Gaia, Inc. (GAIA) Q4 2011 Earnings Report, Transcript and Summary

Welcome to the Gaiam Fourth Quarter 2011 Financial Results Conference Call. [Operator Instructions] Today’s call is being recorded. If anyone has objections you may disconnect at this time. I would now like to turn the call over to John Mills of ICR. You may begin.

Great. Thank you. Good afternoon, everyone, and thank you for joining our call today. 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 on this call are forward-looking statements that involve risks and uncertainties including but not limited to, general business conditions, integration of acquisitions, timely development of new businesses, the impact of competition, and other risks detailed from time to time in the SEC reports. The Company does not undertake any obligation to update forward-looking statements. On the call today representing Gaiam are Mr. Jirka Rysavy, Chairman; Lynn Powers, CEO; and Mr. Steve Thomas, CFO. Now I would like to turn the call over to the Company’s Chairman, Mr. Jirka Rysavy. Go ahead, Jirka.

Thank you, John, and good afternoon, everyone, and thank you for joining our call. About 30 minutes ago, we announced that we have entered into an agreement to acquire Vivendi Entertainment from Universal Music Group in an accretive transaction. In 2011, Vivendi Entertainment sold approximately 21 million media units, generating gross sales over $200 million. Gaiam will recognize only the net fee revenue, so acquisition is expected to add approximately $25 million in revenue and equal amount of gross profit on annualized basis. The combination of Vivendi Entertainment, which is the seventh largest theatrical media distributor in the U.S., with Gaiam it will create the largest independent and third largest overall non-theatrical media distributor in the United States, behind Warner, about even with Lionsgate, and ahead of all of the major studios, like Disney, Paramount, Universal, Fox, and Sony. Gaiam will acquire Vivendi for about $3.4 million plus adjustment for working capital, which at the time of our Board approval and signing of the document was expected to be about $8 million. The transaction is expected to close by the end of the month, and is subject to satisfaction of certain closing conditions. In addition two expected financial benefits, the transaction will elevate Gaiam brand across the media landscape, while immediately positioning the Company as a powerhouse independent distributor, with a combined library of about 7,000 titles. Reflecting the combined scale of Gaiam and Vivendi existing distribution operation, we expect to realize very significant synergies. The Vivendi acquisition and the deconsolidation of Real Goods Solar will allow us to focus on our growing three core businesses. Gaiam brand distribution licensing and subscription services. During 2011 Gaiam repositioned in its direct response television business to create a branded products that can be marketed through company extensive retailer and digital partnerships. We also expanded Gaiam digital distribution capabilities, and entered into direct agreements with all meaningful third-party digital distributors. We also launched a beta version of new subscription service Gaiam TV, and we began to shift focus of Company e-commerce to our frame of Gaiam-branded apparel and fitness. The Vivendi agreement is another step in expanding our brand reach and improving profitability. Lynn and Steve will provide you some more perspective on the Vivendi transaction in a few minutes, but let me first run through to Q4 and 2011 operating results. Revenue for fourth quarter, which ended December 31, increased $12.6 million or 15% to $95.9 million from $83.3 million during the same quarter and about $0.5 million, 2% during the end of the year. Operating cash flow for the year increased to $5.2 million from the use of cash of $5 million during the previous year. The mid-teen internal revenue gross as we reported in fourth quarter is expected to continue in the first quarter and as well as through rest of 2012. Reflecting the Gaiam share price in December 31, 2011 we took $22 million non-cash write-off of goodwill. Excluding the goodwill impairment charge income from operation for the quarter would have been about $1.5 million. In the solar segment, the Real Goods Solar successfully reduced about $2.5 million per quarter pre-acquisition losses at Alteris Renewable, and posted an operating profit of about $200,000 for the quarter. On December 31, we converted our super voting Class B Real Goods to Class A, resulting it in 38%, Gaiam ownership of Real Goods, which is about equal loading percentage and the consolidated in Real Goods for Gaiam accounting purposes. On a net basis, we have recorded a non-cash gain on this deconsolidation of about $2.6 million, which was based on marking the fair value as we require in equity method accounting, which we come to do for Real Goods. Obviously, we still have 10 million shares as before. The $2.6 million gain was recorded as a non-cash pretax loss of $4.5 million and more than offsetting tax gain to adjustment of the deferred tax liability. In December, we started marketing our beta version of our new digital subscription service, which we call Gaiam TV. We remain committed to further leveraging our brand in all places, we also want to leverage our industry leadership, and our extensive retailer and online distribution capabilities. On the balance sheet side after repurchasing about $2.4 million of our shares, so repurchasing -- or spending about $2.4 million of repurchasing our shares in 2011 and investing some money inventory for our new target role, and also deconsolidating about $11.9 million of Real Goods cash from our balance sheet. We entered into 2012 with about $14.5 million in cash. So our balance sheet has a working capital ratio of about $2.9 million and it’s definitely capable of supporting additional value creating initiative such as this acquisition of [indiscernible]. We are committed to exploring and executing on all initiatives that will help grow our core businesses, which right now they are three of them Gaiam brand distribution licensing and subscription services through all of 2012. We expect to grow our revenue internally in teams which all business growing -- business units growing at a very good rate in 2012. Which will bring Gaiam revenue, which excluding the consolidated Real Goods revenue, to about $200 million from $165 million reported in 2011. This number exclude any revenues from Vivendi acquisition which is expected to add approximately $25 million annualize of which we would report about nine months or three quarters for 2012. Real Goods revenues, which will be deconsolidating from Gaiam starting in January 1, 2012, I expect it to grow even faster, which would bring pro forma revenue to compare to 2011 revenue as we reported of $274 million to about $345 million. So now I would take it over to Steve, who will give you more of these numbers, and Lynn for more details and operating reviews.

