now report these businesses as discontinued operations, and, accordingly, we have reclassified the selected financial data for all periods presented to reflect them as such.

 

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The historical operating results are not necessarily indicative of the results to be expected for any other period. You should read the data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, included elsewhere in this Form 10-K. Until December 31, 2011, we accounted for our investment in Real Goals Solar as a consolidated subsidiary.

 

     Years ended December 31,  

(in thousands, except per share data)

   2013 (c)(d)     2012 (b)     2011 (a)     2010 (a)     2009 (a)  

Consolidated Statements of Operations Data:

          

Net revenues

   $ 155,463      $ 127,242      $ 223,691      $ 204,017      $ 198,416   

Cost of goods sold

     90,155        70,723        144,835        122,917        119,760   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     65,308        56,519        78,856        81,100        78,656   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

          

Selling and operating

     64,657        56,292        73,525        64,574        74,062   

Corporate, general and administration

     11,249        10,400        11,828        10,772        11,165   

Acquisition-related costs

     76        —         2,393        —         —    

Other general income and expense

     10,967        —         22,456        —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     86,949        66,692        110,202        75,346        85,227   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (21,641     (10,173     (31,346     5,754        (6,571

Interest and other income (expense)

     2,421        (86     (90     1,291        (1,524

Gain on sale of investment

     25,096        —         —         —         —    

Loss from equity method investment

     —         (18,410     —         —         —    

Loss from deconsolidation of subsidiary

     —         —         (4,550     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     5,876        (28,669     (35,986     7,045        (8,095

Income tax expense (benefit)

     25,974        (9,444     (10,713     2,192        (4,225
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     (20,098     (19,225     (25,273     4,853        (3,870

Income from discontinued operations, net of tax

     (1,995     6,648        3        216        3,653   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (22,093     (12,577     (25,270     5,069        (217

Net (income) loss attributable to noncontrolling interest

     (659     (305     398        (794     513   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Gaiam, Inc.

   $ (22,752   $ (12,882   $ (24,872   $ 4,275      $ 296   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to Gaiam, Inc.
common shareholders—basic:

          

From continuing operations

   $ (0.90   $ (0.86   $ (1.08   $ 0.17      $ (0.14

From discontinued operations

     (0.09     0.29        0.00        0.01        0.15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share attributable to Gaiam, Inc.

   $ (0.99   $ (0.57   $ (1.08   $ 0.18      $ 0.01   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to Gaiam, Inc.
common shareholders—diluted:

          

From continuing operations

   $ (0.89   $ (0.86   $ (1.08   $ 0.17      $ (0.15

From discontinued operations

     (0.09     0.29        0.00        0.01        0.16   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share attributable to Gaiam, Inc.

   $ (0.98   $ (0.57   $ (1.08   $ 0.18      $ 0.01   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding:

          

Basic

     22,972        22,703        23,126        23,226        23,306   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     23,115        22,703        23,126        23,383        23,378   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     As of December 31,  

(in thousands)

   2013 (c)     2012 (b)     2011 (b)     2010 (a)     2009 (a)  

Consolidated Balance Sheet Data:

          

Cash

   $ 32,229      $ 9,858      $ 14,545      $ 28,773      $ 48,325   

Working capital

     60,540        51,418        62,217        95,006        94,910   

Total assets

     140,002        197,231        163,290        207,433        211,849   

Total liabilities

     34,712        78,359        32,116        38,671        44,322   

Total equity

     105,290        118,872        131,174        168,762        167,527   

 

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(a) Until December 31, 2011, we accounted for our investment in Real Goods Solar as a consolidated subsidiary.
(b) On December 31, 2011, as a result of a decrease in our voting ownership to 37.5%, we converted our accounting for Real Goods Solar from consolidated subsidiary to equity method investment. Thus, our consolidated balance sheet data at December 31, 2011 and beyond excludes Real Goods Solar’s consolidated balance sheet and our consolidated statement of operations data for 2012 presents Real Goods Solar on an equity method investment basis.
(c) During May 2013, as a result of a decrease in our voting ownership to less than 20% and the resignation of our chairman from his position as Chairman of the Board for Real Goods Solar, we changed the accounting for our investment in Real Goods Solar from the equity to cost method. Thus, our consolidated balance sheet data at December 31, 2013 and our consolidated statement of operations data for 2013 reports Real Goods Solar as a cost method investment. See Note 3 to our consolidated financial statements for 2013.
(d) During 2013, we recognized $11.0 million for certain impairments and restructuring costs, $2.0 million net loss from discontinued operations due to the closure of our DRTV business, and the sale of GVE and a $25.0 million gain on the sale of stock. We also recorded a $23.2 million charge to income tax expense to provide a valuation allowance against our deferred tax assets.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward-looking statements that involve risks and uncertainties. When used in this discussion, we intend the words “anticipate,” “believe,” “plan,” “estimate,” “expect,” “strive,” “future,” “intend” and similar expressions as they relate to us to identify such forward-looking statements. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” and elsewhere in this Form 10-K. Risks and uncertainties that could cause actual results to differ include, without limitation, general economic conditions, competition, loss of key personnel, pricing, brand reputation, acquisitions, new initiatives we undertake, security and information systems, legal liability for website content, merchandise supply problems, failure of third parties to provide adequate service, reliance on centralized customer service, overstocks and merchandise returns, our reliance on a centralized fulfillment center, increases in postage and shipping costs, E-commerce trends, future Internet related taxes, our founder’s control of us, litigation, fluctuations in quarterly operating results, consumer trends, customer interest in our products, the effect of government regulation and programs and other risks and uncertainties included in our filings with the Securities and Exchange Commission. We caution you that no forward-looking statement is a guarantee of future performance, and you should not place undue reliance on these forward-looking statements which reflect our views only as of the date of this report. We undertake no obligation to update any forward-looking information.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and related notes included elsewhere in this document. This section is designed to provide information that will assist readers in understanding our consolidated financial statements, changes in certain items in those statements from year to year, the primary factors that caused those changes and how certain accounting principles, policies and estimates affect the consolidated financial statements.

Discontinued Operations

During 2013, we sold our non-branded entertainment media distribution operation and discontinued our DRTV operations. We now report these businesses as discontinued operations, separate from our continuing operations. The following management discussion and analysis of financial condition and results of operations is for our continuing operations, unless indicated otherwise.

Overview and Outlook

We are a leader in the design, creation, and marketing of products and media for consumers who are interested in yoga, fitness, and wellbeing. Additionally, we operate a subscription video on-demand service, Gaiam TV, which is dedicated to creating, acquiring, and delivering conscious media. Through our business activities, we seek to position our brand as a trusted source for information and products that are relevant to our consumers’ active lifestyles and transformational journeys. Our broad distribution network includes retail, online, and digital channels. At the end of 2013, our brands were carried by over 38,000 retail stores worldwide. Our business is vertically integrated from product design and content creation through product development and sourcing, to customer service and distribution. This efficient supply chain enables us to provide quality products at competitive prices for all of our brands.

We intend to build upon our authenticity and heritage in the yoga, fitness, wellbeing, and conscious media sectors. We believe that the size of our end markets is growing as a result of growth in yoga participation, greater awareness of health and wellness, and the success of our retail and online partners. We intend to leverage our product development, supply chain, and retail relationships to continue to expand and innovate our brand’s offerings enabling us to capitalize on the growth in our end markets.

 

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On October 21, 2013, we sold GVE Newco LLC (“GVE”), a wholly-owned subsidiary of ours comprised of our non-branded entertainment media business, to Cinedigm Corp. (“CIDM”), for $51.7 million, plus a post-closing adjustment for GVE’s closing net working capital that is currently being negotiated by the parties. Going forward, we intend to focus on and invest in growing our branded yoga, fitness and wellbeing, and video subscription streaming businesses, both organically and through acquisitions.

We market our products and services across two segments: business and direct to consumer. GVE was part of our business segment and DRTV was part of our direct to consumer segment, and now both are reported as discontinued operations.

Our business segment sells directly to retailers, digital partners, and corporate accounts. Following the sale of GVE, our products were available in over 38,000 retail doors worldwide. Our business segment has also successfully expanded our brands with strategic store-within-store placements in all Sports Authority stores, bringing the total of our branded store-within-store presentations to over 14,500 locations worldwide.

During 2013, the improvement in our business segment’s net revenue, which grew over 22%, was driven by strong sales of Gaiam branded yoga and fitness accessory products, SPRI accessory products, and growth of existing lines of business. Within our Gaiam branded business, Restore by Gaiam, our at-home rehabilitative and restorative offerings grew significantly at existing accounts and gained additional placement in national retailers in the sporting goods, mass, and grocery segments. Our core yoga and fitness products also grew strongly, posting double-digit percentage gains at some of our largest customers. During the year, we prioritized our initiative of expanding SPRI, our line of professional fitness accessories historically sold primarily to the commercial segment, to our consumer retail accounts. We launched the brand in one of our largest national accounts, and continued aggressively growing existing placement in the sporting goods segment. Additionally, we launched a new line of accessories under the brand SPRI CrossTrain in the fourth quarter. These accessories target the rapidly growing high intensity training market, and are now available nationally at Sports Authority.

Our business segment’s net revenue was impacted by declines in DVD media. While we maintain our category management and media aggregator roles with some of the largest retailers in the country and our number one ranking on Nielsen’s Videoscan for fitness media, the shift in media consumption from DVD to digital continues to impact the DVD market. We believe that our strong brand equity in fitness media combined with our category management and media aggregator roles best position us to continue leveraging our media assets. We generate strong gross margins from our media business, and with our digital business still growing strongly, are committed to the media portion of our business.

Our direct to consumer segment gives us the ability to test, launch, and support new products, and through direct relationships with our customers, allows us to promote our products, grow out digital subscription and steaming customer base, and gather customer feedback on Gaiam and the LOHAS industry.

In our direct to consumer segment, we continue to work on the category and channel expansion of the Gaiam brand by moving our e-commerce and catalog offerings towards more proprietary yoga and fitness, health and wellness, and apparel products. This year, we completed updates for our e-commerce platform that deliver more engaging, focused, and simplified shopping experiences to our customers. Our re-designed website has allowed us to stay even more connected with and accessible to our customers, including through user friendly mobile designs for Apple and Android devices. We continue to expand our e-commerce offerings with unique products that are only available online and that complement our core Gaiam product lines. We plan to continue to grow our offerings for video, interactive, and mobile devices as these initiatives enable us to better leverage our e-commerce and catalog products.

We are also continuing to invest in and actively market our subscription video streaming business, Gaiam TV (GaiamTV.com). In late 2013, we acquired My Yoga Online (“My Yoga”), Canada’s largest online yoga video streaming subscription business, to merge it with Gaiam TV. With a subscription price the same as Gaiam TV, $9.95 per month, My Yoga is a perfect complement to Gaiam TV’s offerings and well aligned with the Gaiam brand. Now with over 6,000 video titles, Gaiam TV offers subscribers access to the world’s largest online library of yoga and fitness, health and wellness, and conscious media videos.

Critical Accounting Policies

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States, which require us to make judgments, estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 2 to the consolidated financial statements in Item 8 of this Form 10-K summarizes the significant accounting policies and methods used in the preparation of our consolidated financial statements.

We believe the following to be critical accounting policies whose application has a material impact on our financial presentation, and involve a higher degree of complexity, as they require us to make judgments and estimates about matters that are inherently uncertain.

 

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Allowances for Doubtful Accounts and Product Returns

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We make estimates of the collectability of our accounts receivable by analyzing historical bad debts, specific customer creditworthiness, and current economic trends. If the financial condition of our customers were to deteriorate such that their ability to make payments to us was impaired, additional allowances could be required.

We record allowances for product returns to be received in future periods at the time we recognize the original sale. We base the amounts of the returns allowances upon historical experience and future expectations.

Inventory

Inventory consists primarily of finished goods held for sale and is stated at the lower of cost (first-in, first-out method) or market. We identify the inventory items to be written down for obsolescence based on the item’s current sales status and condition. We write down discontinued or slow moving inventories based on an estimate of the markdown to retail price needed to sell through our current stock level of the inventories.

Goodwill and Other Intangibles

Goodwill represents the excess of the purchase consideration over the estimated fair value of assets acquired less liabilities assumed in a business acquisition. Our other intangibles consist of customer related assets. We review goodwill for impairment annually or more frequently if impairment indicators arise on a goodwill reporting unit level. We have the option of first assessing qualitative factors to determine whether events and circumstances indicate that it is more likely than not that the fair value of a goodwill reporting unit is less than its carrying amount. If it is determined that the fair value for a goodwill reporting unit is more likely than not greater than the carrying amount for that goodwill reporting unit, then the two-step impairment test is unnecessary. If it is determined that the two-step impairment test is necessary, then for step one, we compare the estimated fair value of a goodwill reporting unit with its carrying amount, including goodwill. If the estimated fair value of a goodwill reporting unit exceeds its carrying amount, we consider the goodwill of the reporting unit not impaired. If the carrying amount of a goodwill reporting unit exceeds its estimated fair value, we perform the second step of the goodwill impairment test to measure the amount of impairment loss. We use either a comparable market approach or a traditional present value method to test for potential impairment. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. Application of alternative assumptions and definitions could yield significantly different results.

