Pro-Dex Inc (PDEX) 2006 Q4 法說會逐字稿

Ladies and gentlemen, welcome to today's Pro-Dex call to discuss the Company's fiscal 2006 fourth quarter and full-year period ended June 30, 2006 financial results and a review of current corporate development.

Your speakers for today are Mr. Mark Murphy, Chief Executive Officer and Mr. Jeff Ritchie, Chief Financial Officer. Today's call will be limited to one hour.

Before I turn the call over to Mr. Murphy, I want to read a statement concerning forward-looking statements. The listeners are cautioned that statements made in this presentation are not historical in nature or that state our management's intentions hopes, beliefs, expectations or predictions of the future may constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 as amended. Forward-looking statements involve risks, uncertainties and assumptions.

It is important to note that any such performance and actual results, financial condition or business could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such difference include but not limited to those discussed in this presentation as well as those discussed elsewhere in the reports filed with the Securities and Exchange Commission. Other unforeseen factors not identified in this presentation could also have such an effect.

We undertake no obligation to update or revise forward-looking statements to reflect change, assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.

Today's call is being recorded. With that I'd like to turn the call over to Mr. Murphy. Mr. Murphy, the floor is yours.

Thank you, Crystal.

Good afternoon and welcome to all of you who have joined us today to review Pro-Dex's fourth quarter and full-year results for fiscal year 2006.

I'll start today's call by providing an overview of the Company's accomplishments and performance. Next, Jeffrey Ritchie will update you on the operational and financial results. I will then comment on Pro-Dex's future prospects, after which we'll open up the call to questions from all of you.

Today is actually my four-year anniversary as a director of Pro-Dex and tomorrow will be my four-week anniversary as CEO. Though my comments today reflect a thorough understanding of the Company's strategic direction and a brief, but intense immersion into the operational issues.

I would characterize my impressions of our Company as both confirmed confidence and confronting challenge. In other words, there are many areas of the Company that are very strong, providing a huge opportunity for us to enjoy and there are other areas that represent obstacles we must overcome, nothing insurmountable by any means but nonetheless, issues. So let's start with the good news.

First of all, our value proposition of speed to market is right on the money, literally. It is a valuable service that our customers want.

While many in our broader industry have seen outsourced manufacturing contracts transition to India or China where the cost of labor is lower, we have seen a steady increase in demand for our services. Our customers value our ability to help them develop products rapidly, protect their intellectual property and manufacture a high quality product.

For a Company in our industry to essentially have more demand than we can successfully accommodate is a very nice problem to have. I participated yesterday in a customer visit that under normal circumstances would have been all about pricing of a commodity product. In other words, it would have been about us getting beaten up over price.

As the value proposition of Pro-Dex was masterfully explained to the customer, the entire conversation shifted from a supplier to a partner and we found ourselves in a completely different conversation looking for additional ways to assist them in a much higher value-added capacity. So the strategy works and it pays well.

More good news is that our diversified holdings in rotary drive systems, motion control and DC motors makes us a strong company. There are market and product synergies for sure, but even at a more basic level this year, the motion control business boomed while the rotary drive business struggled.

The reverse has been true in previous periods, confirming that we own a more stable performance platform than we would if we participated in only a single market.

Thirdly, we own a company of high character; it keeps its promises to our customers. Through thick and thin this year, our customers have stayed with us and they have done that because we have consistently stayed in the game and resolved our issues.

We have not blamed or pointed fingers or abandoned our promises. While this process was not pleasant, it is in challenging times that we learn the true character of our partners and our customers have learned what Pro-Dex is made of.

And perhaps the most encouraging news, to me, is the Company's performance during fiscal year '06 which is arguably the most challenging year it has faced in recent history. As Jeff will explain, the Company increased its revenues, increased its backlog, made a profit, generated cash, and maintained a strong balance sheet.

That's the good news. A sound strategy, a diversified platform, a reputation of high character, and a healthy financial performance amidst challenge.

So now let's talk candidly about the challenge. Starting with the strategy again.

In order to deliver speed to market consistently and reliably, we must invest in the back end functions of the business, engineering, manufacturing and quality. We cannot let ourselves decide between quality and speed, but must fully embrace the challenge of reliable speed to market by design.

