May 13, 2013
Executives
Harold A. Hurwitz - Chief Executive Officer, President, Chief Financial Officer, Principal Accounting Officer, Treasurer and Corporate Secretary
Operator
Greetings, and welcome to the Pro-Dex Fiscal 2013 Third Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Hal Hurwitz, Chief Executive Officer of Pro-Dex. Thank you, sir.
You may now begin.
Harold A. Hurwitz
Thank you, Jesse, and thank you, all, for joining us to review the results for the third quarter and first 9 months of fiscal year 2013. On today's call, I will provide a synopsis of our operating results, as well as some comments.
Then, as Jesse mentioned, we will open up the call to your questions. Before beginning, however, I ask our participants and listeners to note that the comments made on this call may include statements that are forward-looking within the meaning of securities laws.
These forward-looking statements may include, without limitation, statements related to anticipated industry trends and the company's plans, products, perspectives and strategies, both preliminary and projected. Actual results or trends could differ materially.
We undertake no obligation to revise or publicly revise the results of any revision to the forward-looking statements in light of new information or future events. For more information, please refer to the risk factors discussed in the company's Form 10-K as amended for the year ended June 30, 2012, the Form 10-Q filed with the SEC today and the Form 8-K filed with the SEC today, along with the attached press release issued today, all of which can be obtained from the SEC or by visiting our website at www.pro-dex.com.
My discussion of our results for the fiscal 2013 third quarter and the first 9 months will relate to our continuing operations, meaning that the results of our former Astromec motor product line, which was sold in February 2012, will be excluded. First, let's cover third quarter results.
Sales for the quarter ended March 31, 2013, decreased 33% to $3.1 million from $4.5 million for the corresponding quarter in 2012. This decrease was primarily the result of previously disclosed reductions in purchases of the company's powered surgical instrument products by its former largest customer, partially offset by increases in surgical instrument sales to other customers.
Excluding sales to the company's former largest customer, which represented a reduction of $1.7 million in the quarter ended March 31, 2013, from the corresponding quarter in 2012, surgical instrument sales increased $310,000 or 19% in the quarter ended March 31, 2013, compared to the same quarter in 2012, nearly all of which arose from increased sales to the company's current largest customer. Gross profit for the quarter ended March 31, 2013 was $883,000 or 29%, compared to gross profit of $1.2 million or 27% for the year ago period.
This increase in gross profit as a percentage of sales was due primarily to improvements in manufacturing efficiencies, partially offset by increased warranty accruals related to product mix. Operating expenses, which include selling, general and administrative and research and development expenses, for the quarter ended March 31, 2013, decreased 13% to $1.7 million from $1.9 million in the prior year's corresponding quarter.
Included in operating expenses for the quarter ended March 31, 20 thing were: a, $167,000 of payments made to our former Chief Executive Officer in connection with his separation of employment from the company during the quarter; and b, $135,000 of costs associated with the contested election of directors that culminated during the quarter. Included in the operating expenses for the 2012 quarter were separation costs related to a previous Chief Executive Officer's resignation amounting to $339,000.
Loss from continuing operations for the quarter ended March 31, 2013, was $765,000 compared to a loss from continuing operations of $547,000 in the corresponding quarter in 2012. Net loss for the quarter ended March 31, 2013, was $747,000 or $0.22 per diluted share, compared to a net loss of $487,000 or $0.15 per diluted share, for the corresponding quarter in 2012.
During the quarter ended March 31, 2013, the company used $490,000 of cash in operating activities. This use of cash reflects primarily the aforementioned separation payments and proxy contest costs.
Now we'll speak about the 9 months results. Sales for the 9 months ended March 31, 2013, decreased 30% to $9.5 million from $13.6 million in the corresponding 9-month period in 2012.
Excluding sales to the company's former largest customer, which represented a reduction of $5.5 million in the 9 months ended March 31, 2013, from the corresponding period in 2012, sales of surgical instruments increased $1.3 million or 30% in the 9 months ended March 31, 2013, when compared to the 2012 period, 62% of which arose from increased sales to the company's current largest customer. For the 9 months ended March 31, 2013, gross profit was $3.2 million or 33%, compared to $4.6 million and 34%, respectively, for the corresponding period in 2012.
This decrease in gross profit as a percentage of sales resulted primarily from unfavorable changes in product mix, partially offset by a reduction in warranty costs. Operating expenses for the 9 months ended March 31, 2013, decreased 17% to $4.4 million from $5.2 million in the corresponding 9-month period of 2012.
Comprising this decrease were: planned, company-wide expense reductions of $538,000; compensation reductions of $187,000; lower separation costs in 2013 relative to 2012 of $172,000; and $155,000 attributable to the utilization of engineering resources in contractual revenue-producing activities in 2013. Partially offsetting these expense decreases were costs of $177,000 incurred during the 9 months ended March 31, 2013, that were associated with the contested election of directors.
For the 9 months ended March 31, 2013, loss from continuing operations was $1.2 million, compared to a loss from continuing operations of $529,000 for the corresponding period in 2012. Net loss for the 2013 9-month period was $1.1 million or $0.34 per diluted share, as compared to a net loss of $332,000 or $0.10 per diluted share for the corresponding period in 2012.
During the 9 months ended March 31, 2013, the company used $1.3 million of cash in operating activities. This use of cash reflects primarily a buildup of inventory, amounting to $955,000, to fulfill firm customer purchase orders and build stock in order to shorten lead times, combined with the payments of: a, $167,000 to our former Chief Executive Officer in connection with his separation of employment from the company; and b, $177,000 of costs in connection with the contested election of directors.
In addition, as announced previously, in September 2012, the company repaid the entire outstanding balance on its term loan from Union Bank amounting to $685,000. As a result of the foregoing, cash on hand at March 31, 2013, was $2.0 million, compared to $4.1 million at June 30, 2012.
So having covered the numbers at the surface, let's drill down to better understand them. We'll start with our continuing work to renew our revenue base.
Since becoming CEO of Pro-Dex only 78 days ago, I have been treated firsthand to our increased presence in target markets and our enhanced stature with prospective customers. This has been evident in the substance of meetings we have had with prospects at the recent conferences of the American Academies of Orthopaedic Surgeons and of Neurosurgeons, as well as in meetings with key customers.
As a result of such activity, we are in the design and engineering phase on 2 key projects in the cranial-maxillofacial, or CMF space, that are based on next-generation technology relative to our original Pro-Driver product platform, and we are in the discussion or proposal phases for similar projects in the much larger spine space. As I mentioned in the press release issued today, it is not unusual for our sales cycle, even when successful, to span a 12- to 18-month period and the initial engineering phases for new projects may consume an equally lengthy period.
As an example, well over a year ago, we courted a major surgical device OEM regarding the CMF project. This effort resulted in the execution, in December 2012, of an option agreement that allowed the OEM the ability to assess our development work as we mutually serve to finalize the definitive development and supply agreement.
That definitive agreement was executed 2 weeks ago. Because this project, as well as others I've described, are in their early stages, it is likely we will not see meaningful manufacturing revenues from these projects until late in the current calendar year or in 2014.
That said, we are enjoying year-over-year increases in sales of our surgical instruments to existing customers, and while we are unable to assure successful results, we are working hard to maintain this trend. Now let's turn to our work in rightsizing our cost footprint.
The results of the quarter and 9 months ended March 31, 2013 obviously contain 2 large sets of unusual costs: those associated with the proxy contests, which was waived for the first 6.5 months of this fiscal year, and those in connection with Mike Berthelot's separation from Pro-Dex. Those 2 sets of costs combined to represent 40% of our net loss for the 3 months and 31% of our net loss for the 9 months ended March 31, 2013, a magnitude which should not be ignored in understanding our results.
Without consideration of these unusual costs, we reduced operating expenses for the third quarter by $218,000 or 14% on the corresponding quarter in 2012 and by $875,000 or 18% in the 2013 9-month period when compared to the corresponding 2012 period. Looking forward, we continue to identify cost reduction opportunities.
The combination of my position as Chief Financial Officer with my new position as Chief Executive Officer, reduces annualized compensation cost to the company of approximately $260,000. The voluntary reduction of cash and equity-based compensation by members of our board, after giving effect to a new non-employee board member compensation policy approved by the board earlier this month, is expected to result in an estimated annualized expense reduction of approximately $140,000 when compared to what the company's board compensation would've been under the board composition and compensation policy of 1 year ago.
Perhaps more important, however, is the rightsizing exercise we are undertaking that will affect the entire cost structure of the company as we prepare for fiscal 2014 and beyond. This exercise is being led by Rick Van Kirk, who we recently announced has been promoted to Chief Operating Officer.
Rick has been a leader in every operational aspect of Pro-Dex. He is ideally positioned to direct the cost management program that reflects not only a call for increased productivity, but also increased discipline and indeed, a cultural change in our company.
We also recently announced that we have entered into a Purchase Agreement with Aesthetic and Reconstructive Technologies, Inc., which provides for Aesthetic's purchase of the land and building we owned in Carson City, Nevada, that formerly housed our Astromec motor business. Under the terms of the Purchase Agreement, completion of the sale must take place by July 8, 2013, and is contingent on: a, completion by the buyer of its due diligence review of the property by June 21, 2013; and b, the buyer's ability to obtain financing from a loan guaranteed by the U.S.
Small Business Administration. And we cannot assure completion of either of these items.
Should the transaction successfully close, however, the purchase price to be paid to us by Aesthetic under the terms of the agreement is $980,000, well in excess of the carrying value of this property on our balance sheet of $733,000. In sum, we have emerged in a quarter in which we put substantial unusual costs behind us, and we initiated new business projects and cost management programs that have the potential to transform us.
I am now happy to invite any questions you might have with regard to the quarter, the 9 months or our business operations. With that, I'll turn the call back over to Jesse for Q&A.
Operator
[Operator Instructions] Mr. Hurwitz, it appears we have no questions at this time.
I would like to turn the floor back over to you for any concluding comments.
Harold A. Hurwitz
Okay. Thank you, Jesse.
And my thanks to all of you for joining me today. All of us at Pro-Dex appreciate your interest, your time and your support of the company.
And we look forward to speaking with you in September, when we report our fourth quarter and full fiscal year financial results. Thank you.
Operator
Thank you. Ladies and gentlemen, this does conclude today's teleconference.
You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.