ZAGG's (ZAGG) CEO Randy Hales on Q2 2014 Results - Earnings Call Transcript

Aug. 5.14 | About: ZAGG Inc (ZAGG)


Q2 2014 Earnings Conference Call

August 05, 2014, 5:00 PM ET


Kim Rogers - Director of IR

Randy Hales - President & CEO

Brandon O'Brien - CFO


Ross Licero - Craig-Hallum

Jon Hickman - Ladenburg

Bob Evans - Pennington Capital

David Cannon - Aegis Capital


Good day, ladies and gentlemen, and welcome to the ZAGG Inc. Second Quarter Earnings Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today’s conference, Kim Rogers, Director of Investor Relations. Please go ahead.

Kim Rogers

Thank you, Danielle. Good afternoon, ladies and gentlemen, and thank you for joining us today for the ZAGG Inc. second quarter 2014 conference call. On the call today from the company are Randy Hales, President and Chief Executive Officer, along with ZAGG's Chief Financial Officer, Brandon O'Brien.

By now, everyone should have access to the second quarter earnings press release and CFO commentary. If you have not received a copy of the release and the commentary, they can be found on the Investor Relations portion of the ZAGG website under Financial Information Quarterly Results.

This call is being recorded and a podcast of the conference call will also be archived on the ZAGG Investor Relations web page under Events for one year.

Before we begin, we'd like to remind everyone that the prepared remarks contain certain forward-looking statements and management may make additional forward-looking statements in response to your questions.

These statements include, but are not limited to, our outlook for the company and statements that estimate or project future results of operations or the performance of the company. These statements do not guarantee future performance and speak as of the date hereof.

For a more detailed discussion on factors that can cause actual results to differ materially from those projected in any forward-looking statements, we refer all of you to the risk factors contained in ZAGG's annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. ZAGG assumes no obligation to revise any forward-looking statements that may be made in today's release or call.

Please note that on today’s call, in addition to discussing the GAAP financial results and the outlook for the company, the following pro forma financial measures will be discussed; adjusted EBITDA and pro forma net income.

An explanation of ZAGG's use of these non-GAAP financial measures in this call and the reconciliation between GAAP and non-GAAP measures required by SEC Regulation G is included in ZAGG's press release today, which again, can be found on the Investor Relations section of the company's website.

The non-GAAP information is not a substitute for any performance measures derived in accordance with GAAP, and the use of such non-GAAP measures has limitations, which are detailed in the company's press release.

Before I hand the call over to Randy, I want to call your attention to the change in our conference call protocol that we have implemented with this earnings release today for the second quarter of 2014.

Today, immediately following the issuance of our financial results in a press release after the market close, we posted a written commentary and analysis by Brandon O'Brien, our Chief Financial Officer, on our Investor Relations website. This is to allow analysts and investors time to read and review the commentary before the start of our earnings conference call.

We also furnished this commentary to the SEC today on Form 8-K. The goal is to limit our prepared remarks to brief summary comments by Randy and Brandon, and then move into the Q&A portion of the call. We think this new approach will make our earnings release process more efficient and make the time spent on the call more productive for everyone.

I'd now like to turn the call over to Randy Hales.

Randy Hales

Thank you, Kim. Good afternoon, everyone, and thank you for joining us today. I’m pleased to report that we exceeded our internal expectations this quarter for revenue, adjusted EBITDA, and EPS as a result of a lot of hard work by all members of the ZAGG team and great execution against our strategic objectives in product, brand, and distribution.

Typically, the second quarter is our weakest quarter of the year, so the better-than-anticipated results are encouraging. Incremental revenue in the quarter came from better execution with existing customers, the sell-in of a large number of new SKUs, and one of the biggest drivers in Q2 net sales was due to improved shelf presence and point-of-sale fixtures.

We recently installed a new keyboard point-of-sale display in the top locations of one retailer and they are experiencing a 2.5 times lift over the same period last year.

For the second half of this year, we expect to show year-over-year growth due to the following factors; the successful launch of new products across all product categories, higher sell-through due to better shelf placement and point-of-sale merchandising, further SKU expansion with existing customers, the addition of new channels of distribution and the incremental growth from our international business.

Other significant events that occurred during the quarter include the strengthening of our management team with two key new hires; Chris Ahern as our Managing Director of International. Chris is based in Shannon, Ireland, and brings European and emerging markets sales leadership, as well as operations and supply chain management experience.

With Chris now running International, we have begun targeting new retail opportunities while strengthening our existing ones. International has grown nicely in the first half of the year, and we expect that growth to accelerate in the second half.

