Jirka Rysavy - Founder and Chairman Lynn Powers - CEO Steve Thomas - VP, CFO and Principal Accounting Officer.

Chris Krueger - Lake Street Capital Markets.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Gaiam's Financial Results for the Fourth Quarter and Full Year ended December 31, 2015. Joining us today are Gaiam's Chairman, Jirka Rysavy; CEO, Lynn Powers; and CFO, Steve Thomas. Following the 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 the 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 March 15, 2016, includes non-GAAP financial measures within the meaning 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 March 29, 2016 starting at 8:00 PM 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, and good afternoon, everyone. Revenue increased 5% to $57.9 million for the quarter and 13% to $188 million for the year. Excluding the planned reduction in catalog sales revenue was up 10% for the quarter and 19% for the year. Revenue from Gaia increased 35% for the quarter and 36% for the year.

While a reduction in catalog sales hit our reported revenue by $7.6 million, it improved our operating income for $3.5 million. Income from operations for 2015 increased $9.3 million and cash flow from operations for the year improved $17.1 million. At December 31, cash was $13.8 million.

Note that we continue to expand our brand store-within-a-store program adding about a 1,000 new doors in fourth quarter including a launch of 600 doors in Bed, Bath & Beyond to reach 19,000 store-within-a-store at the end of the year.

Gaiam TV finalized its accelerated name change and rebranding to Gaia during the fourth quarter, instead of planned second quarter in 2016. The website changed to this new branding design and url to gaia.com. During the fourth quarter Gaia also finished implementing close captioning of these titles and launched its service on Amazon in early December.

We expect the Gaia subscriber growth rate to increase meaningfully in this coming year. Since the beginning of 2016 subscriber number increased at 90% annual rate to current 155,000 paying members. We believe this market has significant and growing tailwinds.

According to 2015 study completed by [Bespoke], streaming is far and away the preferred method for watching films, 48% of [indiscernible] prefer streaming more than double those prefer cable or satellite as well as DVD. 90% of Gaia content is available worldwide and 93% of content exclusive for streaming on Gaia.

Gaia is positioned as a complementary to the entertainment dependent large players like Netflix. It is approximately 60% our Netflix subscribers also use other services according to [Bespoke] study. The original content producing house now generates 80% of total use which is an excellent hedge against industrializing cost to license content.

The business model thrives and they have working capital. The service is prepaid so pictures received in two days and payable content in 30 to 60 days. Cash contribution margin for a customer is 90%.

We completed a regulatory filing for Form 10 for the spinoff and Gaia is in the final process of NASDAQ trading registration which is expected to be done by the end of this month, end of March.

Prior to consummating this proposed tax-free spinoff we are reviewing possible financing structure, enhancement alternatives for our business units including our travel subsidiary to help maximize shareholder value. We expect to complete this review also by end of March, as Gaia finalizes the NASDAQ trading arrangement.

We don't want to comment about the review. The final SEC filing of Form 10 for the spinoff was done about three weeks ago. Overall the revenue growth of 19% for the Gaiam Brand and 36% of Gaia together is $9.3 million increase in operating income and $17.1 million improvement in our operating cash flow, I think they are good basis for 2016.

Now Steve will give you some additional color on financing. Steve..

Thanks, Jirka, and good afternoon everyone. A quick reminder we updated our segment reporting in the fourth quarter of 2014. Our reported segments are Gaiam Brand and Gaia formerly Gaia TV.

The Gaiam Brand segment includes all of our yoga, fitness and wellness products including media that are distributed through our retail partners and websites plus our eco travel service. The Gaia segment includes our global, digital video subscription service. All figures discussed today reflect our continuing operations from these business units.

Beginning with the income statement, net revenue for the fourth quarter increased 5% from $55.4 million to $57.9 million. Net revenue for the year increased 13% to $188 million compared to $166.7 million in 2014. Gaiam Brand's net revenue for the year increased 11% to $174.6 million driven by the continued success of our apparel line with Kohl's.