Our investment in shoring up these critical areas of the business will provide us with a platform that is scalable with a much higher predictability of performance than we have historically experienced. Specifically during 2005, fiscal 2005, not this last year but the previous year, we strained the Company to the full extent of its capacity at the time. This resulted in some pretty impressive financial results.

Based on this apparent success in fiscal '05, we tried to build on that in '06. Using the analogy of Pro-Dex as an automobile, fiscal '05 ran the engine past redline and in fiscal '06 the engine blew. This surprised all of us and, as many of you know, the result was a quality issue that significantly impacted the Company 's ability to perform this year.

At first it appeared to be strictly an isolated issue resulting from a faulty wire from a vendor. Over time as more products were returned to us for repair we identified additional issues and decided that the best way to respond in order to preserve our customer relationships was to fully redesign the products involved.

This was neither cheap nor easy and the result was the erosion of profit from our medical device business and the allocation of significant engineering resources to the re-engineering effort. This reallocation of resources inhibited the Company's ability to accept any new projects.

So that's the challenge, rebuilding the way we execute our value proposition from the ground up. Much has been done to start this process already, and much remains to be done. It is a challenge that the leadership team and I embrace, own, and will be accountable for.

It will undoubtedly require that we hire some additional resources in these key areas, create the necessary cultural shift, and fully assess the development risk of every project we accept. All work that we are capable of doing, but work that does require time to fully accomplish.

To be very honest with you, I am excited about both the good news and the challenges. The good news provides us with a stable base from which to improve and the challenges are internally resolvable. We are not reliant on some uncontrollable external force to improve our Company's long-term earning power.

I will speak more to the future later, but right now, let me turn the call over to Jeff Ritchie to discuss the financial results for the fourth quarter and full-year periods.

Thank you, Mark.

Revenue for the fourth quarter of 2006 grew by 22% as compared to the fourth quarter of fiscal 2005 as sales for that quarter were approximately $4.4 million. Sales growth was driven by the Pro-Dex Astromec acquisition completed in January which accounted for more than $800,000 of the increased sales.

Revenue for the fiscal year ended June 30, 2006 grew by 23% to approximately $17.1 million compared to $13.8 million in the fiscal year 2005.

Pro-Dex's Astromec acquisition accounted for about 50% of the growth in sales providing $1.6 million of the increase. The remainder of the sales growth was driven by a large increase in government related sales of our industrial motion control products and continue to increases in the sales of our medical and dental products.

As the increase in industrial motion control products was primarily due to a large single customer order, it is not expected to be repeated in fiscal 2007. We do not expect the higher sales in the industrial motion control products to continue into fiscal 2007 but to revert back to their normal, more stable level.

The customers consolidated gross profit for the quarter ended June 30, 2006 decreased 13% to $1.7 million compared to the same quarter last year. Gross profit as a percentage of sales also decreased to 32% for the quarter ended June 30, 2006 compared to 44% for the same quarter last year, a decrease from 34.5% in comparison to the previous quarter.

As in the earlier quarters this year, margins were diluted by expenses related to a warranty repair and upgrade of a portion of our medical device product line. However, these warranty and repair costs were reduced by over 55% as they totaled approximately $158,000 for the fourth quarter, a $201,000 reduction from the $359,000 in expenses recorded for the third quarter.

Our warranty reserve for anticipated expenses at the end of the fourth quarter totaled $309,000, up slightly from the $275,000 at the end of the third quarter.

This increase is due to the higher number of units that have been returned to us and were in queue for rework at the end of the quarter, but this is offset by the amount accrued for expenses anticipated in future period for units still in the field which potentially could come back as this was reduced to $170,000 from the $235,000 that we had at the end of the third quarter. This reduction is due to engineering and manufacturing improvements implemented in the past year.

Addressing the warranty issues also negatively impacted our manufacturing capacity and efficiencies due to reduced levels of new products being shipped and distraction caused in our normal product manufacturing flow. And as we've stated in our past, our industrial products generate the most favorable margins so the increase here offset the negative impacts of the unfavorable impacts from the repair and upgrade costs in effect that we saw in many of our medical device products.