Kim Rogers joined ZAGG in June as our Director of Investor Relations and Business Development. Kim has been ZAGG’s internal investor relations consultant for five years, and brings a capital markets perspective to our team that will deepen the company’s investor relations platform and provide a dedicated effort to our business development process.

Brian Stech, our new EVP of Sales and Marketing, who we announced on the first quarter call, joined in April, and in his short tenure, has had an immediate impact on the organization. Brian has made necessary changes to improve sales efficiency, grow overall distribution, and align pricing across all channels. He has been instrumental in implementing a strategy with Amazon, which will become a primary driver of our e-commerce business going forward, and he has energized our sales and marketing teams with renewed focus and direction.

During this quarter, we introduced several new products that performed very well for us. The Tadpole is a unique personal audio product that saw broad retail acceptance. It’s currently the smallest portable Bluetooth speaker in the market weighing less than an ounce and the size of a keyfob. We’re having a lot of fun with this product.

We believe we’ve created a new category in audio, companion audio that brings personal and portable audio together. We expect Tadpole sales to continue to grow as consumer awareness and distribution increases.

invisibleSHIELD Glass has been our top-selling invisibleSHIELD product this quarter. We saw strong sales of glass, which carries a higher ASP than film, and had record sell-through even without a major new device launch.

The AutoFit is a revolutionary Bluetooth tablet keyboard designed to provide a custom fit solution for the most popular Android tablets. The Samsung Galaxy Tab 4 Folio is a backlit keyboard and case that features our unique hinge technology to hold tablets at virtually any viewing angle, similar to a laptop.

And most recently, we launched the Rugged Folio Keyboard with AT&T, and we have received fantastic feedback. This is the most versatile keyboard we have ever launched. It is extremely durable, and it converts into four user modes; keyboard, designed for productivity; video viewing for entertainment; case mode for protection; and book mode for reading and surfing the Internet. In addition to all those great features, it ships with a battery that can power the keyboard for up to two years.

These new products saw great performance in the quarter, particularly tablet keyboards where the NPD Data shows that ZAGG has the number one brand in Samsung Keyboards, the number one brand in Universal Tablet Keyboards, and the top-selling keyboards for the iPad Air and the iPad Mini.

Taking a step back from the second quarter for a minute, I’d like to talk about the primary drivers of our growth strategy based on product and distribution. I’ll start with a few highlights in our key categories, which I’m excited about. This fall’s new launch, new product launch will feature some of the best products the company has ever brought to the market.

Starting with keyboards, our forecasts indicate this category is likely to increase as a percentage of revenue and represents our biggest growth opportunity in the foreseeable future. We are introducing even more feature-rich creative product solutions as evidenced by the Rugged Keyboard and (technical difficulty) fall line-up.

Two recent events, the release of Microsoft Office 365 for the iOS operating system and the Apple IBM announcement, both worked to help drive tablet sales in the enterprise, and ZAGG is well positioned to benefit from this trend.

We are working on several strategic partnerships that will enhance tablets as workplace productivity tools when combined with the ZAGG Keyboard. With the invisibleSHIELD, the goal this year has been to stabilize this category and stop the decline we’ve experienced for the past year. The second half of the year is shaping up to be stronger for the invisibleSHIELD product line than the first half.

At this time, we’ve received large initial orders for the invisibleSHIELD in anticipation of key device launches this fall. Our customers believe that customers want to protect their devices, and see the invisibleSHIELD as the best solution for protection. In fact, it may become more important than ever to protect valuable devices as overall cost of ownership and screen replacement increases.

To stabilize the screen protection category, we are focusing on expanding demand for the invisibleSHIELD line by positioning more invisibleSHIELD products to tablet users, developing stronger messaging for the growing Android-based market, increasing international sales, emphasizing the importance of protection against screen breakage, which can be the most costly repair, and promoting our newest invisibleSHIELD products with a unique two-tab easy-install method that greatly improves the consumer experience.

This fall, we will introduce a new HDX film. This film will have the best impact, best install, and best self-healing offered in the industry, along with high-definition clarity. One additional means to stabilize the category is with the invisibleSHIELD On Demand. We are finalizing the roll out to our franchise locations and monitoring our progress closely. The invisibleSHIELD On Demand is also in limited testing at a few key retailers.

