ProDex
notes from the AGM
By Manuel Maurício
March 01, 2021
I’ve recently come across a twitter thread where a fellow investor who goes by the name of Willy shared some notes taken during the ProDex’s Annual General Meeting back in November 2020.
He kindly allowed me to use them here. Thank you Willy. What follows are those notes with some of my own commentaries (in green).
If you’re new to Prod-Dex’s story, I advise you to read my previous posts HERE.
When do you plan to have operations beginning in the newly acquired building? And how close is that building to your current operation?
Richard Van Kirk, CEO: The building is very close. It’s about three miles up the street from where we are now. We plan to be up and running by the end of our fiscal year, which is end of June [2021], but we’re working pretty hard with contractors & architects to get up and running before that. But kind of the first draft conservative schedule looks like, June [2021].
Nothing new here.
Can you talk about how things are progressing with the recent product launches as well as the ones on the horizon?
Yes, absolutely. So, I’m sure a lot of you followed us for some time while we are working on the thoracic driver launch. And that launch, I think our first shipments were in March [2020] and several more in our fourth quarter through June, and it’s gone well. The surgeons really like the product, much like the neurosurgeons did on some of our CMF launches earlier. And what’s encouraging for us is that often with these types of projects, there’ll be an initial purchase order for a large quantity, launch quantity, if you will, and maybe not see a follow-on order for another year. On this product, in particular, we’ve already got a large follow-on order.
There is a large initial order, and they’re asking for it in the very early part of our third quarter [Jan-March 2021]. So that’s really encouraging. It’s been received well, and we’re happy about that.
We have another […] branded product that we developed that we’ve also found a partner for. We’re excited about that. We signed a distribution contract with them over the summer [2020], and that should be launching in the January [2021] time frame for us with another large customer. So, we’re happy with what’s been released. We’re excited about what’s coming forward. We have some more projects later in the year, an ENT project we’re excited about that’s tracking to ship, we think, this fiscal year [fiscal year end: June 2021]. And we like what’s going on in our development cycle right now.
What product is he talking about?
Next question, if cash continues to pile up on the balance sheet, how do you think about your capital allocation strategy?
This came up in last year’s meeting, and I think we were pretty good about making sure that we make sure that we fund the business, the operations, first and foremost, including reinvesting back in the business, whether it’s new products or technologies or equipment or even development of people.
And of course, those that follow projects knew that we do some other things, too, if we’ve got some excess capital in terms of investing in other company securities, stock buyback plans, which people are enthusiastic about when we do. So, there’s a lot of things that we can and quite possibly will do. And we discussed those pretty regularly in our Board meetings and frequently in between.
Also nothing new here. It goes to show that the Board of Directors and Management understand capital allocation and their not following a blind policy (like regular buybacks regardless of the price).
How do you assess the total addressable market of the thoracic driver relative to the other driver that you’ve recently launched, the CMF driver? I understand it’s a much larger total addressable market, is that right? And does that mean anything?
It is and we’re encouraged by that. We have a couple more opportunities with other customers that are interested in that product now. And we try to leverage this technology a couple of ways with an existing customer in various departments or surgical applications. And then we try to leverage that to different possible customers.
So, we’ve made most of the major players aware of this technology and this product. A couple of them are sampling it now. And we typically get very good reaction when people get a chance to actually work with the product. So, it’s kind of like selling a car. They get in to sit in the car and they’re going to want it, right? So, we’re getting people to try this product and some of the big players. So, we’re pretty optimistic about getting a much bigger share of this market as we go on.
This is very bullish. Pro-Dex owns the technology and is able to sell it to other customers. I believe that the existing customer is DePuy and Prodex is currently trying to sell the drivers to other of its divisions.
Also great to know that other major companies are sampling the drivers.
With the new building, what would you estimate your sales capacity now is?
We think that this will allow us to have sales capacity to $80 million to $100 million-plus, which is a good thing because I’ve submitted to the Board, in our last Board meeting, a pretty aggressive growth plan, and we’ll definitely be able to handle it with the new facility.
Also very bullish. The company did $16.9 Million in revenue on the first half of 2021. That’s around $34 Million per year. The new facility will allow them to almost triple those numbers.
Can you please provide an update on the status of the CE mark for the ATL driver and also detail what other countries you are trying to obtain approval in?
[Definition: CE marking is an administrative marking that indicates conformity with health, safety, and environmental protection standards for products sold within the European Economic Area.]
We are trying to finish some filing and documentation with our notified body to get that CE mark approved. I think we’ve talked before maybe in shareholder meetings or in some of the individual calls with our friends on some of the podcasts that there’s been a backlog of work with a lot of notified bodies overseas. And it took a long time to get a response for this. And then when we did, as often as the case, there’s a little bit of feedback, “Hey, can you clarify this or clarify that?” and they’re pretty easy to clarify.
We think that maybe didn’t quite understand the filing where they should have. And so, on the process of that, try to get some approval and then hopefully be able to help our partnership this product overseas. That’s the focus right now. For overseas, some of our customers will try to be shipping this product in Asia. Some earlier products we did for them, they’re trying to get those approved right now. We expect this one will follow the same path eventually. But right now, the focus is on the CE marking.
Nothing new here. High hopes for Europe (and Asia).
Is Europe a similar-sized market for screwdrivers as the U.S.A.?
It’s probably similar, maybe not as big, but we think it’s a pretty good size market.
Can you discuss the investment in former employee start from a couple of years ago?
[Monogram Orthopedics]
Obviously, start-up investments are risky, but you assessed the risk/reward as favorable. Yes. That’s going okay actually. They raised the money. They paid back the note, the money we lent them. We still have manufacturing rights, and we’re working with them now on helping them with their design and development of some of the products that we’ll be helping them with. They’ve made a lot of progress in terms of fundraising and building the organization, and we’ve actually picked up some activity with them recently in terms of helping them with their product.
I’m not counting on anything coming from Monogram.
Can you provide any color on the ventilator opportunity?
I think there’s a lot of color to that for us. We’re excited about the opportunity for a number of reasons. It’s great to be part of a solution, and we think this will be part of a solution, whether it’s in the United States or other places around the world. It’s a great opportunity for us to work and learn from people at Caltech and JPL. And we think it’s a good business opportunity, too. Timing is great as we’re moving into the new building.
We’ll be putting in a clean room where we can do the manufacturing of this. And so, there’s a lot of neat things about it that help us as a company and hopefully, we can help others with it. It was something that we were kind of looking for an opportunity to do. And Nick had suggested that we look for something like this. Jamie Rudy, our sales guy, I think found a link to the JPL project, and we’ve gotten contact with them, made a proposal.
They liked what we had to say and granted us a license. I think we’re one of maybe 23 companies out of over 300 that applied that got the license. And it’s been a nice, collaborative effort with them. And we’re looking forward to getting into production in the next few months.
I still have no clue what this could represent in terms of dollars.
Where is this company going long term?
We’ve made no secret that we’ve got some aggressive growth plans. We’re moving into some additional space. We’re probably doubling our manufacturing footprint. We have a really cool technology with the adaptive torque limiting that gives us an advantage on just about anybody else. But there’s only so many parts of the body you can use that technology.
So, we’re looking forward to developing new products, new ideas. Some of the things that we do to help generate those ideas, we like to develop relationships with surgeons and universities that have some ideas that maybe they’re having trouble getting to market or commercializing or manufacturing. And we’re developing some relationships there.
In fact, we’ve got a couple of projects already where we’re helping with some new ideas. And if we’re going to grow, we’ve got to grow some of our existing technologies, further develop existing customer relationships, but also come up with some new ideas, too. And we’re happy to come up with our own and help other people bring their ideas to market. We have some aggressive growth plans. There was a question earlier about sales capacity. I hope in the next several years, we’re buttoned up against that. And so that’s kind of an idea where we’re going.
Again, very vague, but very bullish. I like the fact that the company knows that they can’t sit tight, they have good expertise and they’re taking advantage of that to come up with new technology.
Can you talk a bit about the depth of the R&D pipeline?
We’ve been kind of in a cycle. We’ve had one or two products in development at the same time. And as a couple of them got launched this year, we kind of roll into the next.
So, we launched two products this past fiscal year, the thoracic and also another CMF product. We’re launching the new CMF driver I mentioned earlier in January and then an ENT project as well, a ventilator project. So those right now are pretty meaty, heavy projects that take up a lot of time. We’ve got […] a number of irons in the fire. Proposals out there that we’re following up on that we think there’s a good chance of landing some business there. And they’ll be added to the pipeline.
We have some other projects that maybe aren’t on the shortest-term horizon. We also have an arthroscopic shaver project in certain stages of development that we’ve kind of shifted resources over to ENT because we think there’s a quicker, better opportunity there.
We have a couple of ideas that we’re working on with universities and surgeons, a disposable handpiece, which would be a new technology for us. So, there’s a lot going on and a lot coming in. We are investing a lot in R&D, as you can see from some of the filings. And it’s starting to pay off, and we expect it to continue to pay off.
We know that the company’s major product is a “handpiece” used in “elective surgeries”. What the CEO is now telling us is that they’re working on a disposable handpiece. This sounds like something that their big client has asked them to work on. I like it.
Next question, gross margins are creeping up. Can this continue?
Yes, we expect them to. There’s a couple of things at play there. There are factors that pull in both directions. We’ve negotiated a long-term contract with extension with Customer #1 and as a lot of big companies, they succeed in getting a few price concessions out of us. So that’s a bit of a drag on margins if we don’t do something about it. But there’s two things that we do about it.
One, we’re doing a really good job of developing cost savings here on that and other projects. We’re making some good make-versus-buy decisions in terms of some of the components. We’re working on process improvements to help drive our costs down, which will improve margin.
And quite frankly, the other thing that we can do. And when we started a group that’s working together now, we were really hungry for work. And we would quote things and price things very […] aggressively, like barely breakeven and things that will cost save our way to taking money someday. And now that we’ve got a little more flexibility in that regard, we don’t necessarily quote that way anymore. We quote more standard medical device industry pricing, if you will. And that helps the margin too as opposed to the previous quotes where it just kind of like really, really struggling to find work here. So that’s obviously changed for us.
The largest customer has been successful in getting a lower price on the handpiece with the recent extension of the contract. The management knows that it can lower the costs to maintain the margins steady by making some of the components themselves instead of buying them.
Before, they were selling their products cheap so they could increase sales, but now they can sell them at more “normal” prices. That’s good.
Thank you for a great year.
You’re welcome. Thank you for your interest and support. And we’re having some fun here. Those of you that followed us know that it’s been kind of a nice turnaround story the last few years. I’m surrounded by a great management team. We’re supported by a great Board. There are amazing people in this building that kind of stuck with us through some of the more challenging years. So, we’re really happy to talk about the way things are going on, and really appreciate your comment there.
CONCLUSION
I liked what I’ve read. All of this tells me that the company can innovate, it can work with its clients, doctors and universities to come up with new products, and they’re doing it.
I would say that the price concessions were the main reason for the recent sell-off, but like in previous times, the management knows that it can keep the margins steady by optimizing the manufacturing process. Rick has done it before (when his compensation was temporarily tied to the gross margin) and I have no doubt he will be doing it again.
I still see the company being able to make $20 Million in profits a few years from now. That could easily mean share price of $65, or 2.5x the current price. Even if it takes 5 years to get there, it would mean a 21% compounded annual rate of return.
I’m thinking of increasing my stake in Pro-Dex. I haven’t made up my mind yet given the high customer concentration, but I’ll let you know when and if I do.
DISCLAIMER
The material contained on this web-page is intended for informational purposes only and is neither an offer nor a recommendation to buy or sell any security. We disclaim any liability for loss, damage, cost or other expense which you might incur as a result of any information provided on this website. Always consult with a registered investment advisor or licensed stockbroker before investing. Please read All in Stock full Disclaimer.