Investments

We account for investments in equity securities that have readily determinable fair values that are not trading securities as available-for-sale securities. Unrealized changes in the fair value of an available-for-sale security are reported in accumulated other comprehensive income, net of tax, until disposed of or determined to be other-than-temporarily impaired, at which time the realized changes are reported in our statement of operations. At December 31, 2013, we had an equity investment with an estimated fair value of $1.3 million, based on its public stock trading price on that date, reported in other assets on our consolidated balance sheet.

Purchase Accounting

We account for the acquisition of a controlling interest in a business using the acquisition method. In determining the estimated fair value of certain acquired assets and liabilities, we make assumptions based upon many different factors, such as historical and other relevant information and analyses performed by independent parties. Assumptions may be incomplete, and unanticipated events and circumstances may occur that could affect the validity of such assumptions, estimates, or actual results.

 

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Media Library

Our media library asset represents the fair value of libraries of media acquired through business combinations, the purchase price of media rights to both video and audio titles, and the capitalized cost to produce media products, all of which we market to retailers and to catalog, e-commerce, and subscription customers. We amortize the fair value of acquired or purchased media titles and content on a straight-line basis over succeeding periods on the basis of their estimated useful lives. We defer capitalized production costs for financial reporting purposes until the media is released, and then amortize these costs over succeeding periods on the basis of estimated sales. Historical sales statistics are the principal factor used in estimating the amortization rate.

Revenue

Revenue primarily consists of sales of products, media licensing, and media distribution. We recognize revenue from the sale of products and the licensing of media when the following four basic criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. We recognize distribution fees from our non-branded entertainment media distribution business and certain other media distribution operations on a net revenue basis. For these media distribution sales, we do not take title to the related product sold as the inventory is owned by the studios or content producers and sold by us under distribution agent agreements. We recognize amounts billed to customers for postage and handling as revenue at the same time we recognize the revenue arising from the product sale. We present revenue net of taxes collected from customers.

Prior to 2012, we also recognized revenue from Real Goods Solar’s energy integration fixed price contracts. For energy system installations of less than 100 kilowatts, we recognized revenue when the installation was substantially complete, determined based on departure from the job site following completion of the installation or passing of building inspection, while for energy system installations equal to or greater than 100 kilowatts, we recognized revenue on a percentage-of-completion basis, with the extent of progress towards completion measured by the cost to cost method.

Share-Based Compensation

We measure compensation cost at the grant date based on the fair value of the award and recognize compensation cost upon the probable attainment of a specified performance condition or over a service period. We use the Black-Scholes option valuation model to estimate the grant date fair value. In estimating this fair value, there are certain assumptions that we use, as disclosed in Note 8. Share-Based Compensation, consisting of the expected life of the option, risk-free interest rate, dividend yield, and volatility. The use of a different estimate for any one of these components could have a material impact on the amount of calculated compensation expense.

Long-Lived Assets

We evaluate the carrying value of long-lived assets held and used, other than goodwill, when events or changes in circumstances indicate the carrying value may not be recoverable. We consider the carrying value of a long-lived asset impaired when the total projected undiscounted cash flows from such asset are separately identifiable and are less than the carrying value. We recognize a loss based on the amount by which the carrying value exceeds the estimated fair value of the long-lived asset. We determine the estimated fair value primarily using the projected cash flows from the asset discounted at a rate commensurate with the risk involved.

Results of Operations

Supplemental Pro Forma Financial Information

The following supplemental pro forma information is presented for informational purposes only, as an aid to understanding our historical financial results as if our deconsolidation of Real Goods Solar was effective for all periods presented. This pro forma information should not be considered a substitute for the actual historical financial information prepared in accordance with generally accepted accounting principles (“GAAP”), as presented in our filings on Forms 10-Q and 10-K. The unaudited pro forma consolidated financial information disclosed below is for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the pro forma events taken place on the date indicated, or our future consolidated results of operations.

On December 31, 2011, we converted our Real Goods Solar Class B common shares, which had ten votes per share, to Real Goods Solar Class A common shares, which have one vote per share. As a result of this conversion, our voting ownership decreased to approximately 37.5% and, thus, we no longer had financial control of Real Goods Solar, but retained significant financial influence. Accordingly, we deconsolidated Real Goods Solar and reported it as an equity investment on our consolidated statement of operations for year ended December 31, 2012 and as a consolidated subsidiary for the year ended December 31, 2011. During May 2013, as a result of a decrease in our voting ownership to less than 20% and the resignation of our chairman from his position as Chairman of the Board for Real Goods Solar, we changed the accounting for our investment in Real Goods Solar from the equity to cost method. Thus, our consolidated balance sheet data at December 31, 2013 and our consolidated statement of operations for 2013 reports Real Goods Solar as a cost method investment. See Note 3 to our consolidated financial statements for 2013.

The unaudited pro forma consolidated statement of operations for the year ended December 31, 2011 presents our consolidated results of operations giving pro forma effect to the deconsolidation of Real Goods Solar as if it had occurred on January 1, 2011 (RSOL Deconsolidated). This pro forma financial statement should be read in connection with our historical consolidated financial statement for the year ended December 31, 2011, which is also presented below (RSOL Consolidated).

We have made pro forma adjustments based on currently available information, estimates and assumptions that we believe are reasonable in order to reflect, on a pro forma basis, the impact of this deconsolidation on our historical financial information.

 

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The following are our unaudited pro forma consolidated statements of operations for the years ended:

 

     RSOL Deconsolidated (a)     RSOL
Consolidated (b)
 

(in thousands, except per share data)

   2013     2012     2011     2011  

Net revenue

   $ 155,463      $ 127,242      $ 114,434      $ 223,691   

Cost of goods sold

     90,155        70,723        63,438        144,835   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     65,308        56,519        50,996        78,856   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Selling and operating

     64,657        56,292        49,891        73,525   

Corporate, general and administration

     11,249        10,400        7,719        11,828   

Acquisition-related costs

     76        —         —          2,393   

Other general expense

     10,967        —          22,456        22,456   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     86,949        66,692        80,066        110,202   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (21,641     (10,173     (29,070     (31,346

Interest and other income (expense)

     2,421        (86     94        (90

Gain on sale of investment

     25,096        —          —          —     

Loss from equity method investment in RSOL

     —          (18,410     (713     —     

Loss from deconsolidation of RSOL

     —          —          —          (4,550
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     5,876        (28,669     (29,689     (35,986

Income tax expense (benefit)

     25,974        (9,444     (3,004     (10,713
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (20,098     (19,225     (26,685     (25,273

Income from discontinued operations

     (1,995     6,648        3        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (22,093     (12,577     (26,682     (25,270

Net (income) loss attributable to noncontrolling interest

     (659     (305     (454     398   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Gaiam, Inc.

   $ (22,752   $ (12,882   $ (27,136   $ (24,872
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to Gaiam, Inc. common shareholders— basic:

        

From continuing operations

   $ (0.90   $ (0.86   $ (1.17   $ (1.08

From discontinued operations

     (0.09     0.29        0.00        0.00   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share attributable to Gaiam, Inc.

   $ (0.99   $ (0.57   $ (1.17   $ (1.08
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to Gaiam, Inc. common shareholders— diluted:

        

From continuing operations

   $ (0.89   $ (0.86   $ (1.17   $ (1.08

From discontinued operations

     (0.09     0.29        0.00        0.00   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share attributable to Gaiam, Inc.

   $ (0.98   $ (0.57   $ (1.17   $ (1.08
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding:

        

Basic

     22,972        22,703        23,126        23,126   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     23,115        22,703        23,126        23,126   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth certain pro forma financial data as a percentage of net revenue for the periods indicated:

 

     RSOL Deconsolidated (a)     RSOL
Consolidated (b)
 
     2013     2012     2011     2011  

Net revenue

     100.0     100.0     100.0     100.0

Cost of goods sold

     58.0     55.6     55.4     64.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     42.0     44.4     44.6     35.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Selling and operating

     41.6     44.2     43.6     32.9

Corporate, general and administration

     7.2     8.2     6.7     5.3

Acquisition-related costs

     —       0.0     —       1.1

Other general expense

     7.1     —      19.7     10.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     55.9     52.4     70.0     49.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     -13.9     -8.0     -25.4     -14.0

Interest and other income (expense)

     1.6     -0.1     0.1     0.0

Gain on sale of investment

     16.1 %     —   %     —   %     —   %

Loss from equity method investment in RSOL

     —   %     -14.4     -0.6     —   %

Loss from deconsolidation of RSOL

     —   %     —   %     —   %     -2.1 %
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     3.8     -22.5     -25.9     -16.1

Income tax expense (benefit)

     16.7     -7.4     -2.6     -4.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     -12.9     -15.1     -23.3     -11.3

Income from discontinued operations

     -1.3     5.2     0.0     0.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     -14.2     -9.9     -23.3     -11.3

Net (income) loss attributable to noncontrolling interest

     -0.4     -0.2     -0.4     0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Gaiam, Inc.

     -14.6     -10.1     -23.7     -11.1
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) As if Real Goods Solar was deconsolidated effective January 1, 2011 and accounted for as an equity method investee during 2011 and 2012 and as a cost method investment during 2013.
(b) With Real Goods Solar accounted for as a consolidated subsidiary.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Net revenue. Net revenue increased $28.2 million, or 22.2%, to $155.5 million during 2013 from $127.2 million during 2012, with organic net revenue growth of $27.6 million or 21.7%. Net revenue in our business segment increased $19.0 million, or 22.5%, to $103.4 million during 2013 from $84.4 million during 2012, due to better sales performance at our top 25 retailers and growth in our Gaiam Restore and SPRI product lines. Net revenue in our direct to consumer segment increased $9.2 million, or 21.5%, to $52.0. million during 2013 from $42.9 million during 2012 due primarily to subscriber growth at Gaiam TV, revenues from My Yoga Online, which was acquired during the fourth quarter of 2013, and increased revenue at our travel subsidiary.

Cost of goods sold. Cost of goods sold increased $19.4 million, or 27.5%, to $90.2 million during 2013 from $70.7 million during 2012. Cost of goods sold in our business segment increased $14.3 million to $61.5 million during 2013 from $47.2 million during 2012 and, as a percentage of net revenue, increased to 59.4% during 2013 from 55.9% during 2012, primarily due to a shift in product sales mix. Cost of goods sold in our direct to consumer segment increased $5.1 million to $28.7 million during 2013 from $23.5 million during 2012 and, as a percentage of net revenue, increased to 55.1% during 2013 from 54.9% during 2012, primarily reflecting growth in our travel division which operates at a lower gross margin.

Selling and operating expenses. Selling and operating expenses increased $8.4 million, or 14.9%, to $64.7 million during 2013 from $56.3 million during 2012 and, as a percentage of net revenue, decreased to 41.6% during 2013 from 44.2% during 2012, primarily due to additional investments in our digital subscription businesses.

Corporate, general and administration expenses. Corporate, general and administration expenses increased $0.8 million to $11.2 million during 2013 from $10.4 million during 2012 and, as a percentage of net revenue, decreased to 7.2% during 2013 from 8.2% during 2012, primarily as a result of increased personnel costs.

Other general expense. Other general expense was $11.0 million during 2013 and zero during 2012. The other general expense during 2013 is comprised of impairment charges of $7.1 million, restructuring-related termination benefits and future retirement benefits for one of our executive officers totalling $2.5 million, and $1.4 million of transaction-related and other expenses. The asset impairments and termination benefits, other than those for one of our executive officers, are due to the reorganization and refocus of our continuing businesses following the discontinuation of our non-branded entertainment media distribution and direct response television marketing operations.

 

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Interest and other income (expense), net. Interest and other income (expense), net was income of $2.4 million during 2013 compared to expense of $0.1 million during 2012. Interest and other income, net during 2013 resulted primarily from the collection of principal and interest on our loans to Real Goods Solar, the carrying values for which had previously been reduced to zero through the recognition of losses from our equity method investment in Real Goods Solar.

Gain on sale of investment. Gain on sale of investment of $25.1 million during 2013 represents our gain recognized and net proceeds received from the sale of approximately 9.2 million shares of our investment in Real Goods Solar’s common stock.

Loss from equity method investment. Loss from equity method investment was zero during 2013 and $18.4 million during 2012 and represented our portion of Real Goods Solar’s net loss for 2012. Since we no longer have significant influence over Real Goods Solar and accordingly have changed the accounting for our investment in Real Goods Solar from the equity to the cost method, we no longer recognize our portion of Real Goods Solar’s net loss in our current year financial results.

Income tax expense (benefit). Income tax expense during 2013 was increased primarily by a valuation allowance against our deferred tax assets and by the repatriation of cash from one of our foreign subsidiaries and other permanent differences. Income tax benefit during 2012 was increased primarily due to the reducing of a deferred tax liability related to the carrying value of our equity method investment in Real Goods Solar.

Income (loss) from continuing operations. As a result of the above factors, loss from continuing operations was $20.1 million before minority interest, or $0.89 per share net of minority interest, during 2013 compared to a loss from continuing operations of $19.2 million, or $0.86 per share, during 2012.

Income from discontinued operations. During 2013, we sold GVE and discontinued our DRTV operations. Accordingly, we reclassified and now report the financial results for these businesses as discontinued operations. Income from discontinued operations decreased $8.6 million during 2013 from $6.6 million during 2012, primarily due to the discontinuance and asset write-off of DRTV.