Thank you, Jirka and good afternoon, everyone. As Jirka noted and as we’ve reviewed previously with you, 2011 was a year in which Gaiam took necessary steps to reposition and transition several of our businesses, in order to be more prepared and positioned to address changes that are taking place in several of our markets. These efforts impacted our financial results, but as I think you will glean from our collective comments this afternoon, we believe as a result of our work in 2011 is that we have a strong foundation for growth in 2012. With that said, let me spend a few moments reviewing our financial results, as well as our balance sheet as of the end of 2011, and some prospective on today's announced acquisition. Fourth quarter net revenue was $95.5 million, compared to $83.3 million for the fourth quarter of 2010. Net revenue from our business segment of $34.7 million declined $1.1 million compared to the year ago period, due primarily to the continued contraction in the DVD market, as well as lower sales as a result of the bankruptcy of Border's earlier in the year. These challenges were partially offset by the target aggregator business initiative, which began early in the fourth quarter. As indicated by our announcement of the Vivendi Entertainment accounting acquisition, we are taking a proactive role with actions that allow Gaiam to benefit from the consolidation of the home video market as it transitions to digital platforms. Net revenue generated by our direct to consumer segment declined $6.5 million to $20.9 million from $27.4 million in December, 2010 quarter. The decrease was mainly due to lower revenues associated with the planned repositioning throughout 2011 of our direct response television business. Lynn will provide more color on our business and direct to consumer segment results, including our expectations for improvements in 2012 in both segments in just a moment. Reflecting the acquisition of Alteris Renewables, net revenue from our solar segment increased to $40.3 million from $20.2 million for the same quarter last year. For more information about the results of Real Goods Solar, a separate earnings call will be held Friday, March 16 at 11 AM Mountain Time. Net revenue for the year ended December 31, 2011, increased $0.5 million to $274.8 million from $274.3 million in the prior year. Full year 2011 net revenue includes $109.2 million from the solar segment and $165.6 million from the business and direct segments with the business segment generating revenue of $88.3 million and $77.3 million from the direct to consumer segment. Gross profit for the fourth quarter of 2011 was 38% of net revenue compared to 49.8% for the same quarter of 2010 with a decline in gross profit margin reflecting two factors, first the increase in the solar segment which generated a 23.9% gross profit margin and second, lower revenues from our high margin direct response television business. As a result of the planned decline in direct response TV revenue and the product shift mix excluding our solar segment, gross profit as a percent of net revenue was 48.3% during the quarter compared to $55.9 for the same quarter last year. Selling and operating expenses for the fourth quarter of 2011 decreased to $30.8 million from $31.2 million for the fourth quarter of 2010. The lower selling and operating expenses reflect lower direct response television advertising and the resumption of a direct fulfillment relationship with Wal-Mart which is a much more efficient approach for Gaiam offset in part by the expansion of the solar segments operation due to the Alteris acquisition. Corporate G&A expenses increased to $4.1 million from $3.6 million a year ago mainly as a result of the solar segments consolidation of the Alteris infrastructure. As a percent of net revenue, corporate general and administrative