These revenues were partially offset by our successful transition away from catalog advertising in 2015 which impacted revenues by approximately $7.6 million for the year. Excluding these sales Gaiam Brand net revenue increased 18% in 2015. We also made the strategic decision to phase out third party products that we were selling to a top customer.

The decision impacted the fourth quarter by $1.1 million and the total $1.8 million for the year. The year and fourth quarter were also impacted by a top five customer that recently filed under Chapter 11.

Their problems leading up to this event were evident in our fourth quarter as year-over-year sales with this customer were down nearly 40% or $800,000 as orders were trimmed in advance of the filing. Gaia net revenue increased 36% from $9.9 million in 2014 to $15.5 million in 2015.

Gross profit in the fourth quarter increased 10% to $27.5 million compared to $25 million in the year ago quarter. As a percent of net revenue gross profit increased 230 basis points to 47.4% compared to 45.1% in the year ago quarter due primarily to a lower amount of promotional sales.

Gross profit in 2015 improved 12% or $9.3 million to $84.8 million or 45.1% of net revenue compared to $75.5 million or 45.3% of net revenue in 2014. The gross profit improvement was due to the success of the Gaiam branded apparel launch.

The apparel business carries lower gross margin than our legacy brand business, however has no outbound freight or fulfillment costs nor inventory risk. Offsetting and keeping our overall gross margin neutral is the continued growth of the high margin Gaia business.

Operating expenses in the fourth quarter increased 5% to $23.7 million compared to $22.5 million in the year ago quarter.

Operating expenses included a nonrecurring $550,000 or $0.02 per share charge related to the recent bankruptcy filing by the one of the company's customers as well as one-time costs associated with the separation of the Gaiam Brand and Gaia business units. Operating expenses in 2015 were flat at $80.6 million.

As a percent of net revenue operating expenses decreased to 42.9% in 2015 compared to 48.4% in 2014, reflecting the growth of the business segment revenues and the expected improvement from transitioning away from printing and mailing catalogs. Total segment contribution margin was $8 million in 2015 compared to a loss of $2.3 million last year.

Gaiam Brand segment contribution margin for 2015 more than doubled to $13.1 million compared to $6.4 million last year, again demonstrating the leverage we achieved through execution of our business and growth strategies.

Gaia segment contribution margin improved over 40% from a loss of $8.7 million in the prior-year to a loss of $5.1 million in 2015. After subtracting unallocated corporate expenses, income from operations increased $9.3 million to $4.2 million compared to a loss of $5.1 million last year.

We also recognize losses on foreign currency of $1.4 million in 2015 compared to $600,000 in 2014. The losses in 2015 were incurred primarily in our eco travel business. Before moving to our balance sheet, please note that effective December 31, 2015 we entered into the final settlement associated with the Cinedigm legal proceedings.

As you may recall from our discussion last quarter, we accrued for this final arbitration and no additional charges were recorded in connection with the settlement.

We entered into these settlements to eliminate the uncertainty and risk inherent in any litigation, to significantly reduce the professional fees and cost of the litigation would require as well as the distraction imposed by the process on management. We're happy to put this issue behind us.

We ended the quarter with total cash of $13.8 million and no debt. Our current ratio at December 31, 2015 was 1.8. This metric continues to reflect the health of our balance sheet and our ability to fund our growth.

Inventory turns picked up at an annualized rate of 7.3 times in the quarter compared to 5.9 times in the fourth quarter of last year due to inventory reductions from plan changes in the director to consumer catalog business, increased revenues and our programs to direct ship inventory from our factories to our customers.

The direct import programs helped us to improve our working capital, utilize our working capital more efficiently and lower our operating costs. In 2015 cash flows from operating activities improved by $17.1 million as a result of the improvement in operating results and working capital utilization.

We had $79.6 million of federal and $37.8 million of state NOLs at the end of the year that are not reflected on our balance sheet. Capital expenditures were $9.3 million, depreciation and amortization was $5.2 million and stock compensation expenses at $895,000 for the 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 be opening the call up for questions.

Lynn?.