Net income (loss) attributable to Gaiam, Inc. Net loss attributable to Gaiam, Inc. was $22.3 million, or $0.98 per share, during 2013 compared to a loss of $12.9 million, or $0.57 per share, during 2012.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Net revenue. Excluding our formerly consolidated subsidiary, Real Goods Solar, which was deconsolidated on December 31, 2011 (refer to the Supplemental Pro Forma Financial Information above), net revenue increased $12.8 million, or 11.2%, to $127.2 million during 2012 from $114.4 million during 2011. Net revenue in our business segment increased $15.0 million, or 21.6%, to $84.4 million during 2012 from $69.4 million during 2011, due to better sales performance at our top 25 retailers that contributed to an internal revenue growth of approximately 11.2%. Net revenue in our direct to consumer segment decreased $2.2 million, or 4.9%, to $42.8 million during 2012 from $45.0 million during 2011, primarily attributable to a decrease in catalog circulation. Including Real Goods Solar, net revenue decreased $96.4 million, or 43.1%, during 2012 from $223.7 million during 2011.

Cost of goods sold. Excluding Real Goods Solar, cost of goods sold increased $7.3 million, or 11.5%, to $70.7 million during 2012 from $63.4 million during 2011 and, as a percentage of net revenue, increased to 55.6% during 2012 from 55.4% during 2011. Cost of goods sold in our business segment increased $7.0 million, or 17.5%, to $47.2 million during 2012 from $40.2 million during 2011 and, as a percentage of net revenue, decreased to 55.9% during 2012 from 57.9% during 2011, primarily due to product mix. Cost of goods sold in our direct to consumer segment increased $0.2 million, or 1.2%, to $23.5 million during 2012 from $23.3 million during 2011 and, as a percentage of net revenue, increased to 54.9% during 2012 from 51.7% during 2011, primarily due to the growth of Gaiam TV and corresponding cost of goods sold, and liquidation of inventories. Including Real Goods Solar, cost of goods sold decreased $74.1 million, or 51.2%, during 2012 from $144.8 million during 2011.

Selling and operating expenses. Excluding Real Goods Solar, selling and operating expenses increased $6.4 million, or 12.8%, to $56.3 million during 2012 as compared to $49.9 million during 2011 and, as a percentage of net revenue, decreased to 44.2% during 2012 from 43.6% during 2011, primarily due to the acquisition of Vivendi Entertainment, which was completed in the first quarter of 2012. Including Real Goods Solar, selling and operating expenses decreased $17.2 million, or 23.4%, during 2012 from $73.5 million during 2011.

Corporate, general and administration expenses. Excluding Real Goods Solar, corporate, general and administration expenses increased $2.7 million, or 34.7%, to $10.4 million during 2012 as compared to $7.7 million during 2011 and, as a percentage of net revenue, increased to 8.2% compared to 6.7% during 2011, primarily as a result of costs of certain legal matters that were resolved during the year. Including Real Goods Solar, corporate, general and administration expenses decreased $1.4 million, or 12.1%, during 2012 from $11.8 million during 2011.

 

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Acquisition-related costs. Acquisition-related costs were zero during 2012 and $2.4 million during 2011, representing transaction expenses related to Real Goods Solar’s acquisition of Alteris.

Loss from equity method investment. Loss from equity method investment was $18.4 million during 2012 and was comprised of our noncash portion, $17.0 million, of Real Goods Solar’s net loss for 2012, which included noncash impairment charges to its goodwill, deferred tax assets, and other assets of $38.1 million, and a $1.6 million valuation allowance for a deferred tax asset related to our Tax Sharing Agreement with Real Goods Solar, partially offset by $0.2 million of interest received from Real Goods Solar on our first loan to them. The recording of our portion of Real Goods Solar’s net loss for 2012 reduced the carrying values of our equity method investments in and loans to Real Goods Solar to zero at December 31, 2012. As a result, we do not anticipate needing to report any potential future net losses from Real Goods Solar. Due to related income tax benefits as discussed below, the net impact to us of these equity investment related transactions was a noncash loss of $12.4 million.

Income tax benefit. Income tax benefit during 2012 includes $6.0 million due to the reducing of a deferred tax liability related to the carrying value of our equity method investment in Real Goods Solar.

Loss from continuing operations. As a result of the above factors, loss from continuing operations was $19.2 million, or $0.86 per share, during 2012 compared to $25.3 million, or $1.08 per share, during 2011.

Income from discontinued operations. Income from discontinued operations increased $6.6 million during 2012 from $3 thousand during 2011, primarily due to the acquisition of Vivendi Entertainment in March 2012.

Net loss attributable to Gaiam, Inc. Net loss attributable to Gaiam, Inc. was $12.9 million, or $0.57 per share, during 2012 compared to $24.9 million, or $1.08 per share, during 2011.

 

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Quarterly and Seasonal Fluctuations

The following tables set forth our unaudited results of operations for each of the quarters in 2013 and 2012. During 2013, we sold our non-branded entertainment media distribution operations and discontinued our DRTV operations. We now report these businesses as discontinued operations, and, accordingly, we have reclassified their results of operations for all periods presented to reflect them as such. In our opinion, this unaudited financial information includes all adjustments, consisting solely of normal recurring accruals and adjustments, necessary for a fair presentation of the results of operations for the quarters presented. You should read this financial information in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-K. The results of operations for any quarter are not necessarily indicative of future results of operations.

 

     Year 2013 Quarters Ended  

(in thousands, except per share data)

   March 31     June 30     September 30     December 31 (a)  

Net revenue

   $ 36,679      $ 31,897      $ 36,128      $ 50,759   

Gross profit

     15,750        13,314        14,693        21,551   

Gain on sale of investment (a)

     —         16,429        1,975        6,692   

Income (loss) from continuing operations

     (2,203     8,112        (699     (25,308

Income (loss) from discontinued operations

     1,981        (129     1,004        (4,851

Net income (loss)

     (222     7,983        305        (30,159

Net income (loss) attributable to Gaiam, Inc.

     (277     7,848        120        (30,443

Net income (loss) per share attributable to Gaiam, Inc. common shareholders – diluted:

      

From continuing operations

   $ (0.10   $ 0.36      $ (0.03   $ (1.08

From discontinued operations

     0.09        (0.01     0.04        (0.21
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share attributable to Gaiam, Inc.

   $ (0.01   $ 0.35      $ 0.01      $ (1.29
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding-diluted

     22,732        22,741        22,765        23,668   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Year 2012 Quarters Ended  

(in thousands, except per share data)

   March 31     June 30     September 30 (b)     December 31  

Net revenue

   $ 28,588      $ 24,531      $ 28,537      $ 45,586   

Gross profit

     13,995        10,585        12,601        19,338   

Loss from equity method investment

     (696     (944     (15,940     (830

Loss from continuing operations

     (1,977     (4,756     (11,923     (569

Income from discontinued operations

     679        2,647        997        2,325   

Net income (loss)

     (1,298     (2,109     (10,926     1,756   

Net income (loss) attributable to Gaiam, Inc.

     (1,219     (2,053     (11,157     1,547   

Net income (loss) per share attributable to Gaiam, Inc. common shareholders – diluted:

      

From continuing operations

   $ (0.08   $ (0.21   $ (0.53   $ (0.03

From discontinued operations

     0.03        0.12        0.04        0.10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share attributable to Gaiam, Inc.

   $ (0.05   $ (0.09   $ (0.49   $ 0.07   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding-diluted

     22,698        22,702        22,704        22,706   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) We reported gains of $16.4 million, $2.0 million and $6.7 million in the second, third and fourth quarters of 2013 on the sale of our Real Goods Solar stock, the carrying value for which had previously been reduced to zero through the recognition of our portion of RSOL’s net losses. We recorded a charge of $11.0 million to exit certain businesses, to restructure certain operations, and a net loss of $2.0 million after selling GVE and closing DRTV in the fourth quarter. We also recorded a $23.2 million valuation allowance for our deferred tax assets in the fourth quarter of 2013.
(b) During the quarter ended September 30, 2012, we recorded a noncash loss from our equity method investment in RSOL of $15.9 million and related income tax benefits of $5.7 million.

Quarterly fluctuations in our revenue and operating results are due to a number of factors, including changes in market conditions, the timing of new product introductions and mailings to customers, advertising, acquisitions (including costs of acquisitions and expenses related to integration of acquisitions), competition, pricing of products by vendors and expenditures on our systems and infrastructure. The impact on revenue and operating results due to the timing and extent of these factors can be significant. Our sales are also affected by seasonal influences. On an aggregate basis, we generate our strongest revenue in the fourth quarter due to increased holiday spending and retailer fitness purchases.

 

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Liquidity and Capital Resources

Our capital needs arise from working capital required to fund operations, capital expenditures related to acquisition and development of media content, development and marketing of our e-commerce and digital platforms and new products, acquisitions of new businesses, replacements, expansions and improvements to our infrastructure, and future growth. These capital requirements depend on numerous factors, including the rate of market acceptance of our product offerings, our ability to expand our customer base, the cost of ongoing upgrades to our product offerings, the level of expenditures for sales and marketing, the level of investment in distribution systems and facilities and other factors. The timing and amount of these capital requirements are variable and we cannot accurately predict them. Additionally, we will continue to pursue opportunities to expand our media libraries, evaluate possible investments in businesses, products and technologies, and increase our sales and marketing programs and brand promotions as needed. At December 31, 2013, our cash balance was $32.2 million. Including our investment in Gaiam TV, we estimate that our capital expenditures will total approximately $6.0 million for 2014.

On October 21, 2013, we consummated the sale of GVE, a wholly-owned subsidiary comprised of our non-branded entertainment media business, to CIDM for $51.7 million, comprised of $47.5 million in cash, 666,978 shares of CIDM’s Class A common stock with an estimated fair value of approximately $1.2 million, $2 million of assigned accounts receivable, and a $1 million assumed payment obligation. In addition, the sale consideration will also include a post-closing adjustment payable in cash on April 15, 2014 and based on the final closing net working capital of GVE, which the parties are currently negotiating.

Also on October 21, 2013, each of our subsidiaries Gaiam Americas, Inc., SPRI Products, Inc., GT Direct, Inc., and Gaiam Vivendi Entertainment (collectively the “Borrowers”) paid in full their outstanding balance owed to PNC Bank, N.A. (“PNC”), $19,621,941 (inclusive of principal and interest and other fees), and terminated the underlying Revolving Credit and Security Agreement (“PNC Credit Agreement”), dated July 31, 2012, between the Borrowers and PNC. The PNC Credit Agreement had permitted borrowings of up to $35 million based upon the collateral value of Borrower’s eligible receivables and inventory less certain other amounts and reserves. The Borrowers also paid an early termination fee in an amount equal to $350,000. The PNC Credit Agreement would have expired on July 30, 2015. Upon termination, PNC released all liens granted in its favor on the collateral pledged under the PNC Credit Agreement.

Cash Flows

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

 

     Years ended December 31,  

(in thousands)

   2013     2012     2011  

Net cash provided by (used in):

      

Operating activities – continuing operations

   $ (15,555   $ (1,106   $ 3,535   

Operating activities – discontinued operations (a)

     (7,569     17,582        1,705   
  

 

 

   

 

 

   

 

 

 

Operating activities

     (23,124     16,476        5,240   
  

 

 

   

 

 

   

 

 

 

Investing activities – continuing operations

     64,977        (4,699     (9,358

Investing activities – discontinued operations

     —          (13,491     (1,435
  

 

 

   

 

 

   

 

 

 

Investing activities

     64,977        (18,190     (10,793
  

 

 

   

 

 

   

 

 

 

Financing activities – continuing operations

     777        (583     (3,257

Financing activities – discontinued operations

     (19,967     (2,472     (5,373
  

 

 

   

 

 

   

 

 

 

Financing activities

     (19,190     (3,055     (8,630
  

 

 

   

 

 

   

 

 

 

Effects of exchange rates on cash

     (292     82        (45
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

   $ 22,371      $ (4,687   $ (14,228
  

 

 

   

 

 

   

 

 

 

 

(a) Net cash provided by operating activities for discontinued operations during 2012 includes approximately $18.7 million of net cash provided by purchased Vivendi Entertainment working capital, which was used to partially fund the acquisition of Vivendi. Excluding the net cash flows from the purchased Vivendi Entertainment working capital, net cash used by operating activities for discontinued operations would have been zero million during 2012. Additionally, the net cash provided by operating activities for discontinued operations during 2012 does not include participations payments for Vivendi Entertainment sales during the fourth quarter of 2011 as we didn’t acquire Vivendi Entertainment until March 28, 2012. The fourth quarter is our seasonably largest sales quarter and participations payable resulting from such sales are normally not paid until the following quarter. Also, net cash used in operating activities for discontinued operations during 2013 includes certain participation payments that were due in December 2012, but not paid until January 2013.

 

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Continuing Operations

Operating activities. Our operating activities for continuing operations used net cash of $15.6 million and used net cash of $1.1 million during 2013 and 2012, respectively. The net cash used by operating activities for continuing operations during 2013 was primarily attributable to increased investment in Gaiam TV, decreased accounts payable of $4.4 million, partially offset by decreased inventory of $1.1 million. Our net cash used in operating activities for continuing operations during 2012 was primarily attributable to our net loss as adjusted by our noncash loss on equity investment of $18.4 million, cash provided by increased accrued liabilities of $9.5 million, offset by increased accounts receivable, other current assets, and decreased participations payable of $3.6 million, $6.2 million, and $4.7 million, respectively.

