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

Mark Argento - Lake Street capital markets Nick Meyers - Roth Capital Partners George Kelly - Craig-Hallum Capital.

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 reports 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 August 6, 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 August 20, 2015, starting at 7:30 p.m. Eastern Time tonight. With that, I would like to now turn the call over to Gaiam's Chairman, Jirka Rysavy. Please go ahead..

Thank you John, and good afternoon everyone. So, revenue for the second quarter ending June 30 increased 27% to $41.1 million, compared to the last year. All growth was organic.

Operating expenses decreased to 44.2% from 57.4%, driving and $32 million improvement in income from operation and moving it for the first time in 13 years to a positive territory during our seasonally slowest quarter.

Cash flow from operation for the first six months improved about $10.4 million, added at June we have $18.4 million cash on our balance sheet. Revenue from our brand segment increased 26% to $37.9 million and excluding planned decline in catalogue sales revenue from Gaiam branding business was up 35%.

The stock level at our largest customer is largely resolved at the end of the quarter, and we are still enjoying very nice continuing momentum of our apparel launch. We are also expanding our wellness into the new doors and most recently to vitamin chart.

Gaiam TV unit reached a breakeven point before end of the quarter as planned; and we do expect a third line - income line to be in black. Our Gaiam TV to be profitable at the current revenue level it can grow only at about 30% to 35% rate. So any profit over the modest positive number will be utilized for faster growth.

Actual revenue growth rate in second quarter was 36% to $3.3 million. The breakeven point was achieved at about $14.5 million revenue run rate as predicted on our end of year call. On May 29, we filed the amended Form 10 registration statement with SEC in connection with our previously announced separation of Gaiam TV into a separate public company.

To propose spin-off is currently planned to acquire sort of free tax dividend, a tax-free dividend to our shareholders on October 31.

If this spin-off is currently planned, we envision when the unit becomes an independent company to retain Gaiam TV revenue growth back to the last year's 85% range, which will cause the bottom line to go temporarily back to red. And now I would like to turn the call over to Steve to give you some additional color on financials..

Thanks Jirka and good afternoon everyone. In light of the anticipated spin-off of Gaiam TV and the changes in our business over the past 24 months, we changed 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 that are distributed through our retail partners, websites, and catalogues and our eco travel service. The Gaiam TV segment includes our global, digital video subscription service. All figures discussed today reflect our continuing operations from these business segments.

Beginning with the income statement net revenue for the second quarter increased 27% to $41.1 million, compared to $32.5 million in the same year ago quarter. Net revenue from the Gaiam brand segment increased 26% to $37.9 million from $30 million last year.

Net revenue for the Gaiam TV segment increased 36% to $3.3 million, compared to $2.4 million in the same year ago quarter. As expected, our strategic pivot in our direct-to-consumer business away from catalogue advertising and third party products in 2015 impacted Q2 revenues by approximately $1.4 million, compared to the same quarter last year.

We also expected a large revenue contribution in the quarter from our non-wholly-owned subsidiaries, including our travel business. We anticipate that our travel unit will recognize approximately $1.5 million of revenue in the third quarter that we expected in Q2.

Gross profit in the second quarter improved 18% to $18.2 million or 44.2% of net revenue compared to $15.5 million or 47.7% of net revenue in Q2 of 2014. The gross profit improvement was driven by the increase in revenues. The margin percentage compared to last year decline due to apparel having lower gross margins than our legacy brand business.

However, apparel has no out bound freight or fulfillment costs and no inventory risk. Operating expenses in the second quarter of 2013 declined 2% to $18.2 million, compared to $18.6 million in the year ago quarter. As a percentage of net revenue, operating expenses were 44.2% in the second quarter, compared to 57.4% in the year ago quarter.

The sharp reduction was due to the 27% increase in revenue and reduced advertising and catalogue expenditures as we streamline spending for our direct-to-consumer channel, partially offset by new headcount and expenditures for our apparel product line, and increased marketing expenses for Gaiam TV.

Operating expense in the second quarter also included approximately $350,000 in unplanned expenditures related to the spin-off of Gaiam TV and severance related to the departure of a former executive. Total segment contribution margin was $1 million in the second quarter compared to a loss of $1.6 million in the year ago quarter.

Gaiam brand segment contribution margin was $2.1 million, compared to contribution of $0.4 million in the year ago quarter. This $1.7 million improvement in contribution margin from the $7.8 million of segment revenue growth shows the leverage we are able to achieve from our Gaiam brand operating model.

