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Gaiam, Inc. (NASDAQ:GAIA)

Q1 2013 Earnings Call

May 7, 2013 4:30 pm ET

Executives

Norberto Aja – Investor Relations Officer

Jirka Rysavy – Chairman

Steve Thomas – Chief Financial Officer

Lynn Powers – Chief Executive Officer and Director

Analysts

Mark Argento – Lake Street Capital Markets

George Kelly – Craig-Hallum Capital Group

Operator

Welcome to the Gaiam 2013 First Quarter Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded Tuesday, May 7, 2013. I would now like to turn the conference over to Norberto Aja, Investor Relations. Please go ahead sir.

Norberto Aja

Thank you, operator and good afternoon everyone, thank you for participating in Gaiam’s 2013 first quarter conference call. Joining me today on the call are Gaiam’s Chairman Jirka Rysavy, Gaiam’s CEO, Lynn Powers and Steve Thomas, Gaiam’s CFO.

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 constitute this Safe-Harbor statements of the Private Securities Litigation Reform Act of 1995. Except for historic information contain 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, the timely development of new business, the 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 news announcement and in the company’s filings with the Securities and Exchange Commission including the company’s reports, the current Form 10-K and 10-Q.

Gaiam assumes no obligation to publicly update or revise any forward-looking statements. Today’s call includes non-GAAP financial measures within the meaning of the 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 on the company’s website.

With that, I would now like to take the turn to introduce Gaiam’s Chairman, Jirka Rysavy. Please go ahead.

Jirka Rysavy

Thank you, Norberto, and good afternoon, everyone. The revenue for the quarter ending March 31 increased 19.6% to $56.6 million from $47.3 million in the same quarter of 2012. The internal revenue growth was 6.6%. Gross profit increased $5.1 million and operating income grew by $1.5 million.

The net loss improved to $300,000 or $0.01 per share from the loss of $1.2 million or $0.05 per share in last same quarter last year. Cash flow from operation increased $7 million to $6.2 million from a cash use of $800,000 of same quarter last year. We ended the quarter with $7 million in cash and our borrowing decreased to $8 million.

The integration of Vivendi Entertainment is complete and we are pleased with the operating results. Overall home entertainment grew 5% during the quarter, I mean as an industry, as reported by Digital Entertainment Group, this digital sales through rising about 51% over the first quarter of 2012.

The Gaiam Vivendi beat the market by achieving about 61% increase in digital sales for all continuing a new studios. According to Nielsen video scan Gaiam Vivendi non-theatrical market share grew to 13.7% from 12.8% in the same period of last year. Gaiam has now about 5,000 branded Yoga fitness within a store and has improved its U.S. video market shares to 39.4% from 36.6% at the end of the same quarter of last year.

Our video subscription business and platform distributing media over Internet and of course mobile devices keeps progressing nicely. The conversion from a free trial to a subscription continues to be well above our expectation and running still approximately about 70%.

Revenues for the last months for the unit was about $400,000. We had about 5,200 exclusive video available for digital streaming. With our marketing team now in place, our marketing campaign is starting pretty much now as we speak. The operating loss for the quarter for the subscription unit was about $1.8 million.

And now I’d like to turn the call over to Steve to give you some color on financials. Steve?

Steve Thomas

Thank you, Jirka. I will spend a few minutes reviewing the financials results in greater detail and offering additional prospective on our performance for the quarter, beginning with the income statement. First quarter 2013 net revenue rose 19.6% to $56.6 million, compared to $47.3 million for the first quarter of 2012.

Our overall consolidated internal growth rate was 6.6% or $3.1 million for the quarter, reflecting the strength and health, not just of our media distribution business, but Gaiam’s original content, digital distribution, store-in-store and aggregator businesses as well. Organically our Business segment revenues grew 21% and total net revenue grew from the segment, which is comprised of sales to retailers increased 44.7% to $37.3 million as we continue to expand our distribution footprint and our media, fitness and wellness SKUs across some of the largest U.S based retailers.

As was the case in Q4 Gaiam Vivendi Entertainment continues to play a vital role in the success of our business division, providing us with a growing library of sought-after content and digital relationships that have helped us to consistently grow the business over the last several quarters.

In our direct-to-consumer segment revenue declined by 10.3% from $21.6 million to $19.4 million as our direct response TV business faced comparison with the strong results from the first quarter of 2012, when we first brought to market the very popular Jillian Michaels "Body Revolution" series of fitness videos.