Total operating expenses for the quarter ending June 30, 2006 increased 45%, or $460,000 to $1.5 million, or 28% of sales as compared to $1 million, or 23% of sales for the quarter ending June 30, 2005. Compared to the third quarter of fiscal 2006 operating expenses increased only $21,000, or 1.5% from $1.468 million to $1.447 million.

Total operating expenses for the fiscal year increased 13%, or $642,000, to $5.4 million as compared to $4.8 million for fiscal year 2005, which as a percentage of sales was a reduction from 34% of sales in 2005 to 31% of sales in 2006.

Once again, Astromec expenses accounted for $161,000 and $336,000 respectively of the increased operating expenses in the fourth quarter and the year representing a large part of the growth in absolute expenses. The remainder of the increase was due to sales and marketing activities related to the IntraFlow technology.

As a result, the Company's net income for the three months ended June 30, 2006 was $231,000, or $0.02 per share. That's compared to $928,000, or $0.09 per share on a diluted basis for the three months ended June 30, 2005 and compared to $6,000, or $0.00 per share for the prior quarter.

The effective tax rate incurred for the fiscal years 2006 and 2005 was approximately 28% and 24% respectively, reduced from the normal statutory rate of 40%, primarily due to the use of research and development tax credits in both years and especially in 2005 where we had a reversal of a previously booked income tax credit reserve.

The Company's working capital position at the end of the year decreased to approximately $6.1 million from the $8.3 million at June 30, 2005 and was increased slightly compared to the $6.0 million at the end of last quarter. As cash generated from prior operations and the introduction of mortgage and term debt was used to fund the IntraVantage and Astromec asset acquisitions earlier in this year.

We had positive cash flow of operations of $55,000 in fiscal year 2006 compared to a provision of $557,000 for fiscal year 2005, as a large portion of our operating charges were for non-cash items such as increased inventory and warranty reserves as well as the normal depreciation.

At June 30, 2006 the Company had $358,000 in cash on hand compared to $2.6 million in cash on hand at June 30, 2005. The Company had $900,000 par of its $2 million total credit line availability as of June 30, 2006 leaving $1.1 million available, a $100,000 reduction from the end of the third quarter. An additional indication of cash provided by operations.

We believe that the Company's working capital needs over the next 12 months will be adequately supported by current operations and the remaining credit line availability. At this time, we have only $400,000 borrowed against a credit line and we intend to continue to reduce the amount borrowed on the credit line and maintain its full availability, rebuild our cash balances to wisely invest in our infrastructure and for potential internal and external growth opportunities.

As of June 30, 2006 our backlog stood at $11.7 million, given the addition of $1.8 million in Astromec backlog compared to $7.9 million in backlog last year representing a 48% year-over-year increase. By maintaining this high backlog level, we have shown an ability to maintain strong customer relationships and gain new orders through responsiveness and creative problem solving.

At the end of the fourth quarter our sales show solid increases over the prior quarter and year. Our new orders bookings and our backlog were up compared to last year and last quarter.

Gross profit pressures remained throughout the year. We are starting to see evidence that our operations are stabilizing and have begun to see improvements from our investments in systems, processes and people.

We remain highly cognizant of cash flow management. Although there are many challenges throughout the quarter and the year, we maintain the Company's basic ability to capitalize on future growth opportunities, ultimately to create superior long-term value.

The Company continues to generate cash, maintain cash balances for the wise internal and external investment, has credit available to continues to stabilize the operations, maintain and accelerate growth where prudent.

I'll now turn the call back to Mark for his closing comments. Mark?

Thank you, Jeff.

Historically, this is the point in the call where we would normally provide guidance. Due to our current situation and the revised, and the reduced visibility we face, we will not be providing any type of forward-looking statements.

It is not our intent to hide from you or to be disrespectful to our shareholders in any way. We owe you much more than that. But it is very important that we focus on improving the operational excellence of the Company and that we let our results speak for themselves.

It is important for me to say that I do not believe that the fiscal year 2005 results that we talked about are a reliable predictor of future results as we rebuild the infrastructure of the Company to more consistently deliver profitable growth.