expenses remain consistent at 4.3%. As Jirka indicated earlier, our low share price triggered a non-cash impairment charge to write-off the majority of our goodwill on the balance sheet. Including this non-cash $22.5 million charge, we reported a $20.9 million loss from operations for the quarter. Exclusive of the charge, operating income was $1.5 million compared to $6.8 million in the year ago quarter with a decline reflecting the lower revenue compared to last year’s fourth quarter. On December 31, 2011, Gaiam converted its Real Goods Solar, Inc. Class B common shares, which had ten votes per share, to Class A common shares, which have one vote per share. Gaiam’s voting ownership in Real Goods Solar was reduced to approximately 38% effecting the deconsolidation of Real Goods Solar on the date of conversion. Gaiam recorded a net non-cash gain of $2.6 million on the deconsolidation. The loss on deconsolidation of $4.5 million, after marking to fair value Gaiam’s equity method investment in Real Goods was offset by the reversal of a deferred tax liability of $7.1 million. Inclusive of a non-cash impairment charge and the after-tax gain related to the Real Goods deconsolidation, net loss was $18.5 million or $0.82 per share for the fourth quarter of 2011 compared to net income of $4.2 million or $0.18 per share for the fourth quarter of 2010. Excluding the one-time items, net income would have been $1.4 million or $0.06 per share. Inventory turns for the fourth quarter of 2011 decreased to four times from 4.4 times in the fourth quarter of 2010 both excluding Real Goods. The slight decline reflects the ramp up of about $3 million of inventory related to the target aggregator business. Excluding Real Goods Solar, our days sales outstanding for the fourth quarter of 2011 were 51 days compared to 45 in the fourth quarter of 2010. The increase is attributable to a shift in revenue towards certain customers with longer payment terms. Approximately 83% of our receivables in the trade division were comprised of our top 10 customers. Depreciation, amortization and stock compensation expenses totaled $2.6 million for the fourth quarter of 2011 compared to $2.5 million in the year ago period. Capital expenditures were $2 million, and media rights costs were $363,000. Capital expenditures increased for the fourth quarter due to tenant improvements we made to our building. Total CapEx in 2011 was $4.2 million. In 2011, we repurchased approximately 628,000 shares of our Class A common stock and a total cost of $2.3 million bringing the total number of shares repurchased by the company to approximately $5.43 million or approximately 24% of the shares currently outstanding. We ended the year with cash of $14.5 million after the deconsolidation of $11.8 million of Real Goods Solar cash. And as of December 31, 2011, our current ratio stood at approximately 2.9. So our balance sheet is capable of supporting value creating initiatives. With respect to today’s announcement of the acquisitions of Vivendi, Jirka and Lynn are reviewing the strategic rational in their comments. So I’ll spend just a minute walking you through some of the main deal points. The purchase price is $13.4 million plus networking capital after closing date. Purchase price is expected to be slightly over two times EBITDA after the large synergies we anticipate and the transaction would be accretive. And one final item, we’ve recently retained a New York City based investor and public relations firm of Jaffoni & Collins. They will be working with us on a proactive Investor Relations outreach program. You can reach Joe Jaffoni or Rich Land at 212-835-8500, or their contact information is available on today’s new releases. With that, I’ll turn the call over to Lynn, to provide more detail on our performance and growth initiatives by reporting segment.