With our audio line, we are seeing expanded placement in both new and existing customers. The iFrogz Toxix Headphone was awarded Fab 15 Status at Wal-Mart, which means it’s been identified as a top SKU in the entire electronics category that they want to focus on. iFrogz Plugz EarBuds are the top-selling personal audio product by overall unit volume and the Toxix Headphones are the top-selling headphone under $15.

Power management has been a growth category for us this year, and with the new power products being launched in the third quarter, we expect to further grow the category throughout the year. As with other product categories, we are excited about some of the new technologies and strategic opportunities we are exploring.

Lastly, the case category is one we’ve worked hard to revamp. Our new products have great styling and multi-purpose design to do more than just protect your phone.

Another part of our product growth strategy is acquisitions. With Kim Rogers’ new role in business development, we’ve created a process to more efficiently evaluate potential strategic relationships and small targeted acquisition opportunities. In early September, we will introduce our spring 2015 product line in order to start working with our customers earlier in their planning cycles.

The other key element of our growth strategy is expanding distribution. The focus this year has been to sell more to existing customers, while adding new customers and additional distribution. As we move into the second half of the year, we have identified some key distribution opportunities. Our e-commerce strategy is ultimately about revenue growth, but it’s also about discovery, education, and conversion.

Working more closely with Amazon is a big step as they can influence consumer behavior both online and throughout the retail channel. We recently assigned new management to expand the franchise channel where we see opportunity for growth. This is an important channel for ZAGG as it is often the first introduction for many consumers to our brands.

We continue to make progress in engaging with our distribution partners to further refine our pricing strategy, enter new verticals, and continue to grow the channel.

That concludes my comments on our second quarter results and our strategy for profitable growth. Brandon has a few comments on the financial results, and then we’ll turn the call over to Q&A. Brandon?

Brandon O'Brien

Thanks, Randy, and thanks again to those of you who have joined us on the call or on the Internet today. I wanted to take a few minutes to elaborate on a couple of points in the CFO commentary that we released earlier today.

First, on the impact to gross margin caused by increased inventory reserves and the shift in product mix, we increased the inventory reserve to address some slower-moving items that was impactful to gross margin. We feel our reserves are adequate at this time, but we’ll continue to evaluate our inventory based on market trends and our inventory levels, and will make appropriate adjustments to our inventory reserves as needed.

We have also continued to see a shift in product mix with tablet keyboards contributing a larger portion of our revenue on a year-over-year compare. The overall level of inventory, and in particular, the level of slow-moving inventory should be addressed by processes that are currently in place for order management that have the intended goal of mitigating inventory excess in the future by better matching manufacturing to product demand, and reducing lead times for products sourced in China.

We are focused on reducing inventory levels for the remainder of the year, including sales to discount channels, and have built that into our gross margin forecast.

Tablet keyboards have grown to our number one revenue contributor overall on a year-to-date basis. In the second quarter, keyboards were 34% of net sales versus last year Q2 when they were only 25%. This trend of keyboard sales as our number one revenue category will likely continue for the foreseeable future.

We are reiterating our current net sales guidance of $218 million to $228 million, and our EBITDA guidance of $32 million to $34 million. We anticipate year-over-year net sales growth in the second half of the year, which would give us the operating leverage necessary to meet our current EBITDA guidance. We recognize this implies a higher EBITDA margin in the second half of the year than we have seen year-to-date.

But in addition to improved operating leverage, driven by stronger net sales growth in the second half of the year, there are factors that should help gross margins in the second half of 2014; the anticipated cost savings from our third-party logistics transition in shipping and assembly, the potential benefit of common componentry, improved manufacturing efficiencies, and the stabilization of our invisibleSHIELD product line versus last year. All these factors will be beneficial to gross margin for the remainder of the year.

We’ve exceeded our goal of effectively managing working capital and as a result, we’ve generated eight consecutive quarters of positive cash flow from operations. This provides capital to fund our growth, and along with our $60 million line of credit with Wells Fargo, gives us tremendous financial flexibility in how we grow. At this time, we don’t anticipate any draws on the line for working capital.

At the end of Q2, we still have $7.5 million outstanding on our 2014 stock buyback. We will continue to evaluate our purchases in the market for the remainder of the year. Additionally, we have the necessary working capital to fund inventory, investing in tooling for increased production, which puts our CapEx around $2 million, and we’ll continue to make investments in the business as we deem appropriate.

I’ll now hand the call back to Randy.

Randy Hales

Thank you, Brandon. Operator, we’ll now turn the time over for Q&A.

Question-and-Answer Session


(Operator Instructions) And our first question comes from Dave King from Roth Capital Partners. Please go ahead. Your line is now open.