However, we did see growth across most of the other parts of our direct-to-consumer segment, excluding DRTV the segment had revenue growth of 13.5% even after a 15% decrease in our catalog circulation. Gross profit for the 2013 first quarter increased 18.8% to $32.2 million or 56.9% of net revenue compared to gross profit of $27.1 million or 57.3% of net revenue in the first quarter of 2012. The decrease in gross margin primarily reflects lower net revenues across the higher margin direct response TV marketing business, which was partially offset by the 100% margin net fee revenue of Gaiam Vivendi.

Moving down the income statement, operating expenses were $32.1 million, or 56.6% of net revenue in the 2013 first quarter period compared to $28.4 million or 60% of net revenue in the first quarter kind of 2012. Also included in our operating expenses for the first quarter is $0.4 million of non-cash amortization expense related to the Gaiam Vivendi Entertainment acquisition, a cost we did not incur in the prior year period.

Operating income for the first quarter of 2013 was $0.2 million compared to a $1.3 million loss in the first quarter of 2012. We made several large investments during the quarter. We invested approximately $1.8 million in the Gaiam TV subscription business this quarter as well as other strategic initiatives including a branding study that will help us position the company to take advantage of new growth opportunities in the future.

The strategic investments totaled approximately $1 million in the quarter and they’re expected to taper off to around $300,000 in Q2 when completed. We’re moving to the bottom line, we reported a net loss for the 2013 first quarter of $0.3 million or $0.01 per diluted share compared to a net loss of $1.2 million or $0.05 per diluted share for the first quarter of 2012.

Looking at the balance sheet, we ended the first quarter with $7.1 million in cash and our borrowings under our credit facility decreased from $16.2 million at December 31 of 2012 to $8.3 million at the end of the quarter. This leaves our current ratio at approximately 1.9, a metric that continues to reflect the health of our balance sheet and our ability to fund our day-to-day operations.

Inventories – inventory turns for the first quarter of 2013 were 3.3 times. Taking a brief look at our cash flow statement, we’re pleased to report a $7 million improvement in cash from operations as we went from cash used in operations of $0.8 million to cash provided by operations of $6.2 million. For the first quarter, capital expenditures were $0.7 million and were comprised of $0.4 million of property additions and $0.3 million of media assets.

Depreciation and amortization was approximately $2 million for the quarter. In summary, we continue to prudently manage our balance sheet and investments around important growth prospects such as e-commerce and digital media.

Our first quarter results reflect both the benefits of the Gaiam Vivendi Entertainment acquisition is providing to our business as well as the overall strength in the Gaiam brand, the positive impact of our recent marketing and branding initiatives around e-commerce and catalog and the continued investment we are making in our digital content distribution business Gaiam TV.

With that I will now turn the call over to Lynn, who will provide some added detail on the status of the industry and our growth initiatives. Lynn?

Lynn Powers

Thanks Steve. Overall our performance for the first quarter continued to be strong with internal revenue growth of 6.6% and total revenue growth including the Vivendi Entertainment acquisition of 19.6% both as compared to the first quarter of 2012. As Steve mentioned, our results for the first quarter of 2013 included approximately 21% year-over-year internal revenue growth for the business segment as well as solid revenue improvements in the core direct business.

Both of which helped offset a challenging year-over-year comparison in our direct response television business. Much of our quarterly success is the result of the great job our team did in efficiently and diligently integrating Vivendi Entertainment distribution business into ours and very quickly being able to identify and leverage opportunity. The result was to create additional sales volume and drive operational efficiencies but it helped us not only to meet but to exceed our revenue and gross margin target.

The reduction of third-party distribution cost, the elimination of redundant overhead, and other operational synergies had material impact on the business. However, the more important and valuable results of the integration of the two business is that GVE is now able to further our position as the largest independent distributor of non-theatrical media content in the U.S. and as a much more scalable and robust business that provides us with a greater ability to win content distribution deals and solidify our leading market position.

This is reflected in the fact that over the past six to 12 months alone. GVE has closed to renew agreements with Crown Media to distribute the highly visible and unique Hallmark Channel library. The Jim Henson Company for great children’s content, including Fraggle Rock and Doozers; World Wrestling Entertainment for an additional three years and National Geographic and Discovery for multi-year agreements.

We also renewed our deal with Televisa, the leading content programmer for the rapidly expanding Latino market. We continue to pursue licensing deal and recently signed an agreement for the children’s title Sammy’s Adventure 2, a promising franchise that drove $2.8 million in gross DVD sales during the first quarter.