Gaiam TV segment contribution and margin improved 44% to a loss of $1.1 million, compared to a loss of $1.9 million a year ago. After subtracting unallocated corporate expenses, income from continuing operations was breakeven in the second quarter at $23,000 compared to a loss of $3.2 million in the second quarter of 2014.

Before moving to our balance sheet, please note that the loss from discontinued operations in our P&L, includes approximately $1.1 million in costs related to our ongoing litigation with Cinedigm. We ended the quarter with total cash of $18.4 million and no debt. Our current ratio at June of 2015 was 1.9.

This metric continues to reflect the health of our balance sheet and our ability to fund our growth. Inventory turns ticked up to an annualized rate of five times the quarter compared to 3.6 times in Q2 of last year. 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 open the call up for questions.

Lynn?.

Thank you, Steve. As we have said publicly, Gaiam’s mission is to be the preeminent brand and consumer partner that makes yoga, fitness, and wellness accessible to everyone. Our management team is very focused and committed to executing this vision and we continue to make great strides, which I will explain momentarily.

But first I would like to give a little color on the quarter’s results. Our second quarter was driven by the successful April launch of our exclusive Kohl’s apparel line, which continues to exceed our expectations.

Having said this, even if you exclude this new revenue stream as well as sales from our largest customer, consolidated net revenue from our next Top 25 customers increased 30%, demonstrating the strength of our brand beyond just apparel.

As Steve mentioned, sales in the second quarter were partially offset by a shift in travel revenues to the third quarter, as well as economic and foreign currency challenges in our Australian business. Without the headwinds from our non wholly-owned subsidiaries our Gaiam branded business was up 37% in the quarter.

Obviously, we’re very pleased with our revenue growth. Included in the 37% growth is the negative revenue impact of our strategic decision to pivot our historically catalogue driven direct-to-consumer business to a digital centric consumer engagement strategy for the Gaiam brand.

We decreased the circulation of catalogues, which reduced revenues by over a $1 million in the second quarter.

We expect to continue to decrease catalogue spending throughout 2015 and as I stated previously, we expect an annual decline in direct-to-consumer revenues in 2015 of $5 million to $ 6 million, but that strategic change in revenue decline will result in an annual improvement in operating income of approximately $3 million.

We expect that the revenue impact from this decision will continue at the same rate in the second half of 2015 with continued improvement in the bottom line. In the coming weeks, we are outsourcing our fulfill systems and functions for our direct-to-consumer business as we convert our online business to a variable cost model.

We will also be unveiling a redesigned Gaiam branded website prior to the holiday season that will provide a state-of-the-art fully responsive flagship brand experience for our customers. We successfully re-launched spri.com in this manner in Q4 of 2014 and we’ve been thrilled with the results.

SPRI’s direct-to-consumer revenues this year eclipse 2014 total year revenues by the end of July. Our second quarter revenues were also adversely affected by our largest customers out of stocks and merchandising initiative that I am excited to report that we work together to resolve the problem by the end of second quarter.

All of our top items are now back and stock with replenishment results, with the exception of a couple of direct import items. We expect to maintain our in-stock position in the second half of this year and to experience positive comps.

In addition, this customer plans to more than double the square footage allocated to yoga products in 2016 across all of their doors and we are proud to say they have chosen to expand their partnership with Gaiam for this incremental shelf space where we are developing a good, better, and best product strategy with them for yoga.

I now like to provide an update on our key growth initiatives for 2014 and beyond. Our first and largest initiative is building our yoga apparel business. As discussed previously, we had quantitative studies that show Gaiam as the number one recognized brand by consumers for yoga equipment in the United States.

That same study showed very high consumer purchase intend for Gaiam yoga apparel. Based on this analysis, we embarked on building an apparel line during 2014 April 2013 of this year marked the launch of our new yoga apparel line with Kohl's. The Gaiam apparel line now available in all 1,100 plus stores has exceeded our expectations.

In fact, our basic black OM pant was such a success that it sold out after only three weeks on the floor. Kohl’s continues to do an exceptional job merchandising our products via stores and store displays and the provided great aisle placement for our products setting us up next to Nike on the floor.

We are now working with Kohl’s on an expanded apparel offering for 2016 that includes plus sizes. Given this early success, we remain bullish on our apparel opportunity.

We continue to grow the assortment in order to release new apparel lines in 2016, and we’ve received interest from BigBox department supporting good stores, both domestically and abroad. In fact, couple of our current international retailers have expressed keen interest in the current line.