Thanks, Steve. We continue to execute our vision to make yoga, fitness and wellness accessible to everyone. Now I'd like to give you some color on the quarter and the 2015 sales results. Our top line performance for the quarter includes double-digit comp sales growth at our top 25 customers excluding our largest account.

Excluding the planned catalog declines, Gaiam Brand sales grew by 9% in the fourth quarter. Additionally we added Bed, Bath & Beyond as a key retail partner in the quarter and early results have been strong. This brings our total store-within-a-store presence to 19,000 doors, a 12% increase over this time last year.

For the year we improved cash flow by over $17 million and Gaiam Brand revenues grew 18% excluding the planned $7.6 million decrease in catalog sales. Gaiam Brand contribution margin improved 106% from 2014 to 2015, showing the success of the business model. We are proud of our 2015 results, which includes several wins on our key initiatives.

Number one, our largest customer will be doubling the square footage allocated to yoga products in 2016 across the majority of their doors and we are proud to say they have chosen to expand their partnership with Gaiam with this incremental shelf space.

We have developed an exclusive good-better-best product strategy for them that launched in late February. Second, we improved profitability in the direct consumer business by $3.5 million. At the same time we invested in the business by redesigning our SPRI and Gaiam websites to be mobile first and deliver an exceptional brand experience.

Now that those major transitions are complete we are focusing on growing consumer engagement through storytelling as well as social and mobile marketing.

With the acquisition of Yoga Studio the leading paid yoga app for Apple, mobile, and tablet devices which now have over 1 million downloads, we continue to increase our reach and engagement of the mobile centric yogi. We launched our new meditation app late in the fourth quarter to great success, named one of the best new apps for 2016.

The app offers original guided meditations led by the country's top experts. Third, we continued our endeavor to expand the demographics of yoga by including a men's and kids' lines of yoga products.

These lines are being picked up by a variety of retailers including Target putting kids' yoga in most of their stores and Amazon selling out many of the kids' products over the holidays exceeding our expectations. Last but not least, launching our yoga apparel lines at Kohl's.

Revenue continues to do well and our strategy to expand the line including plus sizes continues to progress nicely. Now I would like to provide an update on our key growth initiatives for 2016.

We have four major growth initiatives for the year including expanding our yoga apparel line to new distribution channels, adding new product lines including a condition specific wellbeing line for grocery and pharmacy and a relaxation line for more spa related distribution, growing our international footprint and continuing to build our online and digital presence.

As you know, from our earlier discussions, our first and largest initiative is building our yoga apparel business. We have pre-lined our new [vest] apparel line, geared for more online, department stores and sporting goods customers called Gaiam Pro. We are getting great response to the line and expect to begin shipping in late 2016.

This line focuses on more advanced designs and materials for the Gaiam customer who wants even more from her yoga apparel. We are in discussions with several retail partners to further expand our presence in 2016.

We are currently testing hardgoods with Macy's in 30 doors and will roll out a full store-within-a-store including apparel in a 100 doors later this year. Our second major growth initiative, product innovation and new product lines focuses on the wellness product category.

We already market this category in our current distribution channels through our Gaiam Restore and SPRI Dynamic Recovery and active therapy lines, which services the needs of the active consumer looking to improve flexibility and overall physical health.

We recently designed to merchandize the 4-foot store-within-a-store display of condition specific wellness products for such areas as back, foot and neck pain under our new wellbeing brand. This new sub brand leverages the brand equity of the Gaiam Brand and it accommodates the needs of new accounts such as pharmacy and grocery channels.

We are in discussions currently with Walgreens and Rite Aid on this new brand. We believe this expanded wellness lines have 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.

We are also researching more products to add to our active sitting wellness initiative. Our Balance Ball Chair has always been one of our top selling products online and has just recently been placed in-store with great results. We just picked up a project to develop new designs and a good-better-best strategy for active sitting.

We expect that we can increase sales over 50% in 2016 from this category. Additionally we added a line of Gaiam relaxed accessories for Fall '16 that will focus on sleep, stress relief and meditation. We believe this new spa inspired line of products will be an added attraction as we expand our stores and store concepts at our current retail partners.