Unidentified Analyst

Hi, good afternoon everybody. This is actually Joe for Dave. My first question is thinking a little bit about the keyboard business in implied guidance for the second half of the year after the strong Q2 results, what sort of growth are you guys really anticipating in the back half of the year? And are you guys being kind of conservative at this point in time given the growth you saw in the first half?

Randy Hales

Yeah, Joe, thanks for the question. The keyboard business is strong for us. It was very strong in the second quarter. We’re still very comfortable with the annual guidance that we’ve provided. Some of the sales in the first half of the year probably matured a little bit more early than we had anticipated. I wouldn’t say necessarily that we’re being conservative, but we feel comfortable with the numbers that we’ve put out there, and certainly, it’s a return to growth again in the second half on a year-over-year basis.

Unidentified Analyst

Are you anticipating as well return to growth for screen protection still in the back half of the year, is that still implied in the guidance?

Brandon O'Brien

We really see that stabilizing. We have some early reads now in the third quarter that would indicate that to be the case.

Unidentified Analyst

And then, thinking about the revenue contribution in the quarter from audio and power management, are you guys able to break that out in terms of what the mix was like for those two segments this quarter?

Brandon O'Brien

We’re seeing growth in those categories, but those aren’t categories that we’ve historically broken out. The good takeaway, Joe, is we’re seeing some strong growth particularly in the power category, and we may get to a point where it makes sense to break those out in the future.


Thank you. And our next question comes from Mike Malouf from Craig-Hallum. Please go ahead. Your line is now open.

Ross Licero - Craig-Hallum

Yeah, hi, this is Ross Licero on for Mike. Could you give us a little more color on your international sales initiatives, and how those are going?

Randy Hales

The international business really benefited early in the year from focusing in some key markets. We also had strong sales with keyboards like we’ve had here in the domestic market, and now with the new leadership there, it brings some experience in sales and distribution with certain retailers in Western Europe that we think will play very importantly in the second half of the year. That’s why we anticipate that even though we had a strong first half, we’ll see more acceleration in the second half.

Ross Licero - Craig-Hallum

Around the commentary from the Microsoft Office and the IBM announcement, can you talk about the strategic partnerships, how far down the road are you in discussions, and how many different people are you talking with?

Randy Hales

I wish we could speak more directly to that, but there are several entities and several businesses that we’re talking to about these strategic relationships. We are quite a ways down the path and you’ll see some announcements both in the third quarter and in the fourth quarter this year.

Ross Licero - Craig-Hallum

And are these with, let’s say, providers or are they directly with the businesses that would be buying these?

Randy Hales

Sorry to stay a little vague on that, but I think that as we make some announcements, you will be pleased with the types of relationships we’re talking about. They are -- it’s opportunity for two entities to come together and both benefit from some combined strategies to drive really the ability to use tablet keyboards more in enterprise.

Ross Licero - Craig-Hallum

And just on timing, is this a 2015 or are you expecting something sooner?

Randy Hales

Definitely 2014 for the first couple of [indiscernible] announcements, and then extending into 2015.


Thank you. And our next question comes from Jon Hickman from Ladenburg. Your line is now open, please go ahead.

Jon Hickman - Ladenburg

Good number on the top line there. I was wondering if you could elaborate on how you’re going to do your new product introduction or announcement in September, is that going to be available to the investor, investing public, as well as your potential customers.

Randy Hales

This is our second semi-annual product launch, Jon. We had a similar meeting in March and we’re getting into a cycle of March and September. We’ve had that meeting close just to internal sales and a couple of our manufacturers’ rep groups to-date. After they first receive the information that first week in September, they’ll then start getting out into the market and talking to our retail partners about it.

We keep that close to the vest because we don’t want the competition to know what we’re doing and where we’re headed with the products, but these fall launches that we’ll introduce will be discussed and displayed and demonstrated at CES. So that’s when you would have an opportunity to really see those in the market in a more public way.

Jon Hickman - Ladenburg

And then, Brandon, could you elaborate a little bit on the slow-moving products that were responsible for your inventory reserves? Was that mostly invisibleSHIELD stuff?

Brandon O'Brien

No. What it is, is we have some audio products, we have some keyboard products that we’re still moving through some inventory on. There are so many - we are in an industry which changes frequently and we need to make sure that we have the right products at the right times. We’ve definitely made tremendous strides in our ordering processes and the disciplines that we have in bringing product in.

So I think we’ve really worked to stem the tide there, not to bring additional products that contribute to that. So there are some other products, some older products that we’re still working through those levels that are slower moving.

