Pro-Dex, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2015, the first quarter of fiscal 2016 (fiscal year ended June 30). The interim financial statements are unaudited.
Business context
Pro-Dex designs and manufactures powered surgical and dental instruments and motion-control products. Its operations also include Fineline Molds, Huber Precision and an Engineering Services Division. The period includes Fineline and Huber, acquired in fiscal 2015.
Financial performance and liquidity
| Metric | Quarter ended Sept. 30, 2015 | Prior-year quarter |
|---|---|---|
| Net sales | $4.097 million | $2.595 million |
| Gross profit / margin | $1.058 million / 26% | $828,000 / 32% |
| Operating loss | $119,000 | $189,000 |
| Net loss | $125,000 | $170,000 |
| Loss per share, basic and diluted | $0.03 | $0.04 |
| Cash from operating activities | $(637,000) | $523,000 |
Sales increased 58%, largely from medical-device shipments and the addition of Fineline and ESD revenue. Gross margin declined six percentage points: management cites higher costs and learning-curve labor and overhead for newly launched products. Operating expenses were $1.177 million, up 16%.
Cash and equivalents were $493,000 at September 30, down from $697,000 at June 30. Working capital was $4.7 million. Total assets were $12.270 million and shareholders’ equity was $8.360 million. Notes payable were $589,000 in total ($524,000 current and $65,000 long-term); the company had no Summit facility borrowings outstanding at quarter-end.
Material changes and notable items
- Medical-device revenue was $2.6 million, up 70%; industrial and scientific revenue was $504,000, down 3%. Fineline contributed $263,000 and ESD $110,000.
- Four customers accounted for 70% of quarterly sales. One customer represented 27%; a supplier represented 17% of purchases and 47% of accounts payable.
- Operating cash use reflected, among other items, a $618,000 decrease in accounts payable, accrued expenses and deferred rent, and a $241,000 increase in unbilled receivables.
- In September, Pro-Dex borrowed $500,000 from Fortitude at 12% annual interest, due March 15, 2016, secured by the Ramsey property. It also established a receivables-backed Summit facility of up to $1 million at prime plus 2%, plus fees. A $300,000 Summit draw during the quarter was repaid by September 30.
- On October 13, 2015, title to Riverside Manufacturing collateral transferred to Pro-Dex and Riverside ceased operations. Pro-Dex says it is marketing the property and attempting to sell machinery and equipment. The $1.709 million recorded investment remained subject to Level 3 fair-value estimates; management reported no impairment charge at September 30.
Outlook, risks and contingencies
Management said cash, receivables and financing were expected to fund operations for at least the next 12 months. It intends to reduce costs on newer products, pursue development projects and sales, integrate acquisitions, and monetize the Ramsey assets. There is no specific revenue or earnings guidance in the filing. Management cautioned that operating cash flow may remain negative, including as the company procures long-lead-time materials for backlog.
Risks include customer cancellations or late payment, high customer concentration, weaker demand for a former leading customer’s orthopedic shaver product, pressure on new-product margins, and delays or losses in selling the Ramsey collateral. The company warned that debt service and collateral pledges may constrain cash, future borrowing and operating flexibility. It reported no legal proceedings it currently considers material and no material changes to previously disclosed risk factors other than the new financing-related risks. Disclosure controls were considered effective; staff turnover and training were noted as a potential internal-control challenge.
Important facts for investors to verify
- Whether gross margins improve as new products move beyond the assembly learning curve, and whether planned cost reductions are achieved.
- Whether the $14.2 million reported backlog converts to shipments and cash on expected schedules, including the extended delivery schedule for a former major customer’s orders.
- Progress and realized proceeds from selling the Ramsey property and other Riverside collateral, and whether proceeds repay the Fortitude loan as planned.
- Cash burn, receivables collection and any use of the Summit facility; the reported 12-month liquidity expectation depends partly on these factors.
- Customer and supplier concentration, including the impact of changes in major-customer demand or supplier terms.