I appreciate your attention. I commit my full efforts to each shareholder and I look forward to speaking with you at our first quarter meeting when I will report back to you on our progress made.

With that, we'll open up the call to any questions you may have.

[OPERATOR INSTRUCTIONS] We will pause for a moment to compile the Q&A roster.

Your first question comes from Scott Hood with First Wilshire.

Yeah, hi, this is Scott Hood from First Wilshire.

Hi, Scott.

Hello. A couple questions.

You talked about making more investments in the back end. You've kind of been working on the problem for about a year now. What stage are you at making sure everything goes smooth from here on out and what do you need to spend money on or time?

I'd say, Scott, that the problem that's been being worked on for a year or so has been the redesign of the products and the recovery, but the rebuilding of the infrastructure, how we got there, is at fairly early stage.

The issues and kind of the urgency of the situation coupled with the leadership transition did not create kind of the cultural shift that says: All right, this was our value proposition. This is the tweak or the modification to the way we execute it, and everybody goes, we're going in the same direction to rebuild it.

There was a lot of, you know, what happened, how did it happen, how did we get here? We can't ever let that happen again, over reaction in one direction, pull back, et cetera.

So the short answer is the work that's been going in the last year has mostly been in identifying what went wrong and the work that we're engaging in today is given that, what are the corrective actions.

And what's the status of the product itself? How many, I don't know if you can say how many products have come back and gone back out, been fixed or how much of your time or the engineers and the production peoples time are they spending on it?

At this point, because the new project queue wound down similar to a jet engine that takes time to wind back up and we're winding it back up, the engineers are in the final touches of not only finishing the products but kind of going to the next level that says the things that bit us were cable design, sterilization, motor sealing, et cetera, et cetera, and we have become quite proficient at those issues, so that we don't expect to be bitten on these projects or any other projects on those knowledge centers because we've put substantial work into them and those competencies are at this point in our bag.

So you're getting back to it then. You're going to start working down the backlog, for example?

Correct.

Okay.

I see the inventory increase, can you talk a little bit about that and also your need for cash over the next year?

I'm going to take the easier one will be the second part of the question.

I think we're going to be able to use whatever cash we generate internally to fund operations so I don't see any secondary offering or new debt offerings going out. So between the credit line that we have outstanding already and internally generated cash, we should not need any additional funding.

The inventory growth was actually even a little bit higher in the mid part of the fourth quarter and we've been working that off and we're starting to see some burn offs as we've got these problems resolved and we're shipping more and more product so we should see further improvement in our inventory turnover going forward.

Okay.

We built a lot of component parts and things to go into the final products that got held up by a button or a switch or something that need to be redesigned and those component parts can now be flushed through the system.

Okay. All right. Well, thanks. It sounds like you're going to start turning the corner now, but thanks.

Thanks, Scott. Appreciate it.

[OPERATOR INSTRUCTIONS] Your next question comes from Larry Brooks with Maloney Securities.

Hi. Good afternoon.

Hi, Larry.

Yeah, a couple of things.

I guess first a comment about the outlook. I kind of like how you're not giving guidance because sometimes you can paint yourself in a corner and things actually are worse. So I would consider that more of a positive versus anything as far as just a comment.

Thank you.

In reference to your margins, your margins, of course, have been coming down. Do you have a feeling as far as what your goal is for this quarter, the first quarter and subsequent?

Do you hope to get back up towards 50? Is that what your goal is or do you think you're going to be in this present 32, 31 range?

We're going to tread the guidance line very carefully, I think. We had the addition of Astromec, which we've been fairly clear that that particular business has lower margins, typically, than the other two so the addition of Astromec will have kind of a permanent impact.

Secondly, I think we talked about 2005 as being a pretty exceptional year, but and thirdly, offsetting is the old issue we've already discussed which is that we had some hits at the margin line that, hopefully, aren't going to recur, so those are the three things we've kind of said that all go into the margin line without getting any more specific to guidance about what they'll actually be.

But it sounds like in essence you may not have as many, hopefully, hits to the quarter as far as extraordinary events, but then again, you're going to increase your cost as far as your engineering and your labor cost to some extent. Would that be somewhat correct?