We’re in the midst of other discussions and negations for additional content provider agreements. The response from our studio to our new origination has been positive and it’s clear that they see our ability to help them generate the most value from their content. This is evident in that our top 10 studio partners will account for more than 75% of our total revenues, saw a sales increase of more than 10% over the first quarter of 2012.

We also continue to further expand our media category management role with over 6,000 doors under our management in the U.S., including being one of only two independent aggregators for media and the sole aggregator for fitness media with the second largest mass retailer in the U.S. In terms of market share with the largest independent distributor of non-theatrical contents and the only intent dependent distributor with direct relationships, with Target, Wal-Mart and all meaningful digital media providers.

During the first quarter we were second in the market share in non-theatrical content only behind Warner. In terms of the overall home entertainment market, 2013, started off on a good note. Digital Entertainment Group recently reported that home entertainment spending rose 5% in the first quarter on the back of strong Blu-ray Disc and digital sales. With electronic sell-through raising more than 51% over first quarter of 2012 due to the broader availability of titles and increased access to digital content, in comparison GVE beat the market by achieving a 61% increase in digital sales for continuing in new studios.

While, we’re pleased with the growth and profitability of the entertainment portion of the Gaiam trade business, we’re also extremely excited about the growth opportunities for our branded fitness and wellness business. We continue to drive this growth with a focus on adding and expanding our store-within-a-store opportunities.

We now have a presence in over 15,000 doors. We expect this number to continue to grow as we expand the distribution reach of our current product offering, as well as launch innovative new products and categories in both the fitness and the wellness market. A recent example of our growth potential is our SPRI professional fitness equipment product line. Historically, SPRI has been offered only in the professional gym market. We recently launched the brand into retail with placement into 450 Serra stores and 460 sports authority stores. We believe SPRI by Gaiam has the opportunity to be the leading authority of professional fitness equipment.

We will continue to solidify this position with new products and equipment design for the cross fit and active recovery markets. We’re in the midst of discussions to expand the brands placement in other retail doors and look forward to continued growth.

We also continue to see strong consumer acceptance for our Gaiam Restore line of at home, rehabilative and restorage of accessories as well as our Gaiam sole line of premium yielded products.

Gaiam restored doubled in sales in Q1 as compared to last year. We are planning to launch additional wellness products under the restore brand in Q3 this year and at our current pace, we will have the opportunity to expand our offering to section in 2014. Supporting this growth, we expect our largest retail partner to place a four foot section of rehabilitation products from the combination of our Gaiam Restore and short active recovery brands in the September 2013 reset.

In summary, our fitness business has demonstrated at the power of our brands and our broad capabilities as a partner with our retail customers. In fact, our revenue from our top 25 accounts in fitness, media and equipment grew by over 30% in first quarter as compared with first quarter 2012. We believe we will continue with double-digit gains throughout the year.

Turing now to our direct-to-consumer segment, the first quarter of 2013 saw sales decline by 10.3% to $19.4 million compared to the prior year period. The main driver behind the decline was the tough comp versus Q1 of 2012 in DRTV. First quarter of 2012 saw 58% comp in DRTV with the launch of Jillian Michael’s Body Revolution.

This year, we experienced more normalized level of revenues that resulted within 30% comp decline. The Jillian and commercial product is now at retail and continues to perform well. But, DRTV sales have declined as part of the normal sales cycle of moving the products from DRTV through our retail channel.

We made several large investments in the quarter. As we discussed in the last conference call, we engaged IDO, a highly regarded brand positioning company to help us position the Gaiam brands to long-term sustainable growth. We received their report in first quarter and are extremely excited about the possibilities as we look ahead in our business planning.

We also invested in infrastructure, our e-commerce platform and of course in our digital initiative Gaiam TV. These investments negatively affected the results by approximately $1.8 million as compared to first quarter of 2012. We believe these investments will payoff in 2014 as we position our direct and digital business to better serve the growing need for health and wellness product, information and content.

As we’ve mentioned during the last call, Andrew Davison joined us in Q1 in the role of President of Gaiam brands. Andrew will continue to brand new to lead our efforts to formulate the IDO research into executable Gaiam brand strategies across all aspects of our business.

I’m pleased to report that the balance of the direct-to-consumer business without DRTV had revenue comps of 18.5%, even after reducing our catalog circulation by 15%. This speaks to the strength of our brand, customer database and the potential of leveraging our new strategies.