Thanks, Steve. 2011 was a year of repositioning and redefinition of our Company as we planned for the future. Our Vivendi acquisition announcement this afternoon, along with our deconsolidation of the solar business reflects the focus across the organization on growing our three core businesses; the Gaiam brand, distribution and licensing, and subscription services. Despite the challenges we faced this year, we made progress in repositioning our Company around two broad strategic goals. First, strengthening and expanding our brands, and second, growing our media business. From Gaiam TV, our new branded streaming video service, to Gaiam Sol, our newly launched premium yoga brand, to our Gaiam Living retail store, we achieved measurable success on these initiatives in 2011 and expect to build on this momentum throughout 2012. Regarding our second goal of growing our media business, our Q3 launch of the media aggregator role at Target has led to a number of additional new opportunities for Gaiam, including our acquisition of Vivendi Entertainment, which I will discuss shortly. We also invested in and completed our digital asset management and delivery platform, signed agreements with all major digital players, and positioned our media business for the digital future. I will now highlight our operating results and repositioning by business unit, beginning with our business segment. Revenue in the business segment for the fourth quarter was $34.7 million compared to $35.8 million in the fourth quarter of 2010. Full year revenue was $88.3 million compared to $97.2 million in 2010. As a reminder, we experienced several one-time events earlier in the year that impacted performance, including persistently low in-stock rates with our largest customer, a costly third-party fulfillment program with Wal-Mart, which resulted in high returns and associated costs, and the bankruptcy of Border's. The fourth quarter revenue was impacted primarily by DVD market contraction. However, our first full quarter as a media aggregator at Target partially offset this contraction. When we announced our aggregator role late last year, we expected that it would become the first step towards significantly growing our media distribution business, particularly since it solidified our role as the only independent distributor, direct with Target, Wal-Mart, Kmart, and all meaningful digital retailers. I am pleased to report that the aggregator business is already leading to additional growth opportunities. During the fourth quarter and into 2012, we signed nine distribution agreements with studios seeking fulfillment in sales into other major retailers. A number of our Target aggregator studios have also expanded their agreements with us to include other retailers. We are using this role to enhance our digital distribution positioning as well. Our strength and industry presence led to the Vivendi Entertainment transaction announced this afternoon. Vivendi Entertainment is the home video distribution segment of Universal Music Group. In just eight years, Vivendi Entertainment has grown to be the 7th largest non-theatrical media distributor, just had Gaiam. In this accretive transaction will be acquiring Vivendi Entertainment's distribution contracts, as well as key studio and vendor relationships. Upon closing the transaction Gaiam will be the third largest non-theatrical media distributor in the U.S. Overall, we believe the strategic and financial benefits of this transaction further strengthens Gaiam’s position as the leading branded lifestyle media company, with extensive retail, direct-to-consumer and online distribution channels. We expect to leverage our unique non-traditional distribution channels, store within store relationships, and category management expertise, to drive revenue for the Vivendi Entertainment studio partners. Our future results are also expected to benefit from strengthened retailer relationships, and the significant increase in the size of our content library. The transaction will position Gaiam Vivendi to pursue new distribution contracts with significant content owners, as our combined scale and expertise differentiates us, and offers additional value to studio partners. As DVD volumes decline, cost efficiencies will become an ever more important competitive differentiator, creating additional opportunities for Gaiam Vivendi Entertainment. Reflecting the combined scale of Gaiam’s and Vivendi’s existing distribution operations the Company expects to realize significant operational and financial synergies, including reduced third-party distribution costs, lower post production and digital distribution costs, and the elimination of redundant overhead, replication, warehousing, and other costs, which collectively are projected to drive significant margin expansion. Furthermore, our in-house digital capabilities including post-production and digital distribution back end systems, may replace outsourced service resulting in additional cost efficiencies. Now turning to fitness products. Last quarter we announced two initiatives, our Restore line of at-home, rehabilitative and restorative accessories, and Gaiam Sol premium yoga line. We’re pleased to report that during the fourth quarter both lines exceeded our expectations. Our Restore products have been among the top performers both at Target where we launched a cohesive group of accessories, as well as at other retailers. Gaiam Sol launched with exclusive placement at high end sporting good stores, natural grocery, and online and still has a lot of room to grow in both SKUs and placement. I am also