Correct. Very correct.

Now, as far as acquisition costs, are those pretty much behind you as far as this Astromec or what's going on?

Yes. All of the acquisition costs are behind us and generally capitalized into the acquisition cost. Going forward, there still are some integration costs that might come up but the one-time acquisition costs are for the most part behind us.

Now in your backlog, is that something that you expect to be shipped in the next 12 months, in the next three months or how do you --

For the most part it's within the next 12 months. Some of it bleeds over into the next fiscal year or in the 15 to 18 months, but the next about 90%, or a very high percentage is in the next 12 months.

In that line of credit, do you hope to pay that off within a period of time? Do you have a target there?

Yes. I'd like to have it down as soon as possible. We've made a lot of progress on it this quarter, we've taken it down another $500,000 from $900,000 to 400 where we're at right now, and if that continues, we may have that done by December.

That being said, I'm not going to not pay vendors just to pay down my line of credit.

Right. What's the interest rate on that?

It's at LIBOR plus 2.5, so it's right around 8% right now.

Okay.

So just around prime, just short of prime.

Now, your accounts receivable bumped up it looks like a little bit. Is that --

Strictly a function of sales. Our DSO, our day sales outstanding, actually went down.

What are they at this point?

Oh, it's in the K. About 60 days.

Let me reference that real quick here. Yeah, we closed at 66 days as it compared to last year, we were at 75 days.

Okay. Good. Well let's hope this turnaround continues and, yeah. Wish you guys the best of luck. Thank you.

Great. Thank you, Larry.

Your next question comes from Michael Potter with Monarch Capital Group.

Hi, Michael.

Hey, guys, how are you? Couple of questions.

First, I'm just a little confused from the presentation. Was there an additional reserve in Q4 for further warranty expenses?

We still maintain on our books a warranty reserve for units still in the field that could potentially come back.

Okay. How much is the reserve currently?

That's 309, we have a total reserve on the books at the end of the period of $309,000. That's for units in-house that we know we're going to fix in addition to estimate for what could come back. So between those two it adds up to $309,000.

Okay. And is that an increase from where we were going into Q4?

At the end of the third quarter we were at 275.

Okay.

It's a little bit of an increase primarily because we got more units back but haven't completed their fixing.

Uh-huh.

So that's about where we're at.

Okay.

And considering that there's two days left in Q1, how do we stand for the reserve? Did we take enough in Q4 or do you think we're going to see further reserve expense in the first half of the year?

Along with the guidance parameters, I'm going to have to keep that quite close to the vest right now because I haven't been able to analyze the numbers completely to go public with them yet, so I was very comfortable with the numbers at 630 and I continue to be comfortable with the numbers through the subsequent event period.

We haven't done the -- there's a fairly complex warranty exposure analysis we have to do, Michael, because we're trying to predict the future from limited data. We're trying to say, okay, if these units have been in the field for 90 days but the warranty period is 12 months and we used to get back this many in the 90 days and that population turned into this over 12 months and now if we're getting this many back in the 90 days what's the statistical probability that we're going to get this many back over the next 12 months, and that's the number that Jeff has to book and we haven't done that analysis as of the 9/30 period yet.

Okay.

So we just don't know yet.

I understand.

To get back to something that you brought up during the call, the new business development contracts. It's been, I don't know, 18, 19 months since the last contract announcement with that in but I understand the distraction that we've had.

Certainly for the first six months of the warranty issues with the engineers getting their hands around it, but there were six or seven months leading up to before the warranty issue became a problem, which was about a year ago this time last year, and you guys have basically gotten your hands around it, I would say, by the springtime, so where do we stand with new projects going forward?

What I will tell you is that during the time where Patrick Johnson was making his transition from CEO to Business Development Officer, working for Jeff as CEO to kind of the new leadership, the new direction, the, you know, here we go, that I have made it fair to Patrick and he understands completely that we've got to get this car back on the track and we've got to get some development agreements and prove our own value proposition back to ourselves and deliver reliable speed to market by design.

