GAIA, INC - Annual Report: 2013 (Form 10-K)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2013

or

For the transition period from              to             

Commission File Number 000-27517

GAIAM, INC.

(Exact name of registrant as specified in its charter)

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:

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.

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

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PART I

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:

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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.

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.

None.

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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:

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.

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.

Not applicable.

PART II

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:

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:

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

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.

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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:

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

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.