pleased to report that our branded stores in store presentations grew to 14,600 at the end of 2011 despite Border's bankruptcy. Now let’s turn to our direct to consumer businesses. For the fourth quarter of 2011 revenue in the direct consumer, business unit was $20.9 million down from $27.4 million in the fourth quarter of 2010. Full year revenue was $77.3 million down from $99.7 million in 2010. The decline was principally the result of fewer direct response programs, which was previously discussed, as we repositioned the business to feature products that can take advantage of our wide retail customer base. In April of 2011, we launched the Firm Express program on DRTV, our first under this new strategy. The program ran for six months on television, and was offered through a select number of retail customers during the fourth quarter. Retail sales at this boxed DVD set generated an additional $2.2 million, validating our approach and providing improved return on investment. We will continue to manage our release windows to maximize revenue and profitability from direct sales before products are released to mass retail. We have a far more robust release for 2012, with one major release scheduled for every quarter this year. In early February, we began airing the Gaiam branded Jillian Michaels Body Revolution, a 90-day fitness and weight loss program starring the top talent in fitness. The response to this program has been very strong and we continue to invest in airtime. Look for this product to hit retail in the second half of the year and help drive our double-digit comp growth. Coming up in the second quarter we’ll be launching the third and inspiration of a healthy cooking product, Express Platinum and we are also developing a line of skin care products as well as additional fitness programs for release in the second half of the year. During the quarter, our eCommerce business benefited from our new Gaiam apparel line. Fall season and holiday sales have encouraged us to continue investment in the apparel business and we are moving forward fitness and casual wear. As the eCommerce revenues shifted more towards proprietary branded products gross margin improved 100 basis points and operating income improved by 8.2% from Q4 2010. Last but certainly not least in the direct to consumer unit is Gaiam TV which we launched beta version in September of 2011, and began to market for the holiday season. To date, we have invested close to $2 million to build this full featured video streaming service, which now bodes over approximately 2,500 exclusive titles for streaming. Gaiam TV offers a unique selection of fitness and entertainment titles targeted at our direct to consumer customer available on the web, mobile devices Roku box, and Samsung SmartTVs, Gaiam TV is a key part of our goal to build our brand in the digital world, and to transition the availability of our content libraries and rights from physical DVDs to digital media. Though Gaiam TV is still in its infancy, we are beginning to explore strategic partnerships in ways we can leverage our broad physical distribution to market the service. We will continue to acquire unique content throughout the year, and expect to move out of beta in May. The markets in which we operate are undergoing significant changes, traditional brick and mortar retailers must compete with online retailers. Media shifting from DVD to digital, and consumer behavior is evolving with ever-greater access to information. Furthering the integration of our business is key to staying ahead of these changes, and ensuring Gaiam maintains a favorable competitive advantage in our business. Our wide retail distribution has enabled us to build a significant media business. Our direct response unit is developing products with mass retail potential, and our digital strategy gives us an edge in media distribution. To summarize, we are committed to the two goals I outlined earlier, to build and broaden our brands, and to grow our media business. Our key initiatives in 2012 to attain these goals are as follows, successfully integrating the business of the Vivendi Entertainment and signing more and large distribution agreements. Leveraging our digital infrastructure to offer digital distribution to our studio partners. Releasing branded direct response products with mass retail potential. Seeking broader placement of Gaiam-branded products with the release of the Restore and the Sol line. Scaling and refining our apparel and retail store strategies, moving out of beta on Gaiam TV in May. Returning to double-digit organic revenue growth with solid growth on all business units leading to $200 million in preacquisition revenue for 2012, and most importantly, significantly improving our operating margin and EBITDA. With many of these changes we are already successfully underway. We believe 2012 will be a pivotal year for the Company. We are well-positioned to become a consolidator in the media business, given the scale afforded by the Vivendi transaction, and our advantageous cost structure and full featured platform encompassing sales, retail relationships, logistics, and digital. Expansion of our apparel, high end yoga and wellness product lines, will better address the needs of our core customer and create inroads into new markets for Gaiam. Early results from first quarter indicate we are on the path to double-digit organic growth, improved performance, and making progress towards our goals. I look forward to giving you an update on our initiatives next quarter. Thank you, and now I would like to open the call up for questions.

[Operator Instructions] Our first question comes from Mark Argento with Craig-Hallum.

Could you help me better understand the acquisition in terms of what you are actually buying, distribution, is it -- I assume DVDs predominantly. Are you getting a warehouse with it, or you kind of -- what comes with it, and maybe you could walk me through some of the economics.

The Vivendi Entertainment is a distributor pretty much on a -- like us, DVD and digital plays. And digital I guess distribution same way. It’s like how are obvious focus right now is home markets transitioning from the DVD to digital, it’s going kind of slower than we expected because we kind of invested early on this digital platforms and over the last two years, which allow us to really play the lead roles because so much more expensive to go through the different digital retailers which all required different formats and different metadata when DVD was just kind of unwrapping to everybody. So that’s kind of putting us in a very unique position right now. And so if we make acquisition like this, it will allow us to obviously benefit from that. As I mentioned we kind of would report that all the -- only the net revenue on our side, so our gross profit would be 100% of revenues. And Lynn maybe goes to obviously -- what we are actually what else we are acquiring, if you want to go to it, but that obviously…

I think Mark the reason for the transaction, first of all is scaling the media business and second is because Vivendi is unique in this positioning because the studios that it represents are brands just like Gaiam is a brand. So we are in a unique position to be able to use our store within store expertise, our non-traditional retailer channels, and our digital capabilities to help really grow these studio brands, and so with very little incremental overhead, we are going to be able to take on this kind of revenue and then the additional the 21 million units that they sold last year brings all of our costs down. So we are able to get synergies also through the cost efficiencies that we will get by being this largest independent player.

So is this similar in terms of like the discovery deal that you guys did.

No, I would compare this more to good time acquisition what we did years ago.

2005.

So because the synergies and scale the discovery deal would be much smaller than this and there we had a different, it’s different if you make an acquisition rather than we sign -- sign it.

So the incrementals that you are going to take, you will be moving these titles into your warehouse replicating these titles and distributing them into the channel, just like you would any of your other products?

Basically yes.

All right and then the -- in terms of the working capital adjustment are we talking 2X, $13 million, are talking single-digit millions any kind of way to help us think about that?

I said in my script that it is the times when we did approve it and sign it which was a few days ago, it was we expected above $8 million.

And you are just getting the physical DVD distribution rights here, there is no digital component to this at all.

No, there is digital. Most of the contracts have a digital component. That was one of the primary reasons for doing this. Like I said, there are a couple of reasons. One is scale on the DVD, becoming the consolidator in the industry and the second is the positioning also on the digital side. I believe almost everything single contract comes with some digital capability. So that also positions us at this independent aggregator digital content.

Which is kind of main things, these are the main things for us Mark right now. Actually because in this transition what’s happening is definitely consolidation here in industry and even it is going slower than expected, you have the digital parts to be a really big player there it’s important because it is the scale that really plays bigger per se play because each distributor requires different formats and different metadata. And as you kind of build these up you able to automate more and more, so it is kind of like self-fulfilling prophecy going forward, so you aren't in and out. So that’s really why, one the main reasons for this acquisition.

And the digital rights, will that give you the right to be able to stream it say on a – you probably wouldn’t want to do it on Gaiam TV, but say another platform that you could great after this side. Do you get the rights to put this thing up on Netflix or Hulu? How substantial digital rights do you have?

It depends on this studio and the contract but we certainly already started talking with some of the studios about creating their own brand of channels. They are certainly that opportunity take the Gaiam TV and reskin it for one of the children's channels as an example.

But we expect to add some to Gaiam TV as well.

Correct.

And then in regards to the Real Goods Solar, so you took the non-cash charge this quarter for deconsolidation? Did I hear that right?

It is actually a gain. It’s $2.6 million…

You took that this quarter?

In the fourth quarter.

Okay. And so but when you, in the $0.06 number you guys are talking to for the quarter, that excludes that number?

Excluded. That $2.6 million gain is on top of that.

And then so going forward, how does this -- is this going to show up on -- the 10 million shares will show up as an asset on your balance sheet going forward?

Yes. We would have a one line, Steve, right?

Yes. One line as investment and then at the very bottom of the P&L, we will pick up our share of their earnings or losses.

And then last question, how many, Steve, do you have handy how many employees you have right now, and maybe that number a year ago just to see total [indiscernible].

Last year would have included…

And it’s probably 600, 650 last year.

With Real Goods, it is probably about 240 this year.

Without Real Goods.

Without Real Goods.

Real Goods is probably at 500, 600.

Core Gaiam has been kind of flat in terms of…

Yes.

Okay. And then, one last question back on kind of the distribution because you have your own distribution center. Do you have -- I assume you guys have enough excess capacity to be able to bring on this business.

Most of the media business goes through a third party and they have plenty of excess capacity.