Toward the end of last year, we initiated a repositioning of our online presence to make it more flexible, interactive and scalable e-commerce platform. All the work is not fully complete; this investment has yielded results and improved traffic numbers, conversion and time onsite. The investment has also provided Gaiam with the best-in-class tools and functionalities that has helped us to improve our online customer experience, better support interactive content, further enhance product pages, and greatly improve testing and data analytics.

Going forward, we will invest in additional core technology efforts around CRM and loyalty and the enhancement of our mobile and tablet efforts. I would also like to mention the positive impact of our partnership with Good Morning America is having. For the past few months, we have had several featured products on the show, it’s provided incremental revenues, new customer acquisition and it’s been a nice tailwind to help drive revenue and retail sales.

Regarding Gaiam TV, as Jirka mentioned, the business was taken out of beta stage approximately six months ago and is now in the middle of a branding phase with an increased marketing spend to help introduce the service and bring added visibility. We now have a library of 5,200 exclusive titles for digital streaming across fitness, health and wellness and personal development puts together with our in-house capability makes Gaiam TV a very appealing offering.

Going forward, we expect the losses incurred for investment on Gaiam TV to stay at their current levels until the end of fourth quarter. As media consumption evolved a way from traditional television viewing, platforms like Gaiam TV are uniquely positioned to meet consumable demands by curating and creating content that can be accessed just about anywhere and at anytime.

Gaiam TV currently streams on our PC and Mac platforms across the iPhone and iPad and over the set top availability via Roku and Apple as well as services such as Verizon FiOS. We’re also encouraged by the results on this front; in particular Netflix’s recent growth has been driven by its streaming service, which similar to Gaiam TV allows users to stream titles to their TVs, PCs and mobile devices.

Incremental content would be a key catalyst for Gaiam TV as it continues to bid on content as well as create original content. currently, we produce five original content shows weekly for Gaiam TV on topics such as fitness, nutrition, relationship and personal development, all of which served to further differentiate Gaiam TV from other streaming media platforms. In addition, expansion into international market remains a big opportunity because of our large owned library. We have virtually unlimited international expansion potential, unlike Netflix or Amazon who rely on restricted content licensing agreements. We are already seeing global uptick for our service with customers and for over a 100 countries.

In summary, I am pleased to report that we’ve accomplished all of our key initiatives that we set out to complete by this time last year and that our results reflect that including integrating the business of Vivendi entertainment finding and renewing more and larger distribution agreements, leveraging our digital infrastructure, repositioning the Gaiam brand and expanding our categories, investing in a new e-commerce platform, seeking broader placement of Gaiam branded products, moving Gaiam TV out of data testing phase, returning to double digit revenue growth, and improving operating results and cash flow. As you can – Steve shared earlier, we are continuing to deliver on a strategic priority. We believe in the strength of our brands and are committed to investing today for a future.

This concludes our prepared remarks and now I would like to turn the call back to the operator for questions, operator?

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions) And our first question comes from the line of Mark Argento with Lake Street Capital Markets. Please proceed with you question.

Mark Argento – Lake Street Capital Markets

Hi, good afternoon.

Lynn Powers

Hey, Mark.

Mark Argento – Lake Street Capital Markets

Hi, in your prepared remarks you had mentioned about some of the store in a store numbers and you also had mentioned that it looks like you’re with one of your larger customer, you are going to be rolling up to a store line, is that going to be a kind of a store in a store format presentation or would that be in line?

Lynn Powers

Well, it will be a store within store for rehabilitative products and it will be both Gaiam store and spry active recovery. So it will be 4C of rehabilitation products, which is the first time we really have that kind of a store presences anywhere and we see lots of opportunity to expand that to other retailers.

Mark Argento – Lake Street Capital Markets

Will that be located at the similar isles where you are right now on sporting goods, or is that going to be a different part of the store?

Lynn Powers

No, it will be in the same Isle.

Mark Argento – Lake Street Capital Markets

Gotcha, okay. And the some of the market growth numbers for the video category has rather through on solid generally positive but what was the growth that you are seeing on the DVD market overall in non-theatrical? Try to scribble it down, but I missed that number.

Unidentified Company Representative

We said – the report was included from digital entertainment was 5%, up year-to-year first quarter 2013

Mark Argento – Lake Street Capital Markets

All right. And then overall when you think about the digital strategy how are you guys going to advertise or promote yourself, I know one point in time you thought about potentially putting some advertising in the packaging of the DVD, just try to get some online penetration or some digital penetration. What are you thoughts about and how do you basically migrate your customer from the DVD format over?

Unidentified Company Representative

Yeah, we did put it in the DVDs and the products link; we can talk about a little more. But as we started this project, it’s a project, when did we start it – maybe a year ago. And so it’s kind of and most of the products – but it’s really what we’re talking the migration is the video is obviously – we put, while we put now some of the discs and stuff into other products, obviously those products still has to be bought in the store. We just try to kind of bring that customer to our direct relationship from just being a talk-relationship in some other stores.

Unidentified Company Representative

Mark, we have a couple of initiatives. We actually have a button on the menu of the DVD. It talks about Gaiam TV. We have some free downloads and then we obviously have some of our free channels like on YouTube and Hulu that can also migrate consumers from watching something that’s free to being a subscriber.

Mark Argento – Lake Street Capital Markets

Got you and in terms of Thai end of Gaiam TV, a lot of the content – can you pay for it in a subscription format like Gaiam TV or will there still be different content on Gaiam TV than say you could walk into the store and buy?

Unidentified Company Representative

Yeah, it’s very – validation maybe overlapped from what you can buy in stores, what you can get in Gaiam TV, from a Gaiam site.

Unidentified Company Representative

Just as an example Mark, you probably have somewhere between 48 and 60 facings for all of fitness in a typical retailer. On Gaiam TV, you have over 500 titles. So you can see that someone who is...

Mark Argento – Lake Street Capital Markets

Fitness.

Unidentified Company Representative

Yeah, who is really into fitness would, much is much better off subscribing to the service, so that they can get the maximum amount of titles at one price.

Jirka Rysavy

Yeah and it’s for right now it’s a subscription as this streaming, but we are going to introduce also if you subscribe or you can download and keep it on your computer as long as you subscribe or which is very different features and for example Netflix has, they don’t none of this current streamers had that feature because they don’t have the rights for the videos to do that. But it’s still different for somebody who is actually buying or downloading video-to-home. This is still a rental.

So why you have access to it depends what’s the use for most of the people owning the right to subscribe it’s more than adequate because why do you really need it. But obviously somewhat they are going to buy it, they buy it. But we believe that either you buy digitally or you stream it digitally long-term. However, that process is much slower than people anticipate and you’ll see that actually the overall markets start to grow after declining few years, which is a good sign for us.

Mark Argento – Lake Street Capital Markets

Shifting gears to some of the financials, do you know where the net operating loss for the NOLs stands currently? And then I know you guys bought your building in number of years ago at the right time real estate markets definitely having run us on source any thought about doing the sale leaseback and locking some of the capital there maybe the buyback stock or deploying another words?

Unidentified Company Representative

So the first question, I think Steve might know more about. I would say it’s about $47 million what we have of NOLs both and which is pretty much over $40 million is not restricted to this about $5 million whether the restriction for about two years, and on the sales leaseback yes we discuss it pretty familiar, we look at how the market is, how is to do it best return of pretty much finished subleasing the space, and so it’s a time, we’ve probably look at transactions something like that in relatively near future, which is the best but it is several ways to do it. We didn’t really decided exactly how, but and there is buildings is on the books. We have probably about little over $19 million in it.

Mark Argento – Lake Street Capital Markets

Gotcha and then any thoughts on stock, stocks have been performing a little bit better here lately, any thoughts about use of capital. I know you have a little bit of debt but like your Vivendi put that at least you took out from Vivendi but going forward share buyback reinvestment of business. What do you think in terms of use of capital?

Unidentified Company Representative

I think we actually do have discussion on this on the Board right now, we frequently saw with (inaudible) say to, you may get the final decision.

Mark Argento – Lake Street Capital Markets

Say you guys are actively looking at some alternatives?

Unidentified Company Representative

We definitely are.

Unidentified Company Representative

We tend to look at right now pretty much evaluating all the PCs and how they’re best from the, like we talk about the building. Is the question do we own the building. We never historically own the building, but because we have a lot of cash, whenever we get like 0.1%, so was the time to buy it, but now we have even debt decline dramatically, because really when we bought, we borrow like $32 million total of is the debt right between the Universal and stuff and its down to 8.

So but – so its like a – it’s a good time to look at, stuff as the business kind of performs better and we have a good cash flow, but you’ve always saw that the cash flow when we borrow was our priority because before if we have always solidifications hands the cash flow is typically not that pressing gives us – it is a kind of borrow, because the value of the cash on debt, but I do want really talk specific till we make some decisions.

