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.

 

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.

 

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.

 

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.

 

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.

 

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	)