And we will look at when the deal closes, we will make whatever determination how we are going to proceed. So remember this deal didn't close yet.

So when you say it goes through a third party, that basically -- that is an opportunity to bring it in-house over time?

We have the duplicators of media. We don’t duplicate in-house, right. So it will be duplicated at somewhere, and you can ship directly from there or we can bring it to our warehouse. So any kind of third-party will be duplicated outside anyway for DVDs and all of the digital obviously goes through our servers.

And Mark, just to be exact, we have pretty close to 300 employees.

The next question is from Robert Routh with Phoenix Partners.

First quick question is obviously Universal has got a lot of great studio partners, WWE, et cetera, as you mentioned in the release. The question I have is, are any of the contracts with Universal or the studios up for renewal any time soon, or are they all locked in long-term, just in terms of are you going to have to go negotiate any of these contracts in a year or two, or how should we kind of look at that on that 7,000 titles that currently you are buying the distribution rights for?

Rob, we’ve already started those negotiations. So we’ve been talking to the studio partners and we’re working right now to make sure that we have good long-term contracts with everyone.

And most of them, obviously they kind of typically they are typically three-year deals. That’s kind of what we have same like Discovery, and they have different state of, because there is a lot of them. So some of them have still three-years left, some of them have may less. So you have to approach it that way, but only a few that’s really to be discussed. Otherwise, it’s done through acquisition of they create a new sub, so it’s kind of obviously that was a big deal to make sure that this is just working.

So you shouldn’t worry about any of those titles, it’s pretty safe to say you got these guys pretty much, they’re happy with it, you’re happy with it on all sides?

Most of them didn’t know about the transaction until now. So it’s kind of what you say.

I think the reason that the studio partners are don’t like this transaction is because Gaiam’s unique ability as I said earlier of having this non-traditional DVD distribution in the places like grocery and sporting goods, and Toys R Us. So we have a broader distribution, and we’re direct with all of that. As well as a unique stores and store approach and most of these studios are real brands. We know how to market those brands, so we think they’re all going to be pretty pleased with the transaction.

And also there is obviously a big pickup, because whatever they had right now in the royalties or whatever, distribution agreements we have about twice as many doors than anybody else in the market including the Vivendi, so it’s definitely a big upside for some of those brands.

And as far as taxes and NOLs go, I know you guys had some NOL and then tax benefits going forward. This transaction wouldn't jeopardize any of those, and then you would still be able to use those to shield those cash taxes going forward? Is that correct? Or is there any funky stuff going on there?

Yes, the transaction have zero impact on NOLs, because effectively we are not picking up any NOLs, not creating any. So it doesn’t impact. We have probably currently I would say close to $50 million of NOLs in or somewhere between $45 million and $50 million of NOLs, what we can use, which of them I think everything is about $10 million is unrestricted. So you can shelter obviously next like say $40 million of earnings.

And also as far as Gaiam TV, as you mentioned you are kind of looking at taking at of beta, and looking at you mentioned partners. I was wondering if you could expand a little on that in terms of what type of partners you would be looking for in what areas, and then in terms of timing. How soon you might see something there, given the type of content you have which is clearly differentiated nobody else has quite what you have, I think that would be a high class problem?

So it kind of a pretty wide questions, but as even before we take it from beta, I think the first wide partner, which it is all done signed and should launch shortly, it’s Verizon Fios. And so we expect that launch to be over next 30-days but you know it is up to them, they have everything from us and everything as done. So it’s up to them to kind of pull the trigger. And we did a bunch of other platforms and we talking some very large partners, but I wouldn't want to talk about names yet, but we did sign Samsung Smart TV. And so they are a lot of activities, but we really kind of want to go through and make sure that we -- that there is, we right now and already more than 50 countries. And that creates various challenges, but it is all of that stuff, it’s kind of cleaned up as a beta, but as you two to different countries, different browsers, and there are different rights to every country. So the question, how do we make sure that we don’t we kind of manage all this rights for country. It’s very convoluted development by its kind of all done, but so assuming everything goes as planned right now to take the beta off in May, you will start to hear some of those announcement and also we will start to go with full marketing.