Mark Argento – Lake Street Capital Markets

Fair enough. And then last question of Lynn, what did you guys did the brand study and I know it sounds like could still some of it’s come back and you kind of high level take ways I mean, I know you guys just have a pretty good brand. Any thoughts around some different ways that to enhance the value.

Lynn Powers

No its definitely all about building and positioning the Gaiam brand for the sustainable growth and certainly our heritage is around Yoga, fitness and wellness and really making accessible to everybody and we’ll have a lot more to share probably on the second quarter call about the study and what our future plans are with it, but a lot of exciting information and opportunities and like Jirka said, we’re evaluating all of the knowledge develop more to be able to talk about coming soon.

Mark Argento – Lake Street Capital Markets

Great. Congrats on a good quarter. Thank you.

Steve Thomas

Hey Mark, just to answer your question. We’ve got $42 million in NOLs and $39 million are available right now.

Mark Argento – Lake Street Capital Markets

Thanks Steve.

Operator

(Operator Instructions) And the next question comes from the line of George Kelly with Craig-Hallum Capital Group. Please proceed with your question.

George Kelly – Craig-Hallum Capital Group

Hi guys. I just wanted to follow-up one of the Marks questions on the building, wondering what year you bought that building and when you acquired it, how much do you just spend on it.

Unidentified Company Representative

We acquired it about two and a half years ago, three years ago.

Unidentified Company Representative

It’s about three and three and a half.

Unidentified Company Representative

Yeah. And I said, we have slightly over $19 million in it with everything what we put in, you have to put some tenant improvements, because we have the three tenants, (inaudible) we did some TIs and stuff so that our total cost everything which in its about little over 19.

George Kelly – Craig-Hallum Capital Group

Okay.

Unidentified Company Representative

And it’s a 13 acres with 150, 000 square feet building, a Triple AAA building.

George Kelly – Craig-Hallum Capital Group

Okay. And then Lynn, you’ve talked about the direct, the DR business, the that [construct tough], when do those start to ease, is it…?

Unidentified Company Representative

Third quarter.

Unidentified Company Representative

Third quarter, it will be third quarter. We launched dealing in January of last year and I think everybody knows Jillian is the pre-eminent brand in fitness so, we have 58% comps in the first quarter over thirty and second so we’ll expect by the third quarter will be back on to having more reasonable comps.

George Kelly – Craig-Hallum Capital Group

Okay. Next, couple of questions on the TV business, did I hear you right that it was a $1.8 million loss in the quarter, and you expect $1.8 million of losses through in each quarter through the fourth quarter?

Jirka Rysavy

It was $1.8 million I would expect slightly bigger in the second Q and less than the third Q it will decline from the third Q, but second Q, because to marketing right now will be probably slightly more. I would kind of say somewhere about its kind to hard to say but probable so far (inaudible).

George Kelly – Craig-Hallum Capital Group

Okay. And to your previous guidance was for breakeven by the fourth quarter. But its sounds like maybe you’ve changed that just wondering why. What’s happened differently then next versus previous expectations?

Jirka Rysavy

Now, we didn’t say first quarter we set breakeven by December, and yeah, its still our goal, we start to marketing above months later so my – move a month but the goal was to do it by December so December generates still kind of thinking now probably kind January versus moving to marketing for months, but if that still same.

George Kelly – Craig-Hallum Capital Group

Okay. And, then, just lastly, the expansion with the 4-foot additional section can you talk about – I may have missed that on your prepared remarks. But can you go through those details again? And, is that 4-foot all incremental space?

Lynn Powers

It’s not a 100% incremental space, because currently we do have some restore products out there, so but it is some incremental face probably two feet so we had probably about 2 feet now, but it will be a 4-foot section of rehabilitative products and it will be a combination of Gaiam restore and active recovery.

George Kelly – Craig-Hallum Capital Group

Okay.

Unidentified Company Representative

We see this as a really growing trend and the fact that it’s being put in mass retail just shows you what kind of opportunities we have certainly in our other channels of distribution as well.

George Kelly – Craig-Hallum Capital Group

Okay, all right. Thank you.

Operator

Mr. Rysavy, there are no further questions at this time. I’ll now turn the call back to you.

Jirka Rysavy

Okay. So I’d like to thank everybody and for being with us and hopefully talking again in next quarter. Thank you very much.

Operator

Ladies and gentlemen that does concludes the conference call for today.

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