And we need the projects to do that and he is actively engaged to make that happen. And I wish I could tell you more, but that's where it stands and there's no uncertainty in the Company that while we happen to enjoy a nice backlog and it gives us some runway to relaunch this thing, we've got to get those engines turning and get that inertia going quickly so that as the engineers wrap up the, you know, the kind of the final ultimate designs, they've got powerful new projects and revenue generating projects to work on.

Well, agreed. I mean, with no development contracts in hand, it doesn't bode well for our future. I mean that's the future of the Company.

I guess it's disappointing, you had a guy who failed miserably as the CEO, destroyed shareholder value, and now he's been allowed to stay in place in business development and so far we're not seeing anything out of there either. At what point with this Company does someone actually get fired? I mean what do you have to do, how badly do you have to screw up before you show them the door and still allowed to be on the Board of Directors?

I think that's a Board of Directors question relative to Patrick's -- actually the shareholders elected Patrick to the Board and the Board does not have the right to ask Patrick to step down or do anything else. Relative to his performance as the Chief Business Development Officer, I have asked him to do what we need him to do.

I think in fairness, the Company has not been in a position to take on new contracts. When every time you go to get a proposal or do an engineering proposal, the engineers are busy with their existing stuff that there has not been a confidence in the Company to take on new projects.

The result, I think the focus has shifted somewhat to the dental business and the IntraFlow and generating revenues where we could, where we could make an impact, where we didn't have another constraint, the motion control business, a little bit of the Astromec focus and it is now time to shift his focus back to the business development of the heart of the Company and honestly, there's nobody that can articulate that value proposition as well as Patrick Johnson.

So I believe that and I'm not trying to play favorites. I'm trying to create shareholder value and I'm going to put the horses on the track that I think are going to create the shareholder value the fastest, and when and if I determine that there's different horses that can that do better, then I'm going to put those horses on the track.

But I'm not comfortable in this setting, Michael, to have an employee review of Patrick's performance. But at the same time I'll tell you that when I watch somebody articulate who we are as a Company, there's not anybody that I've met so far who can do it within 50% as well as he can.

And we're selling a very, very unique concept and when somebody wants to sit down and say, you know, how many hand pieces can you make me and at what price and somebody can in over a 15 to 20 minute period successfully transform that conversation into how can you help me and be a partner and help position me in the market, that's a skill, and that's a skill that has value to you and I as shareholders and it's a skill that we're going to try to exploit and if we determine that we can't, then we'll develop it elsewhere. Fair enough?

Fair enough.

Are we in a position now where our engineers are free enough to start working on proposals and start working on new design contracts?

Yes, and I would say that that was even true as a factual statement a month or two ago, but not as a believe statement. I think just in the time that we've been together as a reconvened leadership team, the clarity in the engineering group, too, that it's time to get this thing back on the track and run it again, has become very evident.

So I think that it's fair to say that both the engineering group and the sales and marketing group have come to the combined consensus in the last four weeks that that's the next objective and that four weeks ago there would have probably still been some, well, I don't know if we're ready and some hesitation which yielded in the deadlock. So we now have a clearer starting point that says, let's go get something going.

Have we lost business due to this distraction? Have our customers had to, have they gone to someone else?

No projects that we're aware of where there is a particular customer that we're aware of who had a particular hand piece that they were going to develop that we should have been the one and they specifically went somewhere else. We don't, obviously, we could never measure the opportunity cost of kind of not being engaged in the market for a while, but we don't have any specific customers or situations where we said that would have been ours, but we lost it.

Okay. To the acquisitions.

The Astromec acquisition is currently accretive or was accretive for the second half of the year?

Yeah. They made positive operating profit. So they're doing okay.

We haven't taken the steps to integrate them as fully and we're going through the reviews to see how and the best way to do that even as we speak.

Okay.

When this acquisition was announced, I believe on the conference call it was articulated that there was a, on an annualized basis $1 million in cost savings by using the Astromec motors that were manufactured in-house into the Pro-Dex handsets. Has that been integrated as of yet?

No.

Basically, the Astromec acquisition has been administratively integrated payroll accounting functions, et cetera, and that's it. The major synergies, which were the use of Astromec motors, the machining of parts by Santa Ana for Astromec, the use of Astromec's space and labor for manufacturing of Santa Ana products and the potential market synