Jirka Rysavy - Founder and Chairman of the Board Stephen J. Thomas - Chief Financial Officer, Principal Accounting Officer and Vice President Lynn Powers - Chief Executive Officer and Director.

Mark Nicholas Argento - Lake Street Capital Markets, LLC, Research Division George Arthur Kelly - Craig-Hallum Capital Group LLC, Research Division David M. King - Roth Capital Partners, LLC, Research Division.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Gaiam's financial results for the first quarter ended March 31, 2015. Joining us today are Gaiam's Chairman, Jirka Rysavy; CEO, Lynn Powers; and CFO, Steve Thomas. Following some prepared remarks, we will open the call for your questions.

Before we get started, however, I would like to take a minute to read the safe harbor language. The following constitutes the safe harbor statement of the Private Securities Litigation Reform Act of 1995.

Except for historic information contained herein, the matters discussed in this call today are forward-looking statements and involve risks and uncertainties including, but not limited to, general business conditions, integration of acquisitions, timely development of new business, impact of competition and other risk details from time to time as described in the SEC reports.

The risks and uncertainties associated with these forward-looking statements are described in today's announcement and in the company’s filings with the Securities and Exchange Commission, including the company's report on Form 10-K and Form 10-Q. Gaiam assumes no obligation to publicly update or revise any forward-looking statements.

Today's call, taking place on May 7, 2015, includes non-GAAP financial measures within the meanings of SEC Regulation G.

When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release as well as the company's website.

I would like to remind everyone that this call will be available for replay through May 21, 2015, starting at 8 p.m. Eastern Time tonight. With that, I would now like to turn the call over to Gaiam's Chairman, Jirka Rysavy. Please go ahead..

Thank you, and good afternoon, everyone. The revenue for our first quarter ending March 31 was flat with the last year at $37.6 million due to revenue swing to the second quarter as we announced in our last call. The issue was caused by well-publicized problems at U.S. ports. We estimate the revenue shift to be about $5 million.

Loss from operation was $2.9 million compared to $2.5 million a year ago due to increased expediting costs caused by the port delays and also our Gaiam TV launch on Comcast. We ended the quarter with cash of $16.9 million. Two weeks ago, we launched our new yoga apparel launch at Kohl's. The yoga apparel is now available in over 1,100 of its stores.

The launch exceeded our expectation as we already received the reorders. The stock level at our largest customers are improving and we expect the issue that was negatively impacting our growth for several quarters to be resolved by end of June.

During the first quarter, we launched category-first technology called Gaiam TV Unplugged, which enables subscribers to download and view any content offline. Also, in the first quarter, we launched Gaiam TV on Xbox International and especially on Comcast. And by the end of the quarter, we already had over 10,000 Comcast subscribers.

Late February, we filed Form 10 registration statement with SEC in connection with our previously announced separation of Gaiam TV into a separate public company. The proposed tax-free spinoff will occur through distribution of all Gaiam TV stock to Gaiam shareholders. We are still expecting to effect the separation on September 30.

Gaiam TV current annual revenue run rate is approximately $14 million, up from $12.4 million during the first quarter, where the $3.1 million reported was a 35% growth rate.

This growth rate -- the growth rate for first 3 quarters of this year is negatively impacted by the push to profitability that is still expected to be reached in June as discussed in our last call.

So with the port slowdown issue behind us, the stock level at our largest customer improving and the successful launch of our yoga apparel line in Kohl's as well as Gaiam TV expected swing to profitability in 6 weeks, we are looking for, I think, for very good rest of the year. And with that, I want to pass it to Steve for some financial details..

Thanks, Jirka, and good afternoon, everyone. In light of the anticipated spinoff of Gaiam TV and the changes in our business over the past 21 months, we updated our segment reporting in the fourth quarter of 2014. Our new segments are Gaiam Brand and Gaiam TV.

The Gaiam Brand segment includes all of our yoga, fitness and wellness products and media that is distributed through our retail partners, websites and catalogs. The Gaiam TV segment includes our global digital video subscription service, which operates under the name Gaiam TV.

All figures discussed today reflect our continuing operations from these business segments. Beginning with the income statement. Net revenue for the first quarter was comparable to the same year-ago quarter at $37.6 million. Gaiam Brand net revenue decreased 2% to $34.5 million compared to the same year-ago quarter.