Our third growth initiative is to grow our international business, as it currently represents less than 5% of our revenues. We believe that there is a huge opportunity to address the yoga fitness and wellness business abroad and to do so as successfully as we have addressed it here in the U.S.

Through our licensing partner in Canada we've expanded from 25 to 85 SKUs at over 400 Canadian Tire locations and leveraging the success in the U.S. we are opening 45 Bed, Bath & Beyond doors. In Europe we shared our Gaiam and SPRI product lines at the ISPO Trade Show to great response.

We are in discussions with Kaufhof the largest department store in Germany and expect to continue our success at John Lewis and Tesco. Lastly in Asia we are testing concepts in 10 Olive Young locations throughout Korea. It's still early but initial results have been very positive and we expect to expand to 200 to 300 locations by the end of the year.

As more and more sales move online, our fourth initiative is to continue to engage directly with our consumers and create a world-class, omnichannel digital presence.

To this end we reorganized internally to create a dedicated consumer engagement team that focuses on all of our digital consumer touch points, [honing] our digital brand experience as well as leading our app and social content strategy.

We also creating an omnichannel digital marketing and merchandizing team which focuses on optimizing the marketing and merchandizing experiences not only on our owned website but at our partners digital properties as well.

We believe our account relationship, digital production capabilities and digital platforms like apps gives us a unique competitive position in the yoga fitness and wellness market. Now moving to our outlook for 2016.

With the current retail environment we expect Gaiam Brand's segment revenues to grow in the low double-digits and to create incremental contribution margin in the 20% to 35% range. The low end of that range results from additional investments that we may make to expand our apparel and further develop our international business.

The improved contribution margin again demonstrates the power of the operating leverage that we have as we continue to grow our business.

In closing its important for us to connect and engage with our customers by creating a true destination for yoga, fitness and wellness consumer that will address all of their needs, easy-to-use apps, engaging subscription content, affordable yoga clothing and a 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 will be able to grow our business, drive solid top and bottom line growth and achieve our 2016 expectations.

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

Operator?.

Thank you. [Operator Instructions]. We'll go to Chris Krueger with Lake Street Capital Markets first..

I know you guys said that you had a 1,000 new doors in the fourth quarter including 600 at Bed Bath & Beyond. You are trying to do roughly 2,000 for the full year.

Can you tell us what the other chains were, is it primarily Kohl's or what are some of the larger drivers of that?.

Yes. So it's primarily Kohl's..

And going forward into 2016 do you have kind of a pipeline for expectations of continued new chains to enter?.

Correct. We really believe that the new wellbeing line which will -- belongs really in pharmacy and groceries has huge opportunity to grow to be probably one of our larger contributors to new store-within-a-store growth..

At Walgreens have you been testing out a certain number of stores recently or how many doors are you in there?.

We are working with them right now on a test of approximately 30 doors and Rite Aid for considerably more than that. We are adding 100 doors in Macy's for store-within-a-store which launches in late 2016..

And now that we are -- we have got two weeks to go in the first quarter, top line growth trends how do that compare to the fourth so far? Can you read into that?.

We really don’t want to comment on the first quarter yet, but I kind of said that TV that grew like 90% annualized growth rate, but I don’t think we even did grow in the first quarter too much right now..

Can you repeat the subscriber count for Gaia TV?.

It went from like 135,000 -- 136,000 to 155,000 which is right now..

155 okay.

And is that somewhere near the third quarter as far as breakeven for that business?.

No. If you breakeven you can grow like 20% to 30%. Anything over that did, it's investing into the new customers, because we don't capitalize the customer so all the hits from the market [subtract]. So it -- too much anything over like that 20% to 30% would take from the P&L..

All right. That's all I got. Thanks..

Thank you..

Thank you..

And with no additional questions I'd like to turn the conference back over to management..

Thank you very much. We are planning to do our first quarter call somewhere early May. Thank you very much..

Thank you. Ladies and gentlemen, that does conclude today's teleconference. Thank you all again for your participation..