PRO-DEX, INC. — FY2015 Form 10-K
Reporting period: Fiscal year ended June 30, 2015; comparisons are with the year ended June 30, 2014. The filing was signed September 17, 2015. Pro-Dex designs and manufactures powered surgical and dental instruments and motion-control products, with newer operations in injection molding, precision machining, and engineering services.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $13.383 million | $10.812 million |
| Gross profit / margin | $3.704 million / 27.7% | $2.966 million / 27.4% |
| Operating loss | $(902,000) | $(814,000) |
| Loss from continuing operations | $(402,000) | $(651,000) |
| Net loss | $(365,000), or $(0.09) per share | $(488,000), or $(0.14) per share |
| Cash used in operating activities | $(775,000) | $(329,000) |
| Cash and cash equivalents at year-end | $697,000 | $3.188 million |
| Working capital at year-end | $4.712 million | $6.766 million |
Revenue rose 24%, led by 31% growth in medical-device sales to $8.948 million; industrial and scientific sales fell 14% to $2.052 million. Gross margin improved slightly. Operating expenses increased 22% to $4.606 million, including higher selling, administrative, and R&D costs. Other income included a $455,000 realized gain from selling marketable securities, compared with $65,000 in FY2014. FY2015 included $37,000 of income from discontinued operations.
Assets were $12.516 million and liabilities $4.038 million at June 30, 2015. Balance-sheet debt included $94,000 of notes payable and $7,000 of current capital-lease obligations. The company reported no credit facility at year-end; after year-end it obtained a $500,000 loan at 12% and access to a receivables-backed facility of up to $1.0 million. Cash declined by $2.491 million during FY2015. Operating cash use reflected inventory growth of $1.705 million and higher receivables, partly offset by increased payables and deferred revenue.
Material changes and developments
- Backlog increased to $10.6 million from $2.8 million, primarily due to new craniomaxillofacial (CMF) products and an orthopedic surgical handpiece. The backlog includes approximately $1.6 million of orders the largest customer asked to reduce.
- The largest customer represented 49% of sales in both years; the top 20 customers accounted for 82% of FY2015 sales. The company said it could charge for materials if the requested order reductions occur, but would lose the associated gross margin.
- Pro-Dex acquired Huber Precision for $209,000 and Fineline Molds for $757,000 during FY2015. It also launched its Engineering Services Division.
- The company invested $1.7 million in notes, a revolving loan, and real property related to Riverside Manufacturing. Riverside’s notes were in default and on nonaccrual status. Pro-Dex received title to the Ramsey property; after year-end it issued a notice of default and said it was prepared to pursue eviction and liquidation.
Outlook, risks, and unusual items
- Management expected available cash, receivables, and September 2015 financing to fund working-capital and capital needs for at least 12 months, assuming the business continued as then conducted. It also planned to liquidate the Ramsey property and related notes, but gave no assurance of timely recovery.
- Management anticipated possible negative operating cash flow, particularly while purchasing long-lead materials to fulfill backlog. The company said additional financing might be needed and might not be available on acceptable terms.
- One of two significant CMF development projects was completed in Q4; Pro-Dex recognized approximately $336,000 in previously deferred development revenue and delivered initial products. A new powered-surgical-device development agreement signed in Q4 was valued at approximately $500,000. Completion and market success were not assured.
- Key risks include dependence on the largest customer, potential order cancellations or reductions, persistent operating losses, cash needs, competition, product-development and regulatory risks, and recovery of the Riverside investment. A single supplier accounted for 16% of FY2015 purchases.
- Management reported disclosure controls and internal control over financial reporting effective at June 30, 2015. The independent auditor issued an unqualified opinion on the financial statements; it did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether the largest customer’s requested $1.6 million order reductions occurred and the resulting effect on sales, margin, and backlog.
- Cash generation, working-capital needs, and the terms, availability, and use of the September 2015 financing facilities.
- Recoverability and eventual proceeds from the Riverside notes, Ramsey property, and related collateral, including the status and costs of default and eviction proceedings.
- Conversion of the $10.6 million backlog into shipments and revenue, and commercial progress on CMF products and other development programs.
- Whether acquisitions and new divisions contribute sustainable revenue and profitability, given continuing operating losses and increased expenses.