Excluding the planned declined in catalog sales, Gaiam Brand net revenue in the first quarter of 2015 increased 4% to $32.3 million.

We're pleased with the Gaiam Brand revenue in the first quarter, especially after considering our plan to pivot away from catalog advertising in 2015, not renewing our Reebok license and some challenges related to stock issues at our -- or stock levels at our largest customer. Lynn will discuss these business changes in a little more detail shortly.

Gross profit in the first quarter improved to $17.2 million or 45.8% of net revenue compared to $17 million or 45.3% of net revenue in Q1 of 2014. The 50 basis point improvement was largely driven by margin expansion in the Gaiam Brand segment and the high-margin Gaiam TV business.

Operating expenses in the first quarter of 2015 were $20.1 million compared to $19.5 million in the year-ago quarter. As a percentage of net revenue, operating expenses were 53.4% in the first quarter compared to 51.8% in the year-ago quarter.

Decreased catalog operations expenses were offset by increased marketing expenses for Gaiam TV for the launch on Comcast and staffing to support the apparel launch. Contribution margin was a loss of $2.6 million in the first quarter of 2015 compared to a loss of $2.1 million in the year-ago quarter.

The Gaiam Brand contribution margin in the first quarter of 2015 was a loss of $0.3 million compared to income of $0.1 million in the year-ago quarter, driven by costs to launch apparel and expand our business.

Loss from continuing operations was $3.4 million or $0.14 per share compared to a loss of $2.1 million or $0.09 per share in the year-ago quarter. The loss in the first quarter of '15 included an unfavorable impact from foreign exchange of approximately $0.5 million. This is reflected within the interest and other expense income line on our P&L.

This arose out of the surprisingly strong U.S. dollar and its impact on our travel company, where many of their popular trips are to destinations in Canada.

Before moving to our balance sheet, please note that the loss from discontinued operations in our P&L includes $0.5 million in legal costs related to our ongoing litigation with Cinedigm over issues related to the sale of our non-branded home entertainment DVD distribution business in 2013.

We ended the quarter with a total cash of $16.9 million and no debt. Our current ratio at March 31, 2015, was 2.0. This metric continues to reflect the health of our balance sheet and our ability to fund our growth. Inventory turns ticked up slightly to an annualized rate of 4.1x in the quarter.

Overall, we are pleased with our performance in the first quarter. We're excited about our initiatives to launch new products that will help us grow our business and drive increased value to our shareholders.

And we remain confident that our business strategy, product offerings and financial position will result in future revenue growth and profitability. Equally important, we also have the financial flexibility to invest in our repositioned yoga fitness and wellness strategies.

With that, I would now like to turn the call over to Lynn, who will provide some additional detail on our business, after which we will be opening the call for questions.

Lynn?.

Thanks, Steve. Our vision for Gaiam is to be the driving force to make yoga, fitness and wellness accessible to everyone. We spent the last 18 months realigning our business around this vision. Today, we're happy to provide an update on the execution of this plan as we're making significant progress.

First, I'll give you a little color on the quarter's results and then review progress on our growth opportunities for 2015 and beyond. Our revenue in Q1 was in line with our expectations that we discussed on our last conference call.

Comp sales from our top 25 accounts, not including our largest customer, which continues to experience large out of stocks, were up 13% for the quarter, which shows the strength of the brand and our categories.

However, our revenues decreased by strategic moves that were critical to our renewed focus on our brand vision and overall operating income as well as several outside factors. Our first strategic decision was to pivot our catalog-driven, direct-to-consumer business to a digital-centric consumer engagement strategy for the Gaiam and SPRI brands.

We decreased the circulation of catalogs, which reduced revenues by approximately $2 million in the first quarter. We expect to continue to decrease catalog spending throughout 2015.

And as I have stated previously, we expect an annual decline in revenues of $5 million to $6 million, but an improvement in operating income of approximately $3 million for the year.

I'm also happy to announce that we sold through all the remaining third party in eco-living products inventory previously carried online during the first quarter and should experience nice increases in gross margin going forward. In addition, 2 factors outside of our control also impacted our first quarter results.

First, our revenues were affected by our largest customer that had elevated inventory levels in certain non-Gaiam product categories that impacted their open to buy available in our category. The result was that the customer suffered elevated out-of-stock positions on many of our SKUs, which obviously has an adverse impact on sales.

We're working proactively with that customer to correct the problem. Second, like many consumer products company, the West Coast port shutdown due to the longshoremen's labor conflict in the first quarter certainly impacted our results.

While the situation has been recently resolved, we estimate the strike shifted approximately $5 million of revenue from our first to second quarter and created higher costs to expedite goods. I'd now like to provide an update on our key growth strategies for 2015 and beyond. Our first and largest initiative is building out our yoga apparel business.

April 23 marked the launch of our new yoga apparel line with Kohl's. The Gaiam apparel line, now available in all of their 1,100-plus stores, has exceeded our expectations on all fronts. Kohl's sent us some recent PR results around the launch that were very gratifying.

To date, Kohl's has garnered more than 95 million earned media impressions with key placements on The Today Show, E! Entertainment Television and with other major publications. For those of you interested, E! Television did a piece on the Kohl's launch.

We believe this is one of our best segments yet as it incorporates highlights from the launch party in New York City, with specific callouts to key pieces in the collection. The segment can be viewed by visiting etonline.com/kohls.

Kohl's has also done an incredible job merchandising our products via store-within-store displays and great aisle placement next to Nike. The consumer reception has been equally strong as we've received nice reorders only 2 weeks into the launch.

Given this early success, we remain bullish on our apparel opportunity as we continue to grow the assortment in order to release new apparel lines in 2016. Our second focus is on the wellness product category. We entered this category years ago with our Balance Ball Chair.

In 2012, we launched the Gaiam Restore brand and have since followed up with our new SPRI Dynamic Recovery and active therapy lines, which launched in 2012 and 2013, respectively. Together, these brands offer wellness solutions to consumers for a variety of needs.

We've applied our product development and merchandising capabilities to the category and now offer full 4 foot stores and store sets of both of our wellness brands, something which many of our competitors cannot achieve.

We're also positioning our Gaiam Restore line to address more condition-specific wellness areas such as back pain and stress relief in order to accommodate the needs of new accounts in the drug and grocery channel. Third, expanding our demographic appeal.

We know from yoga journals that there are 24 million active yoga participants and another 80 million people that would like to try yoga if it were more accessible. Of that 80 million, 47% are men. To attract them, spring '15 marked the release of a slate of yoga accessories and media content aimed at improving athletic performance.

Our yoga for athletes media series features NBA All-Star Kevin Love and former NFL All-Pro running back and Heisman Trophy winner Eddie George. In May, we launched 2 more titles featuring the Miami Marlins' 2-time MLB All-Star Giancarlo Stanton and England Revolution and U.S. Men's National Team soccer player Jermaine Jones.

Our spring launch reflects our full multichannel capability, spanning retail to online. You saw advertising on major online media outlets including ESPN, USA Today, SLAMonline and STACK.com around March Madness.

We also launched a new website called GameOnYoga.com that will offer these products to athletes seeking new ways to achieve higher performance. In retail, we launched our athletic yoga line in a 60-store test at Dick's Sporting Goods in April. We're also testing at Sports Authority in the next 10 days with 82 doors.

Like our wellness line, we'll leverage our distribution network to place compelling, branded store-within-store sets in major retail outlets like these. We're also preparing to launch a line of kids yoga media and accessories in fall '15 using a similar targeted strategy, including a 350-store test at Target.

We expect to leverage our apparel and our new men's and kids yoga lines to open new retail channels put in department stores and children's stores. Our fourth area of focus for the year will be on growing our international business. Gaiam's international business still represents only 6% of our revenues.

We believe there's a huge opportunity to address the yoga fitness and wellness business abroad and to do so as successfully as we've addressed it here in the U S. Our strategy is focused on adding distribution in Europe and parts of Asia by utilizing a mix of direct relationships, distributors and sales agents. In the U.K.

we're in John Lewis, every Whole Foods location and in 320 doors with Tesco. We're optimistic that this presence will provide a springboard for increased distribution in the U.K. and Europe.

Looking ahead, excluding the negative impact of our reduced catalog circulation, we continue to expect the Gaiam Brand segment revenues to grow approximately 20% in 2015 and to generate incremental margin in the 15% to 25% range with the low end of that range resulting from additional investment we may make to expand our apparel and international businesses.

This incremental margin will materialize beginning in the second quarter of 2015 as our retailer inventory stock levels improve and we ship our apparel line. In closing, our vision and strategies are based on a careful analysis indicating that we address a large and growing athletic market.

This market is benefiting from significant tailwinds, including the at leisure trend and consumers generally embracing more active lifestyles. When it comes to yoga, Gaiam has the #1 unaided brand awareness in yoga equipment with an expanding presence in the large yoga apparel market.

Our brand promise is to bring yoga, fitness and wellness to all by creating new and innovative products and experiences for people across the globe. In return, we believe our innovative high-quality products have created a loyal customer base.

We're creating a true destination for the yoga consumer that will address all of their needs with easy-to-use apps, engaging subscription content, affordable yoga clothing and our broad selection of yoga fitness and wellness accessories.

In partnership with Gaiam, our retailers can offer their consumers a unified branded assortment of yoga apparels, accessories and engaging content that no other brand can offer. All of this gives us confidence that we'll be able to grow our business and drive strong top and bottom line growth for the rest of 2015 and into the future.

This concludes our prepared remarks. So I'd like to turn the call back to the operator for questions.

Operator?.

[Operator Instructions] We'll take the first question from Mark Argento with Lake Street Capital Markets..

Can you talk a little bit about kind of the sell-through patterns you're seeing with the Kohl's on the apparel launch, in particular maybe some -- is there a certain region that's doing better than others? Or maybe just give some of your -- maybe a little bit more granularity on how that's rolling out and anything you've learned from the launch..

Well, as I said, we -- it's exceeding our expectations as well as their expectations, and right now, we're chasing a variety of goods for reorder. I can't really comment on their regions but I do know that their cold weather regions seem to be performing extremely well.

But I think I'd rather have them answer on how it's performing on a store-by-store and region-by-region basis..

We can go to the next question. It comes from George Kelly with Craig-Hallum Capital Group..

I will just follow up on Mark's question then. Wondering if you could update the -- you mentioned in previous calls $15 million to $20 million expected from Kohl's.

Is that still the target for the year?.

Yes, although I'd err on the side of the higher of that range..

Okay, that's great.

And then, with Kohl's, what's the calendar? When are the heavy -- when do you expect most of the sell-in?.

I think from here on, it's -- right now, I'd say fairly equal by quarter with, of course, fourth quarter normally being your largest seasonal quarter. Some of that will shift, I believe, September and October..

Okay, okay. And then shifting to Gaiam TV. So breakeven in 6 weeks.

What's -- have you stepped up marketing a lot there? Or what's the kind of -- what's been the focus with marketing? And then second question, can you give any kind of metrics around what you're seeing with what the growth rate is right now and then subscribers and any of those kind of subscriber metrics that you've given before?.

It's -- the growth right now for -- starts to -- as we start marketing at kind of before -- beginning of December, so that's going to drive some of the growth but -- or at least beginning of the quarter. So the subscribers, I said in the last call, which was like beginning of March, you just cross about 100,000. We have at current level 115,000.

And from the revenue, I said the annual growth rate right now as of -- we speak, it's about $14 million. The first quarter was $12.4 million.

The first quarter was about 35% growth rate compared to previous first, which is kind of lower than we're probably going to see going again from the fourth quarter because kind of our growth is more like a -- was more like around 50-plus for sure.

And if we kind of watch a little more the cost per customers because the drive to profitability, we really want to hit the profitability set in by the end of June and have a profitable third quarter. And so that is the customers growing. Until we have enough customers, we have to really manage the cost to go through the profitability.

And so that's, I think, answered all your questions.

So are you -- have some more questions there?.

Yes, that's great. I have 1 or 2 more.

What do you see -- once you break through profitability, what is the incremental margin on the TV business?.

About -- the way how you run -- we run today, a little over 50% on the pretax line. So you can say that for roughly a -- 50% of the revenue drops to the pretax. It's actually right now and the current, as we manage the cost, is more like 60%.

But I think as we go faster, because we kind of manage a little bit, that growth rate of 35% is really kind of little clamped [ph] by trying to be profitable. So I think the margin will be more like 50% incrementally, even if the current spend is more like 60%..