Okay, and would it be safe to assume that your expectations for Gaiam TV let’s say in a year or two, not once your first deal or partner is announced and it goes out of beta. We will notice some meaningful, or you expect to meaningful impact on the reported financials, in terms of subscribers and revenue and all of that? I am trying internally what you are looking for from that financially?

Well, I would probably obviously now we kind of know kind of what the subscriptions are, how they grow that we have very good conversion from the free trial to signed subscription over 50%, which is much larger than most of people out there. But we still cannot really tell the retention it looks pretty good, but it’s so early to tell. So utility we can really, it’s obviously a big part of projections, so I would rather wait until the next call in May, when we are going to start to see some kind of at least project some retention to really answer these questions, but obviously we believe, or I believe that this can be very meaningful, very meaningful to Gaiam future.

And just one last question. When it comes to your other new initiatives that you mentioned -- obviously you mentioned skin care products are coming out and obviously the apparel line, and what you have done. What is the planned investment in those kind of new products, other than on the media side in 2012?

Rob, most of those are just part of our ongoing business plan. The skin care will be launched through DRTV. We are having – we’re working on formulations right now, so there is no large upfront cost, other than the production of the infomercial. And apparel we are working right now, we have got it out there on our on our direct to consumer, and we are just working towards making a line available to be sold out to retailers by holiday of 2012.

So we shouldn't model in any incremental spending, just kind of the normal operating expenses for all of these new initiatives? It is built in already?

That’s correct.

Molly Iarocci with Stifel, Nicolaus.

I have just a couple of questions. The first has to do with your line expansion within Barnes and Noble. You had talked about that last quarter, and I was just wondering if that was something that you are still intending to do, if there was anything new that we should know about from the fourth quarter?

No. It’s still, we are still working on that and they have picked up several of our Restore branded products, which are doing very well there. And they are looking at the Sol line, so we expect some growth on both of our new lines in Barnes and Noble.

And then I am kind of going to switch a little bit back to Gaiam TV. You talked about the subscription count. I think you said that so far you have had 50% of your free trials move over to subscriptions. Is there -- can you give any other color in terms of a number, and also are you still anticipating that you were needing I think it was about 34,000 subscriptions in order to breakeven on the investment?

So there are several questions so, yes, I can provide some more colors. On what is the break even, it is really a question of retention so that would really, we kind of give you the estimates last, but we really kind of want to need to see what’s really happening, we don't have a yet good color, because it is so new, because we only started marketing in December, and we took it very slow obviously first internally. So we can get just very few subscribers over in a year and because we want to make sure that all the technology works good. We are right now about 4,000 subscribers who pay $10 a month. And the conversion rate was from -- we provide 10 days free trial, so it is a conversion rate from free trial to subscription. What I mentioned and I guess what was the last question? Wasn't some other part what I didn’t…

Breakeven.

It was the breakeven.

I mean that right away went away until we kind of see retention obviously the conversion from free which is kind of happening better than we expected and but the retention is like, so far as the people kind of there, so because they just -- months or two really on the site. So we cannot really see it how they replace. So I think we need at least a couple of months maybe more to really project the solid retention, which is obviously the huge impact on the profitability.

Right, and just so that I’m clear so you said you have about 4,000 subscribers right now who…

Paid subscribers. They are more people in a site as the subscribers in a free trial but we don’t count those when we give you -- going to give you reports will be just people who pay subscription which is $120 a year.

And when you said the 50% went from free trial to subscribers, so essentially you had about 8,000 going through your free trial program.

Well, I mean when we started we had different programs because we tested different ones and retention rate also, the conversion rate is changing, so I am just kind of providing a current snapshot, and it is kind of too early to -- these numbers might not be meaningful a few months from now because this is so early, so I have other way to provide more details because if you have 500 subscribers, you can't really draw any averages from it.

And then last question with regard to kind of your retail I’m sorry you said things are going well. Do you have any other rollout plans moving forward?

We are working on our retail strategy right now. Store is -- it took about five months and now it’s at breakeven but we have been a little busy with this transaction. So the retail strategy kind of took a back seat for the last quarter but we are going to put it back on the front burner as soon as we finalize the integration of Vivendi Entertainment.

I would now like to turn the call back over to Mr. Rysavy for closing comment.

Thank you very much. Thank you everybody for being with us and we will hopefully meet in May on our next call. Thank you very much.

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