PRO-Dex, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2013. Financial statements are unaudited. The company designs and manufactures products for medical, dental, industrial, and scientific applications.
Financial performance
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2013 | Six months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Net sales | $2.640 million | $3.007 million | $5.194 million | $6.468 million |
| Gross profit / margin | $549,000 / 21% | $1.033 million / 34% | $1.494 million / 29% | $2.269 million / 35% |
| Loss from continuing operations | ($338,000) | ($364,000) | ($320,000) | ($418,000) |
| Net loss | ($338,000) | ($348,000) | ($126,000) | ($365,000) |
| Operating cash flow | Not presented separately | Not presented separately | ($646,000) | ($791,000) |
For the six-month period, discontinued operations contributed $194,000 of income, including a $167,000 gain on the sale of the former Astromec facility. Consequently, the reported net loss was narrower than the loss from continuing operations. Six-month comprehensive income was $78,000, reflecting $204,000 of unrealized gains on marketable equity securities.
Financial position and liquidity
- At December 31, 2013, cash and cash equivalents were $1.554 million, working capital was $5.558 million, total assets were $10.389 million, and shareholders’ equity was $8.047 million.
- Cash declined by $126,000 from June 30, 2013. Operating activities used $646,000; investing activities provided $522,000, primarily from the real estate sale; financing activities used $2,000.
- The company had no bank credit facility or bank debt. Capital lease obligations totaled $19,000, of which $7,000 was current.
- Marketable equity securities were carried at $903,000, against aggregate cost of $694,000. Management states that it believes cash balances and operating cash flows will fund operations for the next 12 months, but warns that alternative financing may be needed if anticipated cash flows are not achieved.
Changes versus the prior comparable period
- Second-quarter sales fell 12%; six-month sales fell 20%. The six-month decline was driven mainly by lower medical-device and motion-control revenue, partly offset by growth in dental sales.
- Gross margin contracted 13 percentage points in the quarter and 6 percentage points year to date. Management cited weaker sales volume and product mix, increased anticipated losses on certain development-services contracts, and unfavorable production variances from lower manufacturing volumes.
- Operating expenses declined year over year in both periods, but the savings did not offset the lower gross profit. Lower warranty expense partly mitigated the six-month gross-profit decline.
- Operating cash use improved from $791,000 to $646,000 for the six months, while cash fell from $2.549 million at December 31, 2012 to $1.554 million at December 31, 2013.
Outlook, risks, and unusual items
- Management reported a $5.0 million backlog at December 31, 2013, while noting order-booking variability and the timing of product launches and customer inventory builds.
- Customer concentration is significant: the largest customer represented 49% of quarterly sales and 46% of six-month sales. A former major customer’s minimum-purchase agreement ends in June 2014, after which the company expects no further revenue from that customer. Current orders from its largest customer are expected under a purchase commitment through December 2014; future arrangements had not yet been negotiated.
- The company announced a planned rights offering expected to raise approximately $3.0 million gross, subject to possible reduction. Pricing and offering dates were not yet set. Two beneficial shareholders provided a standby commitment for unsubscribed shares; directors are affiliated with those entities. Proceeds are intended for strategic opportunities or, alternatively, working capital and general corporate and product-development purposes.
- A share-repurchase program authorizes repurchases of up to 750,000 shares, but no shares had been repurchased. The company also reported no credit facility and no assurance that new financing would be available on acceptable terms if required.
- Management maintained a valuation allowance against deferred tax assets and reported $364,000 of unrecognized tax benefits. No significant change in those benefits was anticipated within 12 months.
- A former Santa Ana site was identified in a government report for further screening relating to possible groundwater contamination. The company said no further evaluation had occurred and the effect, if any, on the former site was uncertain.
- Other notable items include the $900,000 net proceeds from the Carson City property sale and a $199,000 increase in the market value of investments over cost at period-end. Management identified risks including customer and market changes, competition, technology evolution, and its ability to develop products and realize returns on opportunities. Disclosure controls were concluded to be effective.
Important facts for investors to verify
- Whether sales and gross margins recover, particularly given development-contract loss accruals and lower-volume production variances.
- Customer order levels and the effect of the June 2014 and December 2014 purchase-commitment end dates, as well as the company’s exposure to its largest customer.
- Actual cash burn and liquidity relative to management’s 12-month funding assessment, including any need for new financing.
- Final rights-offering terms, proceeds, dilution, use of funds, and the related-party standby arrangements.
- Performance and liquidity implications of the marketable-equity investment portfolio, and any developments concerning the former Santa Ana site or tax positions.