Okay, okay. And then last question for me. Lynn, you mentioned a few tests with Dick's and Sports Authority. I've missed what that -- what those tests are.

Can you give more detail on that?.

Sure. That's the men's athletic line. So it's men's yoga athletic lines. It's got the larger mats, larger and more dense mats, and then all of the athletic programming..

Okay.

And so far it's -- how long has the test been going on? And how many stores?.

We are testing in 6 Dick's and it shipped in April, so I don't really have selling yet. Not even sure it's on the floor yet. And then we are shipping in the next 10 days to 82 stores at TSA, Sports Authority..

[Operator Instructions] We'll move next to Dave King with Roth Capital..

So I guess just one follow-up for me. In terms of the Kohl's apparel and how that's going, so it sounds like you said, Lynn, that that's toward the higher end of that prior guidance, the $15 million to $20 million.

Can you just talk about what might be driving that? Is that better sell-through in terms of what you -- versus what you guys previously expected? Or is that them maybe taking on more than you thought? And I guess the reason why I asked is I would have thought due to port issues, et cetera, that maybe there would have been a little bit more left on the table even than that.

So I would say that's pretty encouraging. So any color there would be helpful..

Yes. Well, great question. And I think the reason that we're seeing better sell-through than we had originally anticipated is because we have really perfected what we're calling the yoga fit. It fits very differently than many of the current athletic lines that are out there.

It's really a lot more -- the fabrics are softer, the fit's better and it's a lot more about to and fro, so that you can wear it not only to do yoga but also to throw on your top over your yoga outfit and run to the grocery store. So I think it's missing from most assortments, so it's unique. And the sell-through has exceeded all of our expectations.

So like I said, we have the great problem of chasing reorders, so it's a nice problem to have..

Right, right.

And then as you think about that business longer term beyond Kohl's, I guess, what's -- can you just remind us again of when that exclusive expires and then what the sort of planned longer-term rollout strategy is for apparel and general timing, et cetera?.

Sure, sure. That runs out in spring of '16 and we are already talking to additional retail accounts. I think people have gone in and seen the apparel in Kohl's and are extremely impressed by it. So we're fielding some calls right now and we'll be making decisions on that strategy over the next few weeks..

Great. And then just one more, if I may. In terms of the men's or -- excuse me, athletic line, obviously, it's a test that's encouraging there. But I guess I was -- any other reads that you have on how that's going? I think you have the -- some of the DVD stuff out in the marketplace.

Any initial reads that you can have from that? I guess, what's the general customer response been relative to your expectations?.

I think it's really early on all of that. Obviously, our best channel is always retail and so we should have results from the 60-store tests at Dick's, I'd say, within the next 30 days. I think the real key here is that we're expanding this whole demographic profile for yoga.

And you're seeing more and more in the headlines about how it is improving athletic performance and how many men really want to try yoga. So this can be their entry point and we think that will lead to a lot more opportunities..

And we'll take a follow-up from Mark Argento..

Just a few -- if this has been duplicated, I apologize.

But the $5 million in shift on the ports, is that kind of a carryover from what we saw coming out of Q4 into Q1? So is that -- should we think of that revenue as opportunity you're going to pick back up here in, hopefully, Q2, Q3?.

Yes, that's correct..

Great. And then the -- in terms of the spin of -- or the potential spinoff of the TV business. I know you've mentioned, I believe, Q3, Q4, depending upon the market. When you spin that, I think you've been talking about being a tax-free type spin.

What -- from a capitalization perspective, how much capital do you think that business needs when you spin it off to be able to ensure that it grows? And then, how do you think about funding it?.

The final decision is how much cash will be made before the spinoff by the board, so that was not really decided yet. However, you can get the current -- the cash split in filing, Gaiam TV did the filing, of Form 10, so you can get all the details there. But the final decision really won't happen as before the spin.

It's planned to be in September 30, as we said last time. So I think we would make the decision in September and depends where we are and depends -- there's a few other factors before we decide that, so we don't really yet made those decisions..

At this time, this concludes our question-and-answer session. I'd like -- now like to turn the conference back over to management for any additional or closing remarks..

Well, we just want to thank everybody for being with us, and our next call will be probably somewhere in early August. Thank you very much..

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation..