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INDEX TO FORM 10-Q



United States
Securities and Exchange Commission
Washington, D.C. 20549


Form 10-Q


ý

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

For the Fiscal Quarter Ended March 31, 2002

OR

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

Commission File Number 0-27517


GAIAM, INC.
(Exact name of registrant as specified in its charter)

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

360 INTERLOCKEN BLVD.
BROOMFIELD, COLORADO 80021
(Address of principal executive offices)

(303) 222-3600
(Registrant's telephone number, including area code)


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and 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 ý    NO o

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

Class
  Shares outstanding as of May 10, 2002

Class A Common Stock ($.0001 par value)

 

8,621,884

Class B Common Stock ($.0001 par value)

 

5,400,000



INDEX TO FORM 10-Q

 
   
PART I.   FINANCIAL INFORMATION

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at March 31, 2002 and December 31, 2001

 

 

Condensed Consolidated Statements of Income for the three months ended March 31, 2002 and 2001

 

 

Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2002 and 2001

 

 

Notes to Quarterly Condensed Consolidated Financial Statements

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

PART II.

 

OTHER INFORMATION

Item 1.

 

Legal Proceedings

Item 2.

 

Changes in Securities and Use of Proceeds

Item 3.

 

Defaults Upon Senior Securities

Item 4.

 

Submission of Matters to a Vote of Security Holders

Item 5.

 

Other Information

Item 6.

 

Exhibits and Reports on Form 8-K

This report may contain forward-looking statements that involve risks and uncertainties. When used in this discussion, the words "anticipate," "believe," "plan," "estimate," "expect," "strive," "future," "intend" and similar expressions as they relate to Gaiam or its management are intended to identify such forward-looking statements. Gaiam's 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," "Market Risk" and elsewhere in this report. Risks and uncertainties that could cause actual results to differ include, without limitation, competition, loss of key personnel, pricing, brand reputation, growth of e-commerce, acquisitions, 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, future internet related taxes, control of Gaiam by its founder, fluctuations in quarterly operating results, limited experience in operating retail stores, consumer trends, customer interest in our products, general economic conditions, the effect of government regulation and other risks and uncertainties included in Gaiam's 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 management's view only as of the date of this report. We undertake no obligation to update any forward-looking information.


GAIAM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

Assets

  March 31,
2002

  December 31,
2001

 
 
  (Unaudited)

   
 
Current assets:              
  Cash and cash equivalents   $ 16,986,342   $ 22,243,647  
  Accounts receivable, net     18,084,955     15,747,329  
  Accounts and notes receivable, other     2,673,080     2,086,085  
  Inventory, less allowances     14,509,211     15,447,434  
  Deferred advertising costs     1,567,701     1,779,443  
  Other current assets     1,091,887     489,846  
   
 
 
Total current assets     54,913,176     57,793,784  

Property and equipment, net

 

 

13,261,464

 

 

13,278,545

 
Capitalized production costs, net     4,097,201     3,551,478  
Video library, net     4,246,479     4,332,777  
Goodwill, net     7,266,714     7,266,714  
Deferred tax assets     1,390,545     1,390,545  
Other assets     627,106     573,210  
   
 
 
Total assets   $ 85,802,685   $ 88,187,053  
   
 
 

Liabilities and stockholders' equity

 

 

 

 

 

 

 
Current liabilities:              
  Accounts payable   $ 7,189,219   $ 8,954,607  
  Accrued liabilities     4,600,528     4,352,290  
  Accrued royalties     1,067,449     1,458,367  
  Income taxes payable     43,646     1,413,643  
  Capital lease obligations, current     203,950     211,745  
   
 
 
Total current liabilities     13,104,792     16,390,652  
 
Capital lease obligations, long-term

 

 

195,383

 

 

238,078

 
  Deferred tax liability     517,414     517,414  
   
 
 
Total long-term liabilities     712,797     755,492  

Minority interest

 

 

6,410,939

 

 

6,408,277

 
Redeemable Class A preferred stock in subsidiary     6,000,000     6,000,000  

Stockholders' equity:

 

 

 

 

 

 

 
  Class A common stock, $.0001 par value, 150,000,000 shares authorized, 8,621,372 and 8,581,806 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively     862     858  
  Class B common stock, $.0001 par value, 50,000,000 shares authorized, 5,400,000 issued and outstanding at March 31, 2002 and December 31, 2001, respectively     540     540  
  Additional paid-in capital     48,449,080     48,261,202  
  Deferred compensation     (334,326 )   (352,326 )
  Retained earnings     11,458,001     10,722,358  
   
 
 
Total stockholders' equity     59,574,157     58,632,632  
   
 
 
Total liabilities and stockholders' equity   $ 85,802,685   $ 88,187,053  
   
 
 

See accompanying notes.


GAIAM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 
  For the Three Months Ended
March 31,

 
 
  2002
  2001
 
Net revenue   $ 24,283,540   $ 17,671,513  
Cost of goods sold     10,014,628     6,847,590  
   
 
 
Gross profit     14,268,912     10,823,923  

Expenses:

 

 

 

 

 

 

 
  Selling and operating     10,591,253     8,538,352  
  Corporate, general and administration     2,126,492     1,550,206  
  Non-recurring restructuring charges     375,953      
   
 
 
Total expenses     13,093,698     10,088,558  
   
 
 

Income from operations

 

 

1,175,214

 

 

735,365

 

Other income (expense)

 

 

(86,522

)

 

184,615

 
Interest income/(expense)     55,965     (116,917 )
   
 
 
Total other income (expense)     (30,557 )   67,698  
   
 
 

Income before income taxes and minority Interest

 

 

1,144,657

 

 

803,063

 

Provision for income taxes

 

 

406,353

 

 

301,390

 
Minority interest in net income of consolidated subsidiary, net of tax     2,662     82,645  
   
 
 
Net income   $ 735,642   $ 419,028  
   
 
 

Net income per share:

 

 

 

 

 

 

 
  Basic   $ 0.05   $ 0.04  
  Diluted   $ 0.05   $ 0.04  

Shares used in computing net income per share:

 

 

 

 

 

 

 
  Basic     14,005,480     11,205,844  
  Diluted     14,532,351     11,563,172  

See accompanying notes.


GAIAM, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

 
  For the Three Months
Ended March 31,

 
 
  2002
  2001
 
Operating activities              
Net income   $ 735,642   $ 419,028  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:              
  Depreciation     447,594     846,832  
  Amortization     86,298     148,738  
  Stock compensation     18,000     17,625  
  Minority interest in consolidated subsidiary     2,662     82,645  
 
Changes in operating assets and liabilities, net of effects from acquisitions:

 

 

 

 

 

 

 
    Accounts receivable     (2,924,621 )   311,406  
    Inventory     938,222     (1,601,314 )
    Deferred advertising costs     211,742     146,269  
    Capitalized production costs     (545,723 )   22,303  
    Other current assets     (602,040 )   (338,722 )
    Other assets     (53,896 )   (31,153 )
    Accounts payable     (1,765,387 )   1,999,746  
    Accrued liabilities     (142,680 )   (661,410 )
    Income taxes payable     (1,291,028 )   (188,610 )
   
 
 
Net cash provided by (used) in operating activities     (4,885,215 )   1,173,383  
   
 
 

Investing activities

 

 

 

 

 

 

 
Purchase of property and equipment     (430,513 )   (467,656 )
Payments for acquisitions, net of cash acquired         (3,400,663 )
   
 
 
Net cash used in investing activities     (430,513 )   (3,868,319 )
   
 
 

Financing activities

 

 

 

 

 

 

 
Principal payments on capital leases     (50,490 )   (28,819 )
Proceeds from issuance of common stock     108,913     19,109  
Net proceeds from borrowings         500,000  
   
 
 
Net cash provided by financing activities     58,423     490,290  
   
 
 

Net change in cash and cash equivalents

 

 

(5,257,305

)

 

(2,204,646

)
Cash and cash equivalents at beginning of period     22,243,647     8,578,668  
   
 
 
Cash and cash equivalents at end of period   $ 16,986,342   $ 6,374,022  
   
 
 

Supplemental cash flow information

 

 

 

 

 

 

 
Interest paid   $ 12,829   $ 98,592  
Income taxes paid     2,367,469     490,000  

See accompanying notes.