We evaluate that on a monthly basis, and if we determine that based off historical trends and future demand that there is not demand for those products, then we’ll increase those reserves. So, it’s kind of something we always are looking at to make sure that we have those inventory balances properly stated.

Jon Hickman - Ladenburg

And then, one last question. Could you - I believe Randy mentioned that you’d receive some pretty strong pre-orders in anticipation of some new device launches in the fall, is that primarily the new Apple iPhone?

Randy Hales

It is, yes.


Thank you. And our next question comes from Ryan MacDonald from Northland Capital Markets. Your line is now open. Please go ahead.

Ryan MacDonald - Northland Capital Markets

Just wanted to start off, can you talk a little bit more or elaborate more on the market dynamics you are seeing in the tablet market? It seems like in the second quarter, there is a whole -- the market growth had slowed down a bit, some of your main competitors had difficult quarters. Can you just talk about what you are doing better, I guess, than some of your main competitors in that space to show this kind of growth?

Randy Hales

Let me start by talking about maybe a little more macro perspective on tablet keyboards, and then I’ll address the second part of the question with what we might be doing a little differently. It seems that there is a consumer awareness that’s starting to develop and strengthen. Most of the smart tablets when they were first introduced, and we used them for content consumption whether it was reading a book, surfing the Internet, a little bit of checking e-mail and so on.

As the tablet keyboards have progressed and developed and terrific software bundles have been released whether it’s Evernote or Microsoft Office 365 or some of the Intuit mobile platforms. Consumers are starting to realize that a tablet with a keyboard is a terrific productivity tool, and we’re seeing them coming to the workplace more and more, and even start to displace laptops in some instances. So, we think all of that is building a strong case for growth in tablet keyboard sales.

What we had done a little bit differently, I think, is our continued push to drive more feature-rich product into the marketplace, and it’s evidenced by the Rugged Keyboard we released last month with AT&T that has the two-year battery life, the ability to use that in four different modes. It’s both a Folio or just a keyboard, they separate easily so they don’t have to be joined, releases through magnets.

So just a lot more functionality, feature-rich products, and then as we talked about earlier in the year, we’ve been more aggressive this year in in-store merchandising and displays and some co-op advertising spend and so on. I think all of that combined has led us to see some real strength in that category.

Ryan MacDonald - Northland Capital Markets

And what kind of aggressive in-store merchandising, spending on that, I mean are you anticipate - how do you see that playing out in the back half of the year? Do you intend to spend more on merchandising, and if so, how does that affect EBITDA margins or operating margins on the bottom line?

Randy Hales

We do intend to spend more against in-store display, and we’ve got some terrific commitments from some of our retail partners. You’ll start seeing those show up in the third and fourth quarters of this year, and a lot of that is a redirection of some of the advertising dollars that we set aside all the time when we are selling products to these retailers as part of our contract. We’re just directing those dollars a little more efficiently than we used to.

Ryan MacDonald - Northland Capital Markets

And then moving on to guidance for the full year, you obviously reiterated on the top line there. I mean you had two very solid quarters, you’ve kind of beat on revenues in both quarters, yet you still kind of are reiterating for the remainder of the year. I mean, can you talk about maybe like the - a little bit of the disconnect there, because it seems like -- you seem fairly confident with some of the growth in the tablet keyboard market as well as you’ve got some strong initial orders for the iPhone or iPhone [really the] [ph] invisibleSHIELD launches, I mean is there - what I guess would you say worries you moving into the back half of the year?

Randy Hales

I think you had to step back from it a little bit. Although we’ve had two good quarters, we still had not return to year-over-year growth, and we anticipated that early in the year when we first set expectations on the year that we would be down year-over-year in the first half and start growing in the second half, and I think until we see some of that year-over-year growth start to take hold and the initiatives that we’re working on continue to really take route, we are hesitant to move beyond what we’ve put out for guidance already.

And some of the sales both in the first quarter and the second quarter moved ahead in the year, but by and large, on balance, we still need to see that return to growth. We feel confident with the numbers that we have out there. We’re just not ready yet to claim victory that we’re back on a growth trajectory.


Thank you. (Operator Instructions) And our next question comes from Bob Evans from Pennington Capital. Your line is now open. Please go ahead.

Bob Evans - Pennington Capital

Can you comment - there has certainly been a lot of press as you released your sapphire glass and the impact that might have on your type of product, can you give us your sense of things and if true what that might have for both tablet and mobile types of coverage for you?