We look forward to announcing our next partner when appropriate. Our second major growth initiative focuses on the wellness product category. Currently, we service this category through our Gaiam Restore and SPRI Dynamic Recovery and active therapy lines. Together these brands offer wellness solutions to consumers that address a variety of needs.

We’ve applied our product development and merchandising capabilities to the category and now offer full four foot store within store set for both of our wellness brands, something which most of our competitors cannot duplicate.

Based on our success in this category, we are now positioning our wellness products for two distinct markets, performance and condition specific. Our current performance line is marketed towards individuals looking to improve flexibility and overall muscular help, which includes preventative and post active therapy.

Based on retailer feedback we will be testing a new Gaiam sub brand that addresses condition specific wellness areas such as back pain and stress release. This focus accommodates the needs of new accounts such as the chain drug and grocery channel.

We expect to add 500 to 1,000 new doors with the wellness store within store in the back half of 2015, including the vitamin chart. We believe that our expanded wellness line has the opportunity to be one of our top categories in the future as more and more retailers want to become wellness destinations for their customers.

Our third growth initiative is expanding our demographic appeal. According to Yoga Journal there are nearly 80 million people that are interested in Yoga, but are not yet practicing.

To attract them we continue to add new product categories, including our yoga for athlete’s line of accessories that include longer and denser mats and athletic video programming and instruction. These mats and blocks are currently doing very well at retail and we believe that the category will continue to gain momentum.

We are also preparing to launch a line of kid’s yoga media and accessories in the fall of 2015 using a similar targeted strategy for our youngest yoga practitioners. Target however did not want to wait, so they started a 350 stores test for the product line that began in the last week.

We expect to leverage our new men's and kid's yoga lines to open new retail channels, including specialty and children’s stores. Our fourth growth initiative is to grow our international business. Gaiam’s international business still represents less than 6% of our revenues.

We believe there is 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 US. Our strategy is focused on adding distribution in Europe and parts of Asia by utilizing a mix of direct relationships, distributors, and sales agents.

Currently in the UK, we're in John Lewis all whole foods locations and 320 doors with Tesco, and the back half of the year we are adding 300 plus additional doors with Tesco central Europe opening in Amazon, Germany, UK and France, as well as putting in a store within store at Olive and Young in South Korea.

We are optimistic that this presence will provide a springboard for increased distribution in the UK and Europe. Looking ahead, excluding the negative revenue impact of our reduced catalogue circulation, we expect the Gaiam brand segment revenues to grow over 20% in the back half of 2015 and to generate incremental margin in the 15% to 25% range.

The low end of that range results from additional investments that we may make to expand our apparel in the international businesses. This incremental margin began to materialize in the second quarter and we expect it to improve for the remainder of 2015, as our retailer inventory stock levels normalized and we continue to ship our apparel line.

In closing, it is important for us to connect and engage with our customers by creating a true destination for the yoga fitness and wellness consumer that will address all of their needs, 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 customers a unified branded assortment of yoga apparel 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 beyond.

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

Johnny?.

Thank you. [Operator Instructions] And we will go ahead and take our first question from Mark Argento with Lake Street capital markets, please go ahead sir..

My first question is in regards to the wellness product, obviously that looks like a big area of potential growth for you guys.

Could you maybe elaborate a little bit around what you are doing with vitamin shop and how extensive assortment of product you are going to have with them?.

With vitamin shop we’ve set up a small store within store mostly on our muscle therapy line and we expect though to move forward with more of the condition specific starting with probably fourth quarter this year, fourth quarter into first quarter and really going after that pharmacy business with back here, stress relief, pain relief and products like that.

They will be under a new sub brand too..

Great.

It is going to be one-year brands with a sub brand?.

It will a Gaiam sub brand. Like Gaiam restores today..

Got you.

And then shifting gears, when you talk about the branded business, I guess and you say the branded business and you talk about the growth rates, what isn’t branded at this point if you could remind me?.

No I am just talking about the segments. The branded business and then you have the Gaiam TV. .

Alright got you. Just want to make sure I wasn’t – that is understanding.

And then in terms of Target you said it is seems like the auto stocks have been fixed and they are cranking up the square footage, when would you like to see or when do you think you are going to start to see that square footage extend, is that going to be kind of a reset thing or are they starting to do that now?.

It will be reset in February 2016 and some of it will ship in fourth quarter for [indiscernible]..

Got you. Okay. Alright. Well great I think that does it for me, congrats on a solid quarter..

Thanks Mark..