Gaiam, Inc.

Notes to Quarterly Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2002

1.
Quarterly Condensed Consolidated Financial Statements
2.
Stockholders' Equity
3.
Earnings per Share


Gaiam, Inc.

Notes to Interim Condensed Consolidated Financial Statements

(Unaudited)

March 31, 2002

 
  Three Months Ended
March 31,

 
  2002
  2001
Net income   $ 735,642   $ 419,028
   
 

Denominator:

 

 

 

 

 

 
  Weighted average shares for basic earnings per share     14,005,480     11,205,844

Effect of Dilutive Securities:

 

 

 

 

 

 
  Weighted average of common stock, stock options and warrants     526,871     357,328
   
 

Denominator for diluted earnings per share

 

 

14,532,351

 

 

11,563,172
   
 

Net income per share — basic

 

$

0.05

 

$

0.04
Net income per share — diluted   $ 0.05   $ 0.04
4.
Segment Information
 
  For the Three Months Ended March 31,
 
  2002
  2001
Net revenue:            
  Direct to consumer   $ 11,382,935   $ 10,536,386
  Business to business     12,900,605     7,135,127
   
 
    Consolidated net revenue     24,283,540     17,671,513
Contribution margin:            
  Direct to consumer     126,703     97,736
  Business to business     1,424,464     637,629
  Non-recurring restructuring charge *     375,953     0
   
 
    Consolidated contribution margin     1,175,214     735,365
Reconciliation of contribution margin to net income:            
  Other income (expense)     (30,557 )   67,698
  Income tax expense     406,353     301,390
  Minority interest in net income of consolidated            
    Subsidiary, net of tax     2,662     82,645
   
 

Net income

 

$

735,642

 

$

419,028
   
 
*
Accrued one- time charge for severance and relocation costs associated with the planned consolidation of our finance and creative staff from California into our Colorado headquarters.

5.
Restructuring Charge


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion and analysis of Gaiam's financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements included elsewhere in this document.

Three months ended March 31, 2002 compared to three months ended March 31, 2001

        Revenues increased 37.4% to $24.3 million for the three months ended March 31, 2002 from $17.6 million during the three months ended March 31, 2000. Gaiam's internal growth rate was 45%, fueled primarily by the growth in sales in the business-to-business channel and from proprietary products.

        Gross profit, which consists of revenues less cost of sales (primarily merchandise acquisition costs and in-bound freight) increased 31.8% to $14.3 million for the first quarter of 2002 from $10.8 million during the same period in 2001. As a percentage of revenue, gross profit declined to 58.8% in 2002 from 61.3% in 2001. This was primarily attributable to increased sales contribution from the business-to-business channel, which carries lower gross margin but higher operating margin. Gaiam continues to pursue growth of its proprietary product offerings and increase focus on media products, on which Gaiam has better margins.

        Selling and operating expenses, which consist primarily of sales and marketing costs, commission and fulfillment expenses, increased 24%, which is less than the revenue increase of 37%, to $10.6 million for the three months ended March 31, 2002 from $8.5 million for the same period in 2001. As a percentage of revenues, selling and operating expenses decreased to 43.6% in 2002 from 48.3% in 2001 primarily due to the increased percentage of sales from our business-to-business segment.

        Corporate, general and administrative expenses increased to $2.1 million during the first quarter of 2002, from $1.6 million during 2001, primarily due to higher revenues. As a percentage of revenues, general and administrative expenses were 8.8% for the comparable periods in both 2002 and 2001.

        A non-recurring one-time charge of $375,953 was taken in the first quarter of 2002. The charge is for severance and relocation costs associated with the planned consolidation of our finance and creative staff from California into our Colorado headquarters. The consolidation is planned over the next two quarters and is expected to improve productivity and lower our operating costs by the end of the year.

        Operating income, as a result of the factors described above, increased 59.8% to $1,175,214 for the three months ended March 31, 2002, from $735,635 for the comparable period in 2001. Excluding the accrued one-time charge (described above) operating income increased 110.9% to $1,551,167 or 6.4% of sales in 2002 compared to $735,635 or 4.2% of sales in 2001.

        Gaiam recorded $30,557 in other expense for the three months ended March 31, 2002 compared to other income of $67,698 for the three month ended March 31, 2001. Minority interest was $2,662 during the first quarter of 2002, compared to $82,645 during the first quarter of 2001.

        Income tax provision increased to $406,353 for the three months ended March 31, 2002 from $301,390 for the comparable period in 2001 primarily due to increased profits. The effective tax rate on pre-tax income for 2002 declined to 35.5% from 37.5% in 2001.

        Net income, as a result of the factors described above, increased 75.6% to $735,642 for the three months ended March 31, 2002, from $419,028 for the three months ended March 31, 2001.

Liquidity and Capital Resources

        Gaiam's capital needs arise from working capital required to fund our operations, capital expenditures related to expansions and improvements to Gaiam's infrastructure, development of e-commerce, and funds required in connection with the acquisitions of new businesses and Gaiam's anticipated future growth. These capital requirements depend on numerous factors, including the rate of market acceptance of Gaiam's product offerings, the ability to expand Gaiam's customer base, the cost of ongoing upgrades to Gaiam's product offerings, the level of expenditures for sales and marketing, the level of investment in distribution and other factors. The timing and amount of these capital requirements cannot accurately be predicted. Additionally, Gaiam will continue to evaluate possible investments in businesses, products and technologies, and plans to expand sales and marketing programs and conduct more aggressive brand promotions.

        Gaiam's operating activities used net cash of $4.9 million and provided net cash of $1.2 million for the three months ended March 31, 2002 and 2001, respectively. Gaiam's net cash used by operating activities for 2002 arose primarily from the decrease in Accounts Payable as we took advantage of early payment terms with our vendors, an increase in accounts receivable associated with the growth in our business-to-business segment and the payment of Income Taxes for last year. Gaiam's net cash provided by operating activities for 2001 arose primarily from an increase in cash generated from net income and depreciation and amortization.

        Gaiam's investing and acquisition activities used cash of $430,513 and $3,868,319 for the three months ended March 31, 2002 and 2001, respectively. During the first quarter of 2001, Gaiam completed its merger with Real Goods Trading Corporation, and also acquired all of the stock and net assets of Earthlings, Inc. and Self Care, Inc. for a total combined purchase price for both companies of $3.8 million

        During the three months ended March 31, 2002, Gaiam's financing activities provided $58,423 in cash. During the three months ended March 31, 2001, Gaiam's financing activities provided $490,290 in cash, as borrowing under Gaiam's line of credit agreement increased $500,000.

        We believe our available cash, cash expected to be generated from operations, and borrowing capabilities of $15 million (unused line of credit) will 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, unforeseen operational difficulties or other factors.

        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 the LOHAS (Lifestyles of Health and Sustainability) market. In the event of any future investment, acquisition or joint venture opportunities, we may consider using then-available liquidity, issuing equity securities or incurring additional indebtedness.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

        We do not believe that any of our financial instruments have significant risk associated with market sensitivity. We are not exposed to financial market risks from changes in foreign exchange rates and are only minimally impacted by changes in interest rates. In the future, we may enter into transactions denominated in non-U.S. currencies, which could increase our exposure to these market risks. We have not used, and currently do not contemplate using, any derivative financial instruments.


PART II. OTHER INFORMATION


Item 1.    Legal Proceedings

        Gaiam is not party to any material legal proceedings.


Item 2.    Changes in Securities and Use of Proceeds

        None.


Item 3.    Defaults Upon Senior Securities

        None.


Item 4.    Submission of Matters to a Vote of Security Holders.

        None.


Item 5.    Other Information.

        None.


Item 6.    Exhibits and Reports on Form 8-K.

        None.


Signatures

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


 

 

Gaiam, Inc.
(Registrant)
May 10, 2002

 

 

By:

/s/ Jirka Rysavy

Jirka Rysavy
Chief Executive Officer

 

 

 

/s/ Yudhister Bahl

Yudhister Bahl
Chief Financial Officer