Randy Hales

Bob, thank you for the question. It’s something that we’ve talked about a great deal around the hallways here for the last six months, and we do anticipate there is a very real possibility that we’ll see sapphire crystal showing up on phones in the near future. It’s a very expensive product, and probably creates more need for a consumer to have some kind of protection on that screen to protect their investment.

If a phone were damaged and that needed to be repaired, it would be quite costly, at least that’s our anticipation, and I believe that’s how our customers are feeling about it also as evidenced by very strong orders for the invisibleSHIELD going into this round of rumored iPhone launches, so it looks like the industry still believes that an extensive protection is a very viable option.

Also, we don’t anticipate seeing sapphire crystal on tablets, and our research indicates that the number one concern to tablet users today is screen breakage, and we’ve developed some new products that are hitting the market very soon that make it easier than ever to apply screen protection to large surface of the tablets.

So I mentioned during my remarks that there several things we were doing to help really shore up our position in that product line, another one would be continuing to add features that the OEMs will not have and the sapphire crystal cannot offer. So stay tuned for that. We’re sharing some of those plans with our retail partners now and they certainly seem to be receiving it well.

Bob Evans - Pennington Capital

As it relates to the sapphire glass, won’t you have to re-educate your consumers because I think the general perception out there is you wouldn’t need a screen given the durability and toughness of that screen?

Randy Hales

Yes, and we’ll be messaging that more aggressively than we ever had. The good news is that people in the industry whether it’s [indiscernible] retailer or a wireless company, they are very used to selling screen protection and protecting those investments, and I don’t think that you’ll see that behavior change. In fact, again, they may feel even more so that it’s important due to the fact that it’s a much more expensive device they are trying to protect.

Bob Evans - Pennington Capital

And then, can you comment on tablet sales and the impact on your keyboard sales? I know certainly some of the larger manufacturers, Samsung, Apple have commented on there, sales being trending down considerably from where they were, what impact does that have or how much have you factored that into your guidance?

Randy Hales

I’m sorry.

Bob Evans - Pennington Capital

As it relates to tablet sales and your guidance as it relates to your keyboards and so forth, what type of - how do you view the tablet market and that attachment sales there in terms of the trend of that market?

Randy Hales

We’ve also been watching that news closely, Bob, and seeing the trends in the industry with tablet sales slowing. I think part of that is it’s hard for a consumer to differentiate a new tablet from an older tablet in performance, functionality and so on. And so the manufacturers are really going to have to work to market that awareness and knowledge, why is it I would want to upgrade, it’s not like a phone where people upgrade with every new device that comes out.

So while that seems to be slowing a little bit right now, the adoption of keyboards with the installed base is growing at a very nice pace, and we believe that people will continue to buy tablet keyboards to turn their existing products into productivity tools and obviously that extends into new tablets when they do move for an upgrade.


Thank you. And our next question comes from David Cannon from Aegis Capital. Your line is now open. Please go ahead.

David Cannon - Aegis Capital

First question is on capital allocation, what is your view in terms of the free cash flow that you are generating right now? In light of where the stock price is now, do you still believe it represents a good value and it’s good usage of your cash to buy back your stock?

Brandon O'Brien

Yeah, Dave, this is Brandon. We didn’t execute anymore in the last quarter. We still have $7.5 million that is allocated on that. We are generating some nice free cash flow. Our debt is completely paid off. We want to have some dry powder as we look at some smaller potential acquisitions. We want to have that on the balance sheet to make sure we have that cash.

We’ll continue to look at the stock and determine where if there are opportunistic times for us to get back into the market and buy that, then we definitely feel like that is a good use of some of this free cash.

David Cannon - Aegis Capital

And then, second question is on HzO line, I know it’s been written down to zero on the balance sheet, but it’s always nice to be able to get something for free. Can you give us an update if there is still potential there and exactly where you are?

Brandon O'Brien

We do believe there is still some potential, and HzO has been out, they’ve raised some additional money, so we are down to about 11% owner of HzO. We are still kept up to-date with what they are focusing on and working on, and we’re still optimistic that there could be something out there for them, but certainly it doesn’t -- we don’t spend a lot of time on that.

We let that management team kind of run with the plans they’ve got, and like you said it’d be great to get something for that we’ve written down to zero, so we’re hopeful they will see some great success.


Thank you. And I'm not showing any further questions. I would now like to turn the call back to Mr. Randy Hales for any further remarks.

Randy Hales

Thank you for joining us for this call, and we look forward to visiting with all of you again in our next quarterly update.


Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.

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