Investing activities. Our investing activities for continuing operations generated net cash of $65.0 million and used net cash of $4.7 million during 2013 and 2012, respectively. The net cash provided by investing activities for continuing operations during 2013 was from the $25.1 million net proceeds from the sale of the majority of our investment in Real Goods Solar, cash received of $47.5 million for the sale of GVE, repayment on a loan made to Real Goods Solar of $2.1 million, offset by cash used to acquire property and equipment to maintain normal operations for $1.7 million and media content for $1.7 million, and by cash used to acquire businesses of $6.3 million, net of cash acquired. The net cash used in investing activities for continuing operations during 2012 was used primarily to acquire property and equipment for $2.6 million and media content for $1.1 million, to loan Real Goods Solar, net of interest received, $0.8 million, and for our travel subsidiary’s purchase of the noncontrolling interest of one of its businesses for $0.1 million.

Financing activities. Our financing activities for continuing operations generated net cash of $0.8 million and used net cash of $0.6 million during 2013 and 2012, respectively. The net cash generated by financing activities for continuing operations during 2013 was from issuance of stock, net of tax benefits, for stock option exercises. The net cash used by financing activities for continuing operations during 2012 was used for the payment of a $0.6 million dividend to our travel subsidiary’s noncontrolling interest.

Discontinued Operations

Operating activities. Our operating activities for discontinued operations used net cash of $7.6 million and provided net cash of $17.6 million during 2013 and 2012, respectively. Excluding the net cash flows from the purchased Vivendi Entertainment working capital of approximately $18.7 million, net cash used in operating activities for discontinued operations would have been $1.1 million during 2012. The net cash used in operating activities for discontinued operations during 2013 was primarily attributable to our net loss, offset by asset impairment and other non-cash expenses related to the sale of GVE and discontinuance of DRTV, and reduced by seasonal reductions in working capital during our ownership period of GVE. Our net cash provided by discontinued operations during 2012 was primarily attributable to our net income of $6.6 million, approximately $18.7 million of cash generated by working capital in Vivendi Entertainment, which was used to partially fund the acquisition of Vivendi, offset by an increase in working capital.

Investing activities. We had no investing activities in our discontinued operations during 2013. Our investing activities for discontinued operations used net cash of $13.5 million during 2012. The net cash used in investing activities for discontinued operations during 2012 was used primarily for the $13.4 million cash portion of the purchase price for Gaiam Vivendi Entertainment.

Financing activities. Our financing activities for discontinued operations used net cash of $20.0 million and $2.5 million during 2013 and 2012, respectively. The net cash used in financing activities for discontinued operations during 2013 was for the repayment of borrowings on our line of credit. The net cash used by financing activities for discontinued operations during 2012 was used for the repayment of a promissory note for $18.7 million in connection with the acquisition of Gaiam Vivendi Entertainment, offset by net borrowings on a revolving line of credit of $16.2 million, the funds from which were mainly used for the acquisition of Gaiam Vivendi Entertainment and related working capital needs.

We currently have a shelf registration with the Securities and Exchange Commission for 5,000,000 shares of our Class A common stock and to date no shares have been issued under this shelf registration.

In the normal course of our business, we investigate, evaluate and discuss acquisition, joint venture, minority investment, strategic relationship and other business combination opportunities in our market. For any future investment, acquisition or joint venture opportunities, we may consider using then-available liquidity, issuing equity securities or incurring additional indebtedness.

While there can be no assurances, we believe our cash on hand, cash expected to be generated from future operations, cash that could be raised by the sale of our shelf registration stock or remaining investment in Real Goods Solar, and/or new credit facilities, and available carried forward tax net operating losses should be sufficient to fund our operations on both a short-term and long-term basis. However, our projected cash needs may change as a result of acquisitions, product development, unforeseen operational difficulties or other factors.

 

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Contractual Obligations

We have commitments pursuant to operating lease agreements. The following table shows our commitments to make future payments under these agreements as of December 31, 2013:

 

(in thousands)

   Total      < 1 year      1-3 years      3-5 years      > 5 years  

Operating lease payments

   $ 3,285       $ 1,848       $ 1,437       $ —        $ —    

Off-Balance Sheet Arrangements

We do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks, which include changes in U.S. interest rates and foreign exchange rates. We do not engage in financial transactions for trading or speculative purposes, but do have on occasion forward contracts for or investments in foreign currency, the gains and losses from which have been immaterial. In 2010, we acquired controlling financial interest in and, therefore, consolidated Gaiam PTY, an Australian based joint venture. Since Gaiam PTY’s functional currency is the Australian dollar, this subsidiary exposes us to risk associated with foreign currency exchange rate fluctuations. However, we have determined that no material market risk exposure to our consolidated financial position, results from operations or cash flows existed as of December 31, 2013.

We purchase a significant amount of inventory from vendors outside of the U.S. in transactions that are primarily U.S. dollar denominated transactions. A decline in the relative value of the U.S. dollar to other foreign currencies has and may continue to lead to increased purchasing costs.

 

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Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm

     31   

Gaiam, Inc. Consolidated Financial Statements:

  

Consolidated Balance Sheets

     32   

Consolidated Statements of Operations

     33   

Consolidated Statements of Comprehensive Income (Loss)

     34   

Consolidated Statement of Changes in Equity

     35   

Consolidated Statements of Cash Flows

     36   

Notes to Consolidated Financial Statements

     38   

Financial Statement Schedule:

  

Schedule II — Consolidated Valuation and Qualifying Accounts

     57   

 

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Gaiam, Inc.

Louisville, Colorado

We have audited the accompanying consolidated balance sheets of Gaiam, Inc. and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss), changes in equity, and cash flows for each of the years in the three year period ended December 31, 2013. Our audits also included the consolidated financial statement schedule II for the years ended December 31, 2013, 2012, and 2011. We have also audited the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Criteria”). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s report on internal control over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and the effectiveness of the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gaiam, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America. In our opinion, the related consolidated financial statement schedule II for the years ended December 31, 2013, 2012, and 2011, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Also in our opinion, Gaiam, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO Criteria.

 

EKS&H LLLP

March 31, 2014

Denver, Colorado

 

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GAIAM, INC.

Consolidated Balance Sheets

 

     December 31,  

(in thousands, except share and per share data)

   2013     2012  
ASSETS     

Current assets:

    

Cash

   $ 32,229      $ 9,858   

Accounts receivable, net

     30,066        21,978   

Inventory, less allowances

     20,275        21,252   

Deferred advertising costs

     311        819   

Deferred tax assets

     —          9,129   

Advances

     1,078        2,489   

Other current assets

     8,081        5,300   

Current assets of discontinued operations

     3,212        58,952   
  

 

 

   

 

 

 

Total current assets

     95,252        129,777   

Property and equipment, net

     22,540        23,544   

Media library, net

     5,211        10,441   

Deferred tax assets

     —          14,692   

Goodwill

     13,999        2,673   

Other intangibles, net

     1,155        190   

Other assets

     1,835        652   

Noncurrent assets of discontinued operations

     10        15,262   
  

 

 

   

 

 

 

Total assets

   $ 140,002      $ 197,231   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Accounts payable

   $ 11,697      $ 16,109   

Accrued liabilities

     17,503        9,484   

Participations payable

     3,916        2,871   

Current liabilities of discontinued operations

     1,596        49,895   
  

 

 

   

 

 

 

Total current liabilities

     34,712        78,359   

Commitments and contingencies

    

Equity:

    

Gaiam, Inc. shareholders’ equity:

    

Class A common stock, $.0001 par value, 150,000,000 shares authorized, 18,595,121 and 17,330,464 shares issued and outstanding at December 31, 2013 and 2012, respectively

     2        2   

Class B common stock, $.0001 par value, 50,000,000 shares authorized, 5,400,000 shares issued and outstanding at December 31, 2013 and 2012

     1        1   

Additional paid-in capital

     167,875        159,614   

Accumulated other comprehensive (expense) income

     (33     118   

Accumulated deficit

     (66,413     (43,661
  

 

 

   

 

 

 

Total Gaiam, Inc. shareholders’ equity

     101,432        116,074   

Noncontrolling interest

     3,858        2,798   
  

 

 

   

 

 

 

Total equity

     105,290        118,872   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 140,002      $ 197,231   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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GAIAM, INC.

Consolidated Statements of Operations

 

(in thousands, except per share data)

   2013 (a)     2012 (a)     2011 (a)  

Consolidated Statements of Operations Data:

      

Net revenues

   $ 155,463      $ 127,242      $ 223,691   

Cost of goods sold

     90,155        70,723        144,835   
  

 

 

   

 

 

   

 

 

 

Gross profit

     65,308        56,519        78,856   
  

 

 

   

 

 

   

 

 

 

Expenses:

      

Selling and operating

     64,657        56,292        73,525   

Corporate, general and administration

     11,249        10,400        11,828   

Acquisition-related costs

     76        —          2,393   

Other general income and expense

     10,967        —          22,456   
  

 

 

   

 

 

   

 

 

 

Total expenses

     86,949        66,692        110,202   
  

 

 

   

 

 

   

 

 

 

Loss from operations

     (21,641     (10,173     (31,346

Interest and other income (expense)

     2,421        (86     (90

Gain on sale of investment

     25,096        —          —     

Loss from equity method investment

     —          (18,410     —     

Loss from deconsolidation of subsidiary

     —          —          (4,550
  

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     5,876        (28,669     (35,986

Income tax expense (benefit)

     25,974        (9,444     (10,713
  

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     (20,098     (19,225     (25,273

Income from discontinued operations, net of tax

     (1,995     6,648        3   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     (22,093     (12,577     (25,270

Net (income) loss attributable to noncontrolling interest

     (659     (305     398   
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Gaiam, Inc.

   $ (22,752   $ (12,882   $ (24,872
  

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to Gaiam, Inc. common shareholders—basic:

      

From continuing operations

   $ (0.90   $ (0.86   $ (1.08

From discontinued operations

     (0.09     0.29        0.00   
  

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share attributable to Gaiam, Inc.

   $ (0.99   $ (0.57   $ (1.08
  

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to Gaiam, Inc. common shareholders—diluted:

      

From continuing operations

   $ (0.89   $ (0.86   $ (1.08

From discontinued operations

     (0.09     0.29        0.00   
  

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share attributable to Gaiam, Inc.

   $ (0.98   $ (0.57   $ (1.08
  

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding:

      

Basic

     22,972        22,703        23,126   
  

 

 

   

 

 

   

 

 

 

Diluted

     23,115        22,703        23,126   
  

 

 

   

 

 

   

 

 

 

 

 

(a) RSOL was deconsolidated and accounted for as an equity method investment from December 31, 2011 until May 28, 2013, when it became a cost method investment. Consequently, RSOL is reported as an equity method investment for the year ended December 31, 2012 and as a consolidated subsidiary for the year ended December 31, 2011.

See Accompanying Notes to Consolidated Financial Statements.

 

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GAIAM, INC.

Consolidated Statements of Comprehensive Income (Loss)

 

     Years Ended December 31,  

(in thousands)

   2013     2012     2011  

Net income (loss)

   $ (22,093   $ (12,577   $ (25,270
  

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive income (loss):

      

Foreign currency translation gain (loss), net of related tax

     (292     10        (2

Unrealized gain on equity security, net of related tax

     116        —          —     
  

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

     (176     10        (2
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (22,269     (12,567     (25,272
  

 

 

   

 

 

   

 

 

 

Less: comprehensive income (loss) attributable to the noncontrolling interest

     634        310        (399
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Gaiam, Inc

   $ (22,903   $ (12,877   $ (24,873
  

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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GAIAM, INC.

Consolidated Statement of Changes in Equity

 

                 Gaiam, Inc. Shareholders        

(in thousands, except shares)

   Total
Equity
    Total
Gaiam
Equity
   
Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income
    Common
Stock
Amount
     Additional
Paid-in
Capital
    Common
Stock Shares
    Noncontrolling
Interest
 

Balance at
December 31, 2010

   $ 168,762      $ 151,820      $ (5,907   $ 114      $ 3       $ 157,610        23,298,921      $ 16,942   

Issuance of Gaiam, Inc. common stock and share-based compensation

     1,081        1,081        —          —          —           1,081        26,926        —     

Repurchase of stock

     (2,264     (2,264     —          —          —           (2,264     (628,003     —     

Deconsolidation of subsidiary

     (31,394     562        —          —          —           562        —          (31,956

Issuance of subsidiary common stock and share-based compensation

     537        193        —          —          —           193        —          344   

Subsidiary’s equity consideration in conjunction with an acquisition, net of taxes of $877

     20,794        1,716        —          —          —           1,716        —          19,078   

Subsidiary’s repurchase of stock

     (1,070     (125     —          —          —           (125     —          (945

Comprehensive loss

     (25,272     (24,873     (24,872     (1     —           —          —          (399
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at
December 31, 2011

     131,174        128,110        (30,779     113        3         158,773        22,697,844        3,064   

Issuance of Gaiam, Inc. common stock and share-based compensation

     1,011        1,011        —          —          —           1,011        32,620        —     

Adjustment due to subsidiary’s acquisition of a noncontrolling interest, including taxes of $16

     (163     (170     —          —          —           (170     —          7   

Subsidiary’s dividend to noncontrolling interest

     (583     —          —          —          —           —          —          (583

Comprehensive income (loss)

     (12,567     (12,877     (12,882     5        —           —          —          310   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at
December 31, 2012

     118,872        116,074        (43,661     118        3         159,614        22,730,464        2,798   

Issuance of Gaiam, Inc. common stock in conjunction with an acquisition and share-based compensation

     8,261        8,261        —          —          —           8,261        1,264,657        —     

Noncontrolling interest portion of subsidiary’s business combinations

     426        —          —          —          —           —          —          426   

Comprehensive income (loss)

     (22,269     (22,903     (22,752     (151     —           —          —          634   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at
December 31, 2013

   $ 105,290      $ 101,432      $ (66,413   $ (33   $ 3       $ 167,875        23,995,121      $ 3,858   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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GAIAM, INC.

Consolidated Statements of Cash Flows

 

     Years ended December 31,  

(in thousands)

   2013 (a)     2012 (b)     2011  

Operating activities:

      

Net income (loss)

   $ (22,093   $ (12,577   $ (25,270

Income (loss) from discontinued operations

     1,995        (6,648     (3
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (20,098     (19,225     (25,273

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

      

Depreciation

     2,301        2,107        2,779   

Amortization

     1,659        1,946        2,150   

Share-based compensation expense

     809        913        1,540   

Deferred and stock option income tax expense (benefit)

     23,861        (6,120     (11,438

(Gain) loss on translation of foreign currency

     42        (76     55   

(Gain) on equity method investment

     (25,096     18,410        —     

Income from collection of note receivable

     (2,300     —          —     

Impairment loss and other expenses

     9,194        —          22,456   

Loss on deconsolidation of subsidiary

     —          —          4,550   

Changes in operating assets and liabilities, net of effects from acquisitions and dispositions:

      

Accounts receivable, net

     (2,072     (3,628     2,785   

Inventory, net

     1,097        1,645        653   

Deferred advertising costs

     508        42        (263

Advances

     (44     2,847        (934

Other current assets

     (2,843     (6,228     (3,309

Accounts payable

     (4,407     1,463        5,243   

Participations payable

     1,045        (4,674     4,209   

Accrued liabilities

     789        9,472        (1,668
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities – continuing operations

     (15,555     (1,106     3,535   

Net cash provided by (used in) operating activities – discontinued operations

     (7,569     17,582        1,705   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (23,124     16,476        5,240   
  

 

 

   

 

 

   

 

 

 

Investing activities:

      

Net proceeds from sale of investment

     25,096        —          —     

Collection from (loan to) related party

     2,100        (830     —     

Purchase of property, equipment and media rights

     (3,386     (3,723     (4,392

Proceeds from sale of business

     47,500        —          —     

Purchase of businesses

     (6,333     (146     —     

Collection of note receivable

     —          —          2,700   

Cash from acquired business

     —          —          3,416   

Change in restricted cash

     —          —          730   

Deconsolidation of Real Goods Solar

     —          —          (11,812
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities – continuing operations

     64,977        (4,699     (9,358

Net cash provided by (used in) investing activities – discontinued operations

     —          (13,491     (1,435
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     64,977        (18,190     (10,793
  

 

 

   

 

 

   

 

 

 

Financing activities:

      

Net proceeds from issuance of stock and tax benefits from option exercises

     777        —          77   

Payment of dividends

     —          (583     —     

Repurchase of Class A common stock, including related costs

     —          —          (2,264

Subsidiary’s repurchase of its Class A common stock, including related costs

     —          —          (1,070
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities – continuing operations

     777        (583     (3,257

Net cash provided by (used in) financing activities – discontinued operations

     (19,967     (2,472     (5,373
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (19,190     (3,055     (8,630
  

 

 

   

 

 

   

 

 

 

 

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GAIAM, INC.

Consolidated Statements of Cash Flows (continued)

 

     Years ended December 31,  

(in thousands)

   2013     2012 (a)     2011  

Effect of exchange rates on cash

     (292     82        (45

Net increase (decrease) in cash

     22,371        (4,687     (14,228

Cash at beginning of year

     9,858        14,545        28,773   
  

 

 

   

 

 

   

 

 

 

Cash at end of year

   $ 32,229      $ 9,858      $ 14,545   
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow information:

      

Interest paid

   $ 442      $ 468      $ 195   

Income taxes paid

     577        673        531   

Liabilities and debt assumed from acquisitions

     337        14,277        21,709   

 

 

(a) Cash flows in 2013 include the $25.0 million gain from the sale of RSOL stock, the sale of GVE and the closure of the DRTV Business Unit.
(b) Net cash provided by operating activities for discontinued operations during 2012 includes approximately $18.7 million of net cash provided by purchased Vivendi Entertainment (“Vivendi”) working capital, which was used to partially fund the acquisition of Vivendi. Excluding the net cash flows from the purchased Vivendi working capital, net cash used by operating activities for discontinued operations would have been zero during 2012.

See Accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Notes to Consolidated Financial Statements

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

References in this report to “we”, “us”, “our” or “Gaiam” refer to Gaiam, Inc. and its consolidated subsidiaries, unless we indicate otherwise. We are a lifestyle media company providing a broad selection of information, media, products and services to customers who value personal development, wellness, ecological lifestyles, and responsible media. We were incorporated under the laws of the State of Colorado on July 7, 1988.

We have prepared the accompanying consolidated financial statements in accordance 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 have been eliminated.

Discontinued Operations

During 2013, we sold our non-branded entertainment media distribution operation and discontinued our DRTV operations. Accordingly, the assets and liabilities, operating results, and cash flows for these businesses are presented as discontinued operations, separate from our continuing operations, for all periods presented in these consolidated financial statements and footnotes, unless indicated otherwise. See Note 12. Discontinued Operations.

Investment in Real Goods Solar – Reporting Changes

On December 31, 2011, we converted our Real Goods Solar Class B common shares, which had ten votes per share, to Real Goods Solar Class A common shares, which have one vote per share. As a result of this conversion, our voting ownership decreased to 37.5% and, thus, we no longer had financial control of or made decisions about resources to be allocated to this investee, but retained significant financial influence. Since Real Goods Solar was not deconsolidated until the end of 2011, our consolidated statements of operations and cash flows reflect Real Goods Solar on a consolidated basis for the year ended December 31, 2011, except for the removal of Real Goods Solar’s cash balance at December 31, 2011. On May 28, 2013, we sold a portion of our investment in Real Goods Solar, reducing our voting ownership percentage to below 20%. Additionally, following this sale, our Chairman resigned as Chairman of RSOL’s board, and, thus, we no longer had significant influence over Real Goods Solar. Therefore, we changed our accounting for our investment in RSOL from the equity to cost method, and, consequently, going forward we no longer report our portion of RSOL’s net earnings or losses each year. See Note 3. Related Party Transactions.

2. Significant Accounting Policies

No changes were made to our significant accounting policies during the year ended December 31, 2013.

We have evaluated events subsequent to December 31, 2013 and concluded that no material event has occurred which either would impact the results reflected in this report or our results going forward.

Cash

Cash represents on-demand accounts and letters of credit deposit funds with financial institutions that are denominated in U.S. dollars and foreign currencies. On December 31, 2013, we had letters of credit deposit funds reported in cash on our balance sheets of $0.5 million. At each balance sheet date, cash on hand that is denominated in a foreign currency is adjusted to reflect the exchange rate that existed at the balance sheet date. The difference is reported as a gain or loss in our statement of operations each period. Historically, such gains or losses have been immaterial.

Concentration of Risk and Allowances for Doubtful Accounts

We have a concentration of credit risk in our accounts receivable because our top customer, Target, accounted for 43.6% and 54.5% of accounts receivable, net as of December 31, 2013 and 2012, respectively. This customer is a major retailer in the United States to which we made significant sales during the year-end holiday season.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We make estimates of the collectability of our accounts receivable by analyzing historical bad debts, specific customer creditworthiness, and current economic trends. The allowance for doubtful accounts was $0.6 million and $0.6 million as of December 31, 2013 and 2012, respectively. If the financial condition of our customers were to deteriorate such that their ability to make payments to us was impaired, additional allowances could be required.

 

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Table of Contents

Product Returns

We record allowances for product returns to be received in future periods at the time we recognize the original sale. We base the amounts of the returns allowances upon historical experience and future expectations. Our allowance for product returns was $1.6 million and $2.6 million as of December 31, 2013 and 2012, respectively.

Inventory

Inventory consists primarily of finished goods held for sale and is stated at the lower of cost (first-in, first-out method) or market. We identify the inventory items to be written down for obsolescence based on the item’s current sales status and condition. We write down discontinued or slow moving inventories based on an estimate of the markdown to retail price needed to sell through our current stock level of the inventories. As of December 31, 2013 and 2012, we estimated obsolete or slow-moving inventory to be $2.1 million and $1.5 million, respectively.

Advertising Costs

Deferred advertising costs relate to the preparation, printing, advertising and distribution of catalogs. We defer such costs for financial reporting purposes until the catalogs are distributed, and then we amortize these costs over succeeding periods on the basis of estimated direct relationship sales. We amortize our seasonal catalogs within six months. Forecasted sales are the principal factor we use in estimating the amortization rate. We expense other advertising and promotional costs as incurred. Amounts recorded as advertising expense were $15.3 million, $13.6 million, and $27.2 million for the years ended December 31, 2013, 2012, and 2011, respectively, and we include these amounts in selling and operating expense.

We record sales discounts or other sales incentives as a reduction to revenue. We identify and record any cooperative advertising expenses we pay, which are for advertisements meeting the separable benefit and fair value tests, as part of selling and operating expense.

Property and Equipment

We state property and equipment at cost less accumulated depreciation and amortization. We include in property and equipment the cost of internal-use software, including software used in connection with our websites. We expense all costs related to the development of internal-use software other than those incurred during the application development stage. We capitalize the costs we incur during the application development stage and amortize them over the estimated useful life of the software, which is typically three years. We compute depreciation of property and equipment on the straight-line method over estimated useful lives, generally three to forty-five years. We amortize leasehold and building improvements over the shorter of the estimated useful lives of the assets or the remaining term of the lease or remaining life of the building, respectively.

Investments

We account for investments in equity securities that have readily determinable fair values that are not trading securities as available-for-sale securities. Unrealized changes in the fair value of an available-for-sale security are reported in accumulated other comprehensive income, net of tax, until disposed of or determined to be other-than-temporarily impaired, at which time the realized changes are reported in our statement of operations. At December 31, 2013, we had an equity investment with an estimated fair value of $1.3 million, based on its public stock trading price on that date, reported in other assets on our consolidated balance sheet.

Purchase Accounting

We account for the attainment of a controlling interest in a business using the acquisition method. In determining the estimated fair value of certain acquired assets and liabilities, we make assumptions based upon many different factors, such as historical and other relevant information and analyses performed by independent parties. Assumptions may be incomplete, and unanticipated events and circumstances may occur that could affect the validity of such assumptions, estimates, or actual results.

Media Library

Our media library asset represents the estimated fair value of both video and digital rights acquired through either business combinations or separate purchases and our capitalized cost to produce media products, all of which we market to retailers and our direct customers. We have presented the media library net of accumulated amortization of approximately $13.6 million and $27.2 million at December 31, 2013 and 2012, respectively, and is amortized over the estimated useful life of the titles, which range from five to fifteen years. Additionally, during 2014 we anticipate incurring approximately $3.0 million in royalties related to acquired and produced media content.

 

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Table of Contents

Capitalized media library production costs consist of costs incurred to produce the media content, net of accumulated amortization. We recognize these costs, as well as participation costs, as expenses on an individual title basis equal to the ratio that the current year’s gross revenues bear to our estimate of total ultimate gross revenues from all sources to be earned over a maximum seven-year period. We state capitalized production costs at the lower of unamortized cost or estimated fair value on an individual title basis. We continually review revenue forecasts, based primarily on historical sales statistics, and revise these forecasts when warranted by changing conditions. When estimates of total revenues and other events or changes in circumstances indicate that a title has an estimated fair value that is less than its unamortized cost, we recognize an impairment loss in the current period for the amount by which the unamortized cost exceeds the title’s estimated fair value.

During 2013, capitalized production cost for released titles was approximately $1.5 million, and for those titles not yet released was $0.1 million. Additionally, as of December 31, 2013, we estimate that approximately $1.6 million or 42.5% of the unamortized costs for released titles will be amortized during 2014, and approximately 86.3% of the unamortized costs for released titles will be amortized within the next three years. Accumulated amortization for capitalized produced media content at December 31, 2013 and 2012 was approximately $13.5 million and $15.3 million, respectively. Amortization expense for capitalized produced media content for the years ended December 31, 2013, 2012 and 2011 was $788 thousand, $900 thousand and $1.0 million, respectively.

Our acquired media rights have $1.4 million of remaining unamortized costs as of December 31, 2013 that will be amortized on a straight-line basis over 12 to 84 months. Amortization expense for acquired media rights for the years ended December 31, 2013, 2012, and 2011 was $553 thousand, $772 thousand, and $752 thousand, respectively. Based upon the acquired media titles and rights at December 31, 2013, we expect the annual amortization expense for the next five years to approximate $150 thousand per annum.

Based on total media library costs at December 31, 2013 and assuming no subsequent impairment of the underlying assets or a material increase in the video productions or media acquired, we expect the amortization expense for the next five years to be approximately $1.0 million per annum.

Goodwill and Other Intangibles

Goodwill represents the excess of the purchase consideration over the estimated fair value of assets acquired less liabilities assumed in a business acquisition. Our other intangibles consist of customer related assets. We review goodwill for impairment annually or more frequently if impairment indicators arise on a goodwill reporting unit level. We have the option of first assessing qualitative factors to determine whether events and circumstances indicate that it is more likely than not that the fair value of a goodwill reporting unit is less than its carrying amount. If it is determined that the fair value for a goodwill reporting unit is more likely than not greater than the carrying amount for that goodwill reporting unit, then the two-step impairment test is unnecessary. If it is determined that the two-step impairment test is necessary, then for step one, we compare the estimated fair value of a goodwill reporting unit with its carrying amount, including goodwill. If the estimated fair value of a goodwill reporting unit exceeds its carrying amount, we consider the goodwill of the reporting unit not impaired. If the carrying amount of a goodwill reporting unit exceeds its estimated fair value, we perform the second step of the goodwill impairment test to measure the amount of impairment loss. We use either a comparable market approach or a traditional present value method to test for potential impairment. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment at many points during the analysis. Application of alternative assumptions and definitions could yield significantly different results.

 

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The following table sets forth the changes in goodwill for the period December 31, 2011 through December 31, 2013 by segment.

 

(in thousands)

   Direct to
Consumer
Segment
     Business
Segment
     Total  

Balance at December 31, 2011 and 2012

   $ 2,673       $ —        $ 2,673   

Acquisitions (a)

     11,326         —          11,326   
  

 

 

    

 

 

    

 

 

 

Balance at December 31, 2013

   $ 13,999       $ —        $ 13,999   
  

 

 

    

 

 

    

 

 

 

 

(a) The estimated purchase price and fair value of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the closing date. We believe that information provides a reasonable basis for estimating the consideration transferred and the fair values of the assets acquired and liabilities assumed, but we are waiting for additional information necessary to finalize the amounts and identify separable intangibles. Therefore, the provisional purchase price allocations are subject to change and such changes could be significant.

The following table represents our other intangibles subject to amortization by major class as of December 31, 2013 and 2012.

 

     As of December 31,  

(in thousands)

   2013     2012  

Customer related:

    

Gross carrying amount

   $ 1,818      $ 649   

Accumulated amortization

     (743     (463
  

 

 

   

 

 

 
   $ 1,075      $ 186   
  

 

 

   

 

 

 

Marketing related:

    

Gross carrying amount

   $ 656      $ 576   

Accumulated amortization

     (576     (572
  

 

 

   

 

 

 
   $ 80      $ 4   
  

 

 

   

 

 

 

The amortization periods range from 24 to 84 months. Amortization expense for the years ended December 31, 2013, 2012, and 2011 was $321 thousand, $228 thousand, and $454 thousand, respectively. Based on the December 31, 2013 balance of other intangibles, we estimate amortization expense to be $493 thousand for 2014, $467 thousand for 2015, $195 thousand for 2016, and zero thereafter.

Long-Lived Assets

We evaluate the carrying value of long-lived assets held and used, other than goodwill, when events or changes in circumstances indicate the carrying value may not be recoverable. We consider the carrying value of a long-lived asset impaired when the total projected undiscounted cash flows from such asset are separately identifiable and are less than the carrying value. We recognize a loss based on the amount by which the carrying value exceeds the estimated fair value of the long-lived asset. We determine the estimated fair value primarily using the projected cash flows from the asset discounted at a rate commensurate with the risk involved.

Participations Payable

Participations payable represents amounts owed to talent involved with our media productions based on royalty or distribution agreements. Certain agreements include minimum royalty payments. All amounts due under such agreements are accrued at the time the related revenue is recognized.

Income Taxes

We provide for income taxes pursuant to the liability method. The liability method requires recognition of deferred income taxes based on temporary differences between financial reporting and income tax bases of assets and liabilities, using current enacted income tax rates and regulations. These differences will result in taxable income or deductions in future years when the reported amount of the asset or liability is recovered or settled, respectively. Considerable judgment is required in determining when these events may occur and whether recovery of an asset, including the utilization of a net operating loss or other carryforward prior to its expiration, is more likely than not.

Revenue

Revenue primarily consists of sales of products, media licensing, and media distribution. We recognize revenue from the sale of products and the licensing of media when the following four basic criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. We recognize distribution fees from our media distribution arrangements on a net revenue basis. For these media distribution sales, we do not take title to the related product sold as the inventory is owned by the studios or content producers and sold by us under distribution agent agreements. We recognize amounts billed to customers for postage and handling as revenue at the same time we recognize the revenue arising from the product sale. We present revenue net of taxes collected from customers.

 

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Prior to 2012, we also recognized revenue from Real Goods Solar’s energy integration fixed price contracts. For energy system installations of less than 100 kilowatts, we recognized revenue when the installation was substantially complete, determined based on departure from the job site following completion of the installation or passing of building inspection, while for energy system installations equal to or greater than 100 kilowatts, we recognized revenue on a percentage-of-completion basis, with the extent of progress towards completion measured by the cost to cost method.

Share-Based Compensation

We recognize compensation cost for share-based awards based on the estimated fair value of the award on date of grant. We measure compensation cost at the grant date based on the estimated fair value of the award and recognize compensation cost upon the probable attainment of a specified performance condition or over a service period. We use the Black-Scholes option valuation model to estimate the fair value of the award. In estimating this fair value, we use certain assumptions, as disclosed in Note 8. Share-Based Compensation, consisting of the expected life of the option, risk-free interest rate, dividend yield, and volatility. The use of a different estimate for any one of these components could have a material impact on the amount of calculated compensation expense.

Defined Contribution Plan

We have adopted a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code of 1986, as amended (“Internal Revenue Code”), which covers substantially all employees. Eligible employees may contribute amounts to the plan, via payroll withholding, subject to certain limitations. The 401(k) plan permits, but does not require, us to make additional matching contributions to the 401(k) plan on behalf of all participants in the 401(k) plan. We match 50% of an employee’s contribution, up to an annual maximum matching contribution of $1,500. We made matching contributions to the 401(k) plan of $0.3 million, $0.2 million, and $0.2 million in each of the years ended December 31, 2013, 2012, and 2011, respectively.

Foreign Currency Translation

Our foreign subsidiaries use their local currency as their functional currency. We translate assets and liabilities into U.S. dollars at exchange rates in effect at the balance sheet date. We translate income and expense accounts at the average monthly exchange rates during the year. We record resulting translation adjustments, net of income taxes, as a separate component of accumulated other comprehensive income.

Comprehensive Income (Loss)

Our comprehensive income (loss) is comprised of our net income (loss), noncontrolling interest net income (loss), foreign currency translation adjustments, net of tax, and unrealized changes in the fair value of an equity security, net of tax.

The tax effects allocated to our accumulated other comprehensive income (loss) components were as follows:

 

                                      
     For the Years Ended December 31,  

(in thousands)

   2013     2012      2011  

Before-tax amount

   $ (262   $ 14       $ (3

Tax expense (benefit)

     (86     4         (1
  

 

 

   

 

 

    

 

 

 

Net-of-tax amount

   $ (176   $ 10       $ (2
  

 

 

   

 

 

    

 

 

 

Net Income (Loss) Per Share Attributable To Gaiam, Inc. Common Shareholders

Basic net income (loss) per share attributable to Gaiam, Inc. common shareholders excludes any dilutive effects of options. We compute basic net income (loss) per share attributable to Gaiam, Inc. common shareholders using the weighted average number of common shares outstanding during the period. We compute diluted net income (loss) per share attributable to Gaiam, Inc. common shareholders using the weighted average number of common shares and common stock equivalents outstanding during the period. We excluded weighted average common stock equivalents of 1,439,748, 1,387,000 and 1,306,000 from the computation of diluted net income (loss) per share attributable to Gaiam, Inc. common shareholders for 2013, 2012 and 2011, respectively, because their effect was antidilutive.

 

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The following table sets forth the computation of basic and diluted net income (loss) per share attributable to Gaiam, Inc. common shareholders:

 

     For the Years Ended December 31,  

(in thousands, except per share data)

   2013     2012     2011  

Net income (loss) attributable to Gaiam, Inc. common shareholders:

      

Income (loss) from continuing operations

   $ (20,757   $ (19,530   $ (24,875

Income from discontinued operations

     (1,995     6,648        3   
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Gaiam, Inc.

   $ (22,752   $ (12,882   $ (24,872
  

 

 

   

 

 

   

 

 

 

Weighted average shares for basic net income (loss) per share

     22,972        22,703        23,126   

Effect of dilutive securities:

      

Weighted average of common stock and stock options

     143        —         —    
  

 

 

   

 

 

   

 

 

 

Weighted average shares for diluted net income (loss) per share

     23,115        22,703        23,126   
  

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to Gaiam, Inc. common shareholders—basic:

      

Income (loss) from continuing operations

   $ (0.90   $ (0.86   $ (1.08

Income from discontinued operations

     (0.09     0.29        0.00   
  

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share attributable to Gaiam, Inc.

   $ (0.99   $ (0.57   $ (1.08
  

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to Gaiam, Inc. common shareholders—diluted:

      

Income (loss) from continuing operations

   $ (0.89   $ (0.86   $ (1.08

Income from discontinued operations

     (0.09     0.29        0.00   
  

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share attributable to Gaiam, Inc.

   $ (0.98   $ (0.57   $ (1.08
  

 

 

   

 

 

   

 

 

 

3. Related Party Transactions

Under our Intercorporate Services Agreement with Real Goods Solar, we had until September 30, 2013 provided services to RSOL in the ordinary course of business, for which we at least quarterly billed to and collected from Real Goods Solar. This agreement was terminated on December 19, 2013. We billed zero, $0.3 million, and $0.4 million under the Intercorporate Services Agreement for the years 2013, 2012, and 2011, respectively.

As specified by our Tax Sharing Agreement with Real Goods Solar, to the extent Real Goods Solar becomes entitled to utilize certain loss carryforwards relating to periods prior to its initial public offering, it will distribute to us the tax effect (estimated to be 34% for federal income tax purposes) of the amount of such tax loss carryforwards so utilized. These net operating loss carryforwards expire beginning in 2018 if not utilized. Due to our step acquisitions of Real Goods Solar, it experienced “ownership changes” as defined in Section 382 of the Internal Revenue Code. Accordingly, its use of the net operating loss carryforwards is limited by annual limitations described in Sections 382 and 383 of the Internal Revenue Code. As of December 31, 2013, $4.4 million of these net operating loss carryforwards remained available for current and future utilization, meaning that Real Goods Solar’s potential future payments to us, which would be made over a period of several years, could therefore aggregate to approximately $1.6 million based on current tax rates. Based on Real Goods Solar’s establishment of a valuation allowance for all its net deferred tax assets at December 31, 2012, we established a valuation allowance, by charging loss from equity method investment in 2012, for our entire $1.6 million deferred tax asset related to our Tax Sharing Agreement with Real Goods Solar.

On December 19, 2011, we entered into an Industrial Building Lease Agreement with Real Goods Solar for office space located in our owned building in Colorado. The five year lease commenced on January 1, 2012 and has a monthly payment of approximately $22,000 plus common area maintenance and tax expenses.

 

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During 2013, we sold the majority of our investment in Real Goods Solar for total net proceeds of approximately $25 million. Following the sale of the first portion in May 2013, our voting ownership percentage declined to below 20% and our Chairman resigned as Chairman of RSOL’s board and, thus, we no longer had significant influence over Real Goods Solar. Therefore, we changed our accounting for our investment in RSOL from the equity to cost method. Due to this accounting method change, we will no longer report our portion of RSOL’s net income or loss each period.

At December 31, 2012, we had two loans receivable from Real Goods Solar totaling $2.7 million, bearing interest at an annual rate of 10%. During 2012, Real Goods Solar recorded an impairment and, through the equity method accounting for our investment in RSOL, the net carrying value of these loans was reduced to zero as of December 31, 2012. On March 27, 2013, the maturity dates for these loans were extended, with $1.0 million due April 26, 2014 and $1.7 million due April 30, 2014. On April 23, 2013, we entered into a conversion agreement with Real Goods Solar whereby the $1.7 million loan was reduced by $0.1 million in exchange for 62,111 shares of Real Goods Solar’s Class A common stock. The conversion ratio was determined based on the closing market price of Real Goods Solar’s Class A common stock on the date of the conversion. On November 5, 2013, we collected $2.1 million in cash from Real Goods Solar and $0.2 million of tenant improvements in settlement of the two outstanding loans made. The $2.3 million gain resulting from the collection of these loans are reported in Interest and other income on our consolidated statement of operations for the year ended December 31, 2013.

As of December 31, 2013, we owned 836,989 shares of Real Goods Solar’s Class A common stock.

4. Property and Equipment

Property and equipment, stated at lower of cost or estimated fair value, consists of the following as of December 31:

 

(in thousands)

   2013     2012  

Land

   $ 5,603      $ 5,582   

Buildings

     16,637        16,366   

Furniture, fixtures and equipment

     6,839        6,213   

Leasehold improvements

     1,622        1,633   

Website development costs and other software

     9,919        10,015   

Studios, computer and telephone equipment

     9,182        9,292   

Warehouse and distribution equipment

     1,765        1,765   
  

 

 

   

 

 

 
     51,567        50,866   

Accumulated depreciation and amortization

     (29,027     (27,322
  

 

 

   

 

 

 
   $ 22,540      $ 23,544   
  

 

 

   

 

 

 

 

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5. Accrued Liabilities

Accrued liabilities consist of the following as of December 31:

 

(in thousands)

   2013      2012  

Accrued compensation

   $ 5,500       $ 2,031   

Customer deposits

     8,478         6,086   

Other accrued liabilities

     3,525         1,367   
  

 

 

    

 

 

 
   $ 17,503       $ 9,484   
  

 

 

    

 

 

 

Accrued compensation at December 31, 2013 included severance and termination benefits of $2.5 million.

6. Commitments and Contingencies

Operating Leases

We lease office and warehouse space through operating leases. Some of the leases have renewal clauses, which range from 3 to 6 years.

The following schedule represents the annual future minimum payments under these commitments, as of December 31, 2013:

 

(in thousands)

   Operating  

2014

   $ 1,848   

2015

     1,112   

2016

     325   

2017

     —     
  

 

 

 

Total minimum lease payments

   $ 3,285   
  

 

 

 

As a result of our divestiture of our non-branded entertainment media operations and our discontinuance of DRTV operations, in the fourth quarter of 2013 we closed our office in New York, NY and recognized an expense representing the cumulative remaining obligation under that lease agreement, net of expected recoveries from sublease agreements. The previous table reflects the future minimum payments we are obligated to make on this lease agreement.

We incurred rent expense of $1.0 million, $1.0 million and $1.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Risks and Uncertainties

We are subject to risks and uncertainties in the normal course of our business, including legal proceedings; governmental regulation, such as the interpretation of tax and labor laws; and consumer sensitivity to changes in general economic conditions. We have accrued for probable and estimatable costs that may be incurred with respect to identified risks and uncertainties based upon the facts and circumstances currently available to us. Due to uncertainties in the estimating process, actual costs could vary from those accruals.

7. Equity

During 2013, we issued, under our 2009 Long-Term Incentive Plan, 49,187 and 160,470 shares of our Class A common stock to our independent directors, in lieu of cash compensation, for services rendered during 2013, and to our employees upon the exercise of stock options, respectively. We recorded the shares issued to our directors at their estimated fair value based on the market’s closing price of our stock on the date the shares were issued, which by policy is the last trading day of each quarter in which the services were rendered.

On October 11, 2013, we issued 15,759 shares of our Class A common stock under restricted stock award agreements of the same date to certain of our former board directors. See Footnote 8. Share-Based Compensation. On October 31, 2013, we issued 1,055,000 shares of our Class A common stock into escrow as part of the consideration transferred for an acquisition.

During 2012, we issued 32,620 shares of our Class A common stock under our 2009 Long-Term Incentive Plan to certain of our independent directors, in lieu of cash compensation, for services rendered in 2012. We recorded these shares at their estimated fair value based on the market’s closing price of our stock on the date the shares were issued, which by policy is the last trading day of each quarter in which the services were rendered. Additionally, our adventure travel subsidiary, which is 51.4% owned by us, paid its shareholders dividends of $0.7 million from additional paid-in capital and $0.5 million from retained earnings, and, as a result, the noncontrolling interests on our consolidated balance sheet at December 31, 2012 was decreased by $0.6 million.

 

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During 2011, we issued 11,518 of our Class A common shares under our 2009 Long-Term Incentive Plan to our independent directors, in lieu of cash compensation, for services rendered in 2011, and issued 15,200 of our Class A common shares upon exercise of options under our 1999 Long-Term Incentive Plan. We value the shares issued to our independent directors at estimated fair value based on the closing price of our stock on the date the shares are issued, which by policy is the last trading day of each quarter in which the services were rendered. Additionally, we repurchased 628,003 of our Class A common shares for a total cost of $2.3 million. We recorded this repurchase of our shares in accordance with the cost method of accounting for treasury stock. Because we have not decided the ultimate disposition of the re-acquired shares, their cost is reflected in our consolidated balance sheet at December 31, 2011 as a reduction to additional paid-in capital.

On December 31, 2011, we converted our Real Goods Solar Class B common shares, which had ten votes per share, to Real Goods Solar Class A common shares, which have one vote per share. As a result of this conversion, our voting ownership decreased to 37.5% and, thus, we no longer had financial control of Real Goods Solar, but retained significant financial influence. Accordingly, we deconsolidated Real Goods Solar from our equity by removing the noncontrolling interest in Real Goods Solar at December 31, 2011 and increasing additional paid-in capital for a portion of the adjustment to a deferred tax liability related to this investment.

During May 2013, as a result of a decrease in our voting ownership to less than 20% and the resignation of our chairman from his position as Chairman of the Board for Real Goods Solar, we changed the accounting for our investment in Real Goods Solar from the equity to cost method. Thus, our consolidated balance sheet data at December 31, 2013 and our consolidated statement of operations data for 2013 reports Real Goods Solar as a cost method investment.

The following schedule reflects the effect of changes in Gaiam, Inc.’s ownership interest in its subsidiaries on Gaiam, Inc.’s equity for the years ended December 31, 2012 and 2011, respectively. There were no changes to Gaiam, Inc.’s equity during 2013 as a result of converting our accounting for our investment in Real Goods Solar from the equity to cost method.

 

     For the Year Ended December 31,  

(in thousands, except share data)

   2012     2011  

Net income (loss) attributable to Gaiam, Inc.

   $ (12,882   $ (24,872

Transfers from the noncontrolling interest:

    

Decrease in Gaiam, Inc.’s paid-in capital for its subsidiary’s acquisition of a noncontrolling interest, including related taxes of $16

     (170     —    

Increase in Gaiam, Inc.’s paid-in capital for the issuance of 29,408 Real Goods Solar Class A common shares in conjunction with nonemployee director fees, and for employee share-based compensation

     —         193   

Increase in Gaiam, Inc.’s paid-in capital for the issuance of 8,700,000 Real Goods Solar Class A common shares in conjunction with its acquisition of Alteris

     —         1,716   

Decrease in Gaiam, Inc.’s paid-in capital for Real Goods Solar’s repurchase of 379,400 of its Class A common shares

     —         (125

Increase in Gaiam, Inc.’s paid-in capital in conjunction with the remeasurement of deferred tax liabilities related to our equity investment in Real Goods Solar upon deconsolidation

     —         562   
  

 

 

   

 

 

 

Change from the net income (loss) attributable to Gaiam, Inc. and transfers from the noncontrolling interest

   $ (13,052   $ (22,526
  

 

 

   

 

 

 

As of December 31, 2012, we had the following Class A common shares reserved for future issuance:

 

Conversion of Class B common shares

     5,400,000   

Awards under the 2009 and 1999 Long-Term Incentive Plans:

  

Stock options outstanding

     1,662,450   
  

 

 

 

Total shares reserved for future issuance

     7,062,450   
  

 

 

 

Each holder of our Class A common shares is entitled to one vote for each share held on all matters submitted to a vote of shareholders. Each of our Class B common shares is entitled to ten votes on all matters submitted to a vote of shareholders. There are no cumulative voting rights. All holders of our Class A common shares and our Class B common shares vote as a single class on all matters that are submitted to the shareholders for a vote. Shareholders may consent to an action in writing and without a meeting under certain circumstances. Jirka Rysavy, our chairman, holds 100% of our 5,400,000 outstanding shares of class B common stock and also owns 648,682 shares of Class A common stock. Consequently, our chairman holds approximately 75% of our voting stock and thus is able to exert substantial influence over us and to control matters requiring approval by our shareholders, including the election of directors, increasing our authorized capital stock, or a merger or sale of substantially all of our assets. As a result of Mr. Rysavy’s control of us, no change of control can occur without Mr. Rysavy’s consent.

 

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Our Class A common shares and our Class B common shares are entitled to receive dividends, if any, as may be declared by the board of directors out of legally available funds. In the event of a liquidation, dissolution or winding up of our Company, our Class A common shares and our Class B common shares are entitled to share ratably in our assets remaining after the payment of all of our debts and other liabilities. Holders of our Class A common shares and our Class B common shares have no preemptive, subscription or redemption rights, and there are no redemption or sinking fund provisions applicable to our Class A common shares and our Class B common shares.

Our Class B common shares may not be transferred unless converted into our Class A common shares, other than certain transfers to affiliates, family members, and charitable organizations. Our Class B common shares are convertible one-for-one into our Class A common shares, at the option of the holder of the Class B common shares.

8. Share-Based Compensation

During 2009, we adopted the Gaiam, Inc. 2009 Long-Term Incentive Plan (the “Plan”). The purpose of the Plan is to advance our interests and those of our shareholders by providing incentives to certain persons who contribute significantly to our strategic and long-term performance objectives and growth. An aggregate of not more than 3 million of our Class A common shares, subject to certain adjustments, may be issued under the Plan, and the Plan terminates no later than April 23, 2019. The authority to grant new options under our 1999 Long-Term Incentive Plan expired on June 1, 2009. We have generally granted options under both of our incentive plans with an exercise price equal to the closing market price of our stock at the date of the grant and the options normally vest and become exercisable at 2% per month for the 50 months beginning in the eleventh month after date of grant. We have recognized the compensation expense related to share-based payment awards on a straight-line basis over the requisite service periods of the awards, which are generally five years for employee options and two years for Board members’ options. Commencing with options granted during 2011, we extended the expiration date for grants from seven to ten years from the date of grant.

The determination of the estimated fair value of share-based payment awards on the date of grant using the Black-Scholes option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. We derive the expected terms from the historical behavior of participant groupings. We base expected volatilities on the historically realized volatility of our stock over the expected term. Our use of historically realized volatilities is based upon the expectation that future volatility over the expected term is not likely to differ from historical results. We base the risk-free interest rate used in the option valuation model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. Our dividend yield assumes no annual cash dividends. In accordance with FASB share-based compensation guidance, we are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We primarily use historical data by participant groupings to estimate option forfeitures and record share-based compensation expense only for those awards that are expected to vest.

The following are the variables we used in the Black-Scholes option pricing model to determine the estimated grant date fair value for options granted under our 2009 and 1999 Long-Term Incentive Plans for each of the years presented:

 

     2013   

2012

   2011

Expected volatility

   57% - 61%    59%    58% - 61%

Weighted-average volatility

   58%    59%    59%

Expected dividends

   —%    —%    2.8% - 4.2%

Expected term (in years)

   5.1 - 7.8    7.1    7.1 - 9.3

Risk-free rate

   1.33% - 2.32%    1.36% - 1.61%    1.50% - 3.13%

The table below presents a summary of option activity under our 2009 and 1999 Long-Term Incentive Plans as of December 31, 2013, and changes during the year then ended:

 

     Shares     Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
 

Outstanding at January 1, 2013

     1,406,450      $ 5.61         

Granted

     527,500        5.30         

Exercised

     (160,470     4.84         

Cancelled or forfeited

     (111,030     4.63         
  

 

 

         

Outstanding at December 31, 2013

     1,662,450      $ 5.65         5.2       $ 2,049,536   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at December 31, 2013

     912,390      $ 5.84         2.4       $ 1,104,611   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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On November 8, 2013, for 3 former board members, we extended the exercisability date of their outstanding options to the lesser of October 10, 2014 or the expiration date of their grants. These modifications resulted in total incremental share-based compensation cost of $0.1 million that was immediately recognizable. On March 5, 2012, for options previously granted under our 1999 Long-Term Incentive Plan that were scheduled to expire within the next two years, we extended the original expiration dates by two years. As a result, grants to 7 employees were modified and these modifications resulted in total incremental share-based compensation cost of approximately $0.1 million that was immediately recognizable. During 2009, for options previously granted under our 1999 Long-Term Incentive Plan to 49 employees, we reset the exercise price to $5.00 per share. The options continued to vest over their remaining original vesting periods. These 2009 repricing modifications resulted in total incremental share-based compensation cost of approximately $0.2 million, recognizable over 2009 through 2013.

We issue new shares upon the exercise of options. We received $0.8 million in cash from stock options exercised during 2013. No options were exercised during 2012. The weighted-average grant-date fair value of options granted during the years 2013, 2012, and 2011 was $3.14, $2.39, and $2.32, respectively. The total intrinsic value of options exercised during 2013 and 2011 was $0.1 million each year. The total fair value of shares vested was $0.6 million during 2013 and $0.8 million during each of 2012 and 2011.

On October 11, 2013, we issued 15,759 shares of our Class A common stock under restricted stock award agreements of the same date to certain of our former board members. The estimated fair value of these restricted stock awards was $0.1 million and was based on the closing market price of our stock on October 11, 2013. These restricted stock awards vest 100% on April 10, 2014.

Our share-based compensation cost charged against income was $0.8 million, $1.0 million, and $1.6 million during 2013, 2012, and 2011, respectively, and is shown in corporate, general and administration expenses. The portion of our share-based compensation expense related to Real Goods Solar was $0.5 million for 2011. The total income tax benefit recognized for share-based compensation was $0.3 million, $0.4 million, and $0.6 million for 2013, 2012, and 2011, respectively. As of December 31, 2013, there was $1.4 million of unrecognized cost related to nonvested shared-based compensation arrangements granted under our 2009 and 1999 Long-Term Incentive Plans. We expect that cost to be recognized over a weighted-average period of 3.78 years.

9. Asset Impairments and Exit Activity Costs

During 2013, as a result of the reorganization and re-focus of our continuing businesses following the discontinuation of our non-branded entertainment media distribution and direct response television marketing operations, we impaired $4.4 million of media libraries and capitalized production costs, $1.5 million of advances, and $1.3 million of property, plant, and equipment, net of accumulated depreciation, and other investments. These noncash impairments reduced the carrying value of assets for our business and direct to consumer segments by $5.1 million and $2.0 million, respectively. We estimated the fair value of each impaired asset category using a traditional present value technique, relying upon various sources of information for our assumptions, such as estimated future sales, internal budgets and projections, and judgment about the related product’s future earnings potential (level 3 of the fair value hierarchy). We also recorded termination benefits of $2.5 million related to the termination of certain employees associated with our restructuring and future retirement benefits for one of our executive officers. These asset impairment and termination benefit charges were recorded in other general expense on our consolidated statement of operations for the year ended December 31, 2013. Also included in other general expenses on our consolidated statements of operations are $1.3 million of expenses related to a brand study, recruiting for a new CEO, and other operating expenses that management believes are unique in 2013.

At December 31, 2013, the accrual liability associated with termination benefits consisted of the following:

 

Charges

   $ 2,472   

Payments made

     (298
  

 

 

 

Accrued liability

   $ 2,174   
  

 

 

 

The $2.2 million accrual balance at December 31, 2013 is expected to be paid $1.3 million in 2014, $ 0.5 million in 2015 and $0.4 million in 2015.

 

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10. Income Taxes

Our provision for income tax expense (benefit) for continuing operations is comprised of the following:

 

     For the Years Ended December 31,  

(in thousands)

   2013     2012     2011  

Current:

      

Federal

   $ 536      $ (4,463   $ 426   

State

     (68     (293     129   

International

     223        196        236   
  

 

 

   

 

 

   

 

 

 
     691        (4,560     791   
  

 

 

   

 

 

   

 

 

 

Deferred:

      

Federal

     23,619        (4,552     (10,735

State

     1,591        (328     (763

International

     73        (4     (6
  

 

 

   

 

 

   

 

 

 
     25,283        (4,884     (11,504
  

 

 

   

 

 

   

 

 

 
   $ 25,974      $ (9,444   $ (10,713
  

 

 

   

 

 

   

 

 

 

Variations from the federal statutory rate are as follows:

 

(in thousands)

   2013     2012     2011  

Expected federal income tax expense (benefit) at statutory rate of 34%

   $ 2,003      $ (4,348   $ (12,235

Effect of permanent goodwill impairment and worthless stock differences

     —          —          7,668   

Effect of 2008 State NOL’s and option forfeitures

     189        —          —    

Effect of permanent enhanced charitable donation differences

  

 

—  

  

 

 

(31

    (25

Effect of permanent other differences

  

 

269

  

    34        96   

Effect of change in financial statement carrying value of investment

     —          (5,077     (5,534

State income tax expense (benefit), net of federal benefit

     67        (196     (872

Federal tax credits

     —          —          (164

Establishment of valuation allowance on net deferred tax assets

     23,153        —          —     

Other

     337        209        406   

Effect of differences between U.S. taxation and foreign taxation

     (44     (35     (53
  

 

 

   

 

 

   

 

 

 

Income tax expense (benefit)

   $ 25,974      $ (9,444   $ (10,713
  

 

 

   

 

 

   

 

 

 

 

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Deferred income taxes reflect net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the net accumulated deferred income tax assets as of December 31, 2013 and 2012 are as follows:

 

     December 31,  

(in thousands)

   2013     2012  

Deferred tax assets (liabilities):

    

Current:

    

Provision for doubtful accounts

   $ 171      $ 245   

Inventory-related expense

     950        699   

Accrued liabilities

     3,341        3,888   

Net operating loss carryforward

     820        3,617   

Worthless Stock Deduction

     3,055        —     

Impaired loans to affiliate

     —          959   

Prepaid and deferred catalog costs

     (103     (250

Other

     35        (29

Exit Activity Accruals

     1,603        —     
  

 

 

   

 

 

 

Total current deferred tax assets

     9,872        9,129   

Valuation allowance

     (9,872     —     
  

 

 

   

 

 

 

Total current deferred tax assets, net of valuation allowance

   $ —        $ 9,129   
  

 

 

   

 

 

 

Non-current:

    

Depreciation and amortization

   $ (825   $ 288   

Section 181 qualified production expense

     (850     (4,579

Net operating loss carryforward

     15,297        13,737   

Charitable carryforward

     1,567        1,681   

Loss (gain) from change in financial statement carrying value of investment, net

     55        228   

Gain from foreign business acquisition

     (347     (347

Impairment of intangibles

     —          5,412   

Tax credits

     920        899   

Other

     69        42   
  

 

 

   

 

 

 

Total non-current deferred tax assets

     15,886        17,361   

Valuation allowance

     (15,886     (2,669
  

 

 

   

 

 

 

Total non-current deferred tax assets, net of valuation allowance

     —          14,692   
  

 

 

   

 

 

 

Total net deferred tax assets

   $ —        $ 23,821   
  

 

 

   

 

 

 

The sources of income (loss) before income taxes are as follows:

 

(in thousands)

   2013      2012     2011  

Domestic

   $ 5,503       $ (29,162   $ (34,977

International

     373         493        (1,009
  

 

 

    

 

 

   

 

 

 
   $ 5,876       $ (28,669   $ (35,986
  

 

 

    

 

 

   

 

 

 

On December 31, 2011, we adjusted the financial statement carrying value of our equity method investment in Real Goods Solar to its estimated fair value due to deconsolidation. Accordingly, we also adjusted the related deferred tax liability for the temporary difference in basis for this investment, thereby recognizing during 2011 an income tax benefit of $7.1 million and a credit to additional paid-in capital of $0.6 million.

Income tax benefit for 2012 includes $6.0 million due to the reducing of a deferred tax liability related to the carrying value of our equity method investment in Real Goods Solar and the reduction of the carrying value of our loans to Real Goods Solar. See Note 3. Related Party Transactions.

Certain of our subsidiaries, namely those for which we own less than 80% of their shares and voting rights and/or are foreign entities, file tax returns separately from Gaiam’s consolidated tax group. At December 31, 2013, we had made a provision for U.S. federal and state income taxes on approximately $0.3 million of undistributed foreign earnings, which are not expected to remain outside of the U.S. indefinitely. Deferred tax liabilities have been established for future taxes on distribution of foreign earnings in the form of dividends or otherwise, in order to derive, for financial statement purposes, the U.S. income taxes (net of tax on foreign tax credits), state income taxes, and withholding taxes payable to the various foreign countries.

 

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Periodically, we perform assessments of the realization of our net deferred tax assets considering all available evidence, both positive and negative. A significant piece of evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2013. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth. On the basis of this assessment, we recorded a charge of $23.2 million to income tax expense to record a valuation allowance against our deferred tax assets as of December 31, 2013. As income is generated in future periods, the Company expects to reverse the valuation allowance and utilize the deferred tax assets.

Based on Real Goods Solar’s establishment of a valuation allowance for all its net deferred tax assets at December 31, 2012, we established a valuation allowance, by charging loss from equity method investment, for our entire $1.6 million deferred tax asset related to our Tax Sharing Agreement with Real Goods Solar. See Note 3. Related Party Transactions. We concluded that no other changes to our existing valuation allowances were necessary. We expect our net deferred tax assets, less the valuation allowances, at December 31, 2013 to be fully recoverable through the reversal of taxable temporary differences and normal business activities in future years.

We realized $0.5 million in tax deductions and $0.7 million in tax benefits recorded to additional paid-in capital as a result of the exercise of stock options for the year ended December 31, 2013. No stock options were exercised during 2012. Also, we charged $0.9 million to additional paid-in capital during the year ended December 31, 2011 as a result of adjustments to a deferred tax liability caused by temporary changes in the financial statement carrying value of our investment in Real Goods Solar.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. We measure the tax benefits recognized in the consolidated financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to our subjective assumptions and judgments which can materially affect amounts recognized in our consolidated balance sheets and consolidated statements of operations. The result of our assessment of our uncertain tax positions did not have a material impact on our consolidated financial statements. Our federal and state tax returns for all years after 2009 are subject to future examination by tax authorities for all our tax jurisdictions. We recognize interest and penalties related to income tax matters in interest and other income (expense) and corporate, general and administration expenses, respectively.

 

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11. Segment and Geographic Information

Segment Information

During 2013, we sold our non-branded entertainment media distribution operation (previously part of our business segment) and discontinued our DRTV operations (previously part of our direct to consumer segment). Accordingly, we have restated the below segment information to present these two businesses as discontinued operations, separate from our continuing segments.

Real Goods Solar was deconsolidated on December 31, 2011, and, thus, the segment information below reports RSOL as an equity method investment for 2012 and as a consolidated subsidiary for 2011. RSOL became a cost method investment during 2013.

We now manage our business and aggregate our operational and financial information in accordance with two reportable segments. The direct to consumer segment contains e-commerce, catalog, retail store and digital subscription channels; and the business segment comprises retailer, distribution, and corporate account channels.

Although we are able to track revenue by sales channel, the management, allocation of resources and analysis and reporting of expenses is presented on a combined basis, at the reportable segment level. Contribution margin is defined as net revenue less cost of goods sold and total operating expenses.

Financial information for our segments was as follows:

 

     Year Ended December 31,  

(in thousands)

   2013     2012     2011  

Net revenue:

      

Direct to consumer

   $ 52,051      $ 42,852      $ 45,041   

Business

     103,412        84,390        69,393   
  

 

 

   

 

 

   

 

 

 

Net revenue excluding Solar (RSOL)

     155,463        127,242        114,434   

Solar

     —         —         109,257   
  

 

 

   

 

 

   

 

 

 

Consolidated net revenue

     155,463        127,242        223,691   

Contribution margin (loss):

      

Direct to consumer

     (22,754 )(b)      (17,308 )(b)      (6,983

Business

     1,113  (b)      7,135        (22,087 )(a) 
  

 

 

   

 

 

   

 

 

 

Contribution margin (loss) excluding Solar (RSOL)

     (21,641     (10,173     (29,070

Solar

     —         —         (2,276
  

 

 

   

 

 

   

 

 

 

Consolidated contribution margin (loss)

     (21,641     (10,173     (31,346

Reconciliation of contribution margin (loss) to net income (loss) attributable to Gaiam, Inc.:

      

Interest and other income (expense)

     2,421        (86     (90

Gain on sale of investment in RSOL

     25,096        —         —    

Loss from equity method investment in RSOL

     —         (18,410     —    

Loss on deconsolidation of RSOL

     —         —         (4,550

Income tax expense (benefit)

     25,974        (9,444     (10,713

Income from discontinued operations

     (1,995     6,648        3   

Net (income) loss attributable to noncontrolling interest

     (659     (305     398   
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Gaiam, Inc.

   $ (22,752   $ (12,882   $ (24,872
  

 

 

   

 

 

   

 

 

 

 

(a) During 2011, we recognized a noncash goodwill impairment charge of $22.5 million in our business segment.
(b) Includes investments in our digital subscription businesses of $8.5 million and $5.9 million for the years 2013 and 2012, respectively. Additionally, during 2013 we recognized impairment and severance charges of $11.0 million.

 

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The following is a reconciliation of reportable segments’ assets to our consolidated total assets. Other unallocated corporate amounts are comprised of cash, current and deferred income taxes, and property and equipment.

 

     As of December 31,  

(in thousands)

   2013      2012      2011  

Total assets – Continuing Operations:

        

Direct to consumer

   $ 39,803       $ 30,500       $ 17,506   

Business

     64,094         63,313         53,725   

Other unallocated corporate amounts

     32,883         29,204         62,792   
  

 

 

    

 

 

    

 

 

 
   $ 136,780       $ 123,017       $ 134,023   

Total assets – Discontinued Operations:

        

Direct to consumer

   $ 1,646       $ 7,925       $ 3,470   

Business

     1,576         66,289         25,797   
  

 

 

    

 

 

    

 

 

 
   $ 3,222       $ 74,214       $ 29,267   
  

 

 

    

 

 

    

 

 

 
   $ 140,002       $ 197,231       $ 163,290   
  

 

 

    

 

 

    

 

 

 

Major Customer

Sales to our largest customer accounted for approximately 32.1%, 22.9%, and 15.8% of total net revenue during 2013, 2012 and 2011, respectively, and are reported in our business segment.

Geographic Information

We sell and distribute essentially the same products in the United States and several foreign countries. The major geographic territories are the U.S., Canada, Australia and the U.K., and are based on the location of the customer. The following represents geographical data for our operations as of and for the years ended December 31, 2013, 2012 and 2011:

 

(in thousands)

   2013      2012      2011  

Revenue:

        

United States

   $ 150,274       $ 122,183       $ 218,741   

International

     5,189         5,059         4,950   
  

 

 

    

 

 

    

 

 

 
   $ 155,463       $ 127,242       $ 223,691   
  

 

 

    

 

 

    

 

 

 

Long-Lived Assets:

        

United States

   $ 29,072       $ 33,827       $ 34,871   

International

     246         626         370   
  

 

 

    

 

 

    

 

 

 
   $ 29,318       $ 34,453       $ 35,241   
  

 

 

    

 

 

    

 

 

 
     As of December 31,  

(in thousands)

   2013      2012      2011  

Components of Long-Lived Assets (a):

        

Property and equipment, net

   $ 22,540       $ 23,544       $ 23,634   

Media Library, net

     5,211         10,441