And we will take our next question from Dave King with Roth Capital Partners, please go ahead sir..

Hello guys, this is Nick Meyers, Dave’s associate. I will be asking questions for him. .

Okay..

Hi Nick, how are you guys doing today?.

Thanks guys. Thanks for taking my questions. So the revenue is a little lighter than expected you talk about a little bit about how one of your customers had problems some problems, and also, I forgot, what was the other one... but anyways....

It is our travel business, travel business about $1.5 million move from second to third quarter. .

Okay, perfect because I was just expecting more because you had good sell through in Kohl’s and I was expecting also that swing in this quarter from the port issues last quarter, does that bear fruit this quarter?.

Yes, we got some of that but obviously whatever we missed in first quarter never comes back..

Of course, of course, and also moving on to gross margins, can you talk – they were also little bit lower than expected, can you break down maybe the margins between the brand segment and the Gaiam TV?.

The Gaiam TV margin is probably like 85% and so you can calculate a difference, but it is – you want to.....

What’s we’ve said on margins consistently is that our core business margins are in the mid-40s and that apparel would be in the mid-30s, but would not have fulfilment expenses nor inventory risk. And so I think when you average that you can see the - what the margin comes out at..

Okay, perfect.

And then just one last one, I know you broke even on the Gaiam TV, but how many subscribers are you guys had at the end of the quarter?.

We had about – the breakeven point was about 14 million which was about 123,000 subscribers, it will be probably right now somewhere in the range from 125 to 127..

Okay, perfect. I appreciate you take my questions. You guys have a good day..

Yeah..

And we will take our next question from George Kelly with Craig-Hallum Capital. [Operator Instructions] George please go ahead..

Hi guys, I have a few questions for you, first on Target, just want to make sure I heard you right, did you say that the square footage would be doubling and if that’s right, go ahead..

Just on yoga. Just of our forefoot yoga..

Okay got you. Just on yoga.

And then shifting over to the TV business Jirka you mentioned that when the spin happens you could look to accelerate growth again closer to 85%, where it was in 2014, what is that due to the model, what happens to the breakeven right then and if you could talk about sort of the changes that that would place sun on the model?.

There is still very little change except how aggressively you go in marketing, you know – the number what we can pay for new customers at current level profitability is the only question because you have a contribution margin about 85% in cash, so it is a function how fast you get customers upfront.

We can grow potentially even faster because we still probably acquire – during the last year we acquired customers about half of the life time value, now we are probably more or like 25% range of our life time value. And so there is definitely, the difference is basically how much marketing you do and how high you go with the acquisition.

So, that is the difference. There is very little difference on the other lines..

But, I mean if you are spending more on sales and marketing to choose the growth rate it will push out the breakeven date again.

So, I am just curious if you could sort of walk through what that would look like, what would be the impact on the fourth quarter margin if you decided to do that or 2016, do you care about profitability in 2016 or what’s the, I understand the tradeoff, just wondering what you are kind of – what’s your vision is for the period after the spin?.

The first I want to say that we will keep it this way when the company is are together. So, [indiscernible] talking, one is independent public company, which is separate from Gaiam. So that is the time what we are talking about. And break-even will change; it is changing every time you get a new customer.

So, you have more money to spend because expenses are pretty flat. So, it is changing depends when the breakeven point has been and how much we are willing to spend for customers. So it I a decision what we make as a new board as a new public company, for right now we plan to keep it above. We are planning to be profitable whole quarter..

Okay.

And then what was the investment in the quarter?.

I don’t understand..

The second quarter, what was, you said it was breakeven….

You are talking about with the loss?.

What was the loss in the first two months, if you [indiscernible] just for the whole quarter..

$1.1 million.

The whole quarter was a loss of 1.1 million on the contribution. We can have a separate within the quarter..

Okay, got you.

And then on Kohl’s it sounds like it is going great, exciting things, do you have – could you update the one-year kind of revenue target that you have put out, has that changed at all?.

No, we are still at that high end of what I said of $15 million to $20 million revenue run rate, so we’re really excited about it and we have placed three orders and so we are chasing that basic home [indiscernible] business right now, which is fun. .

That’s great. And then last question is about the legal expenses, where – what line does that hit? I missed that..

It hits down in discontinued ops..

Okay. Alright that’s it from me thanks..

Thanks George..

At this time this concludes our question-and-answer session I would now like to turn the conference back over to Mr. Rysavy for closing remarks..

We just want to thank everybody and hopefully we will see you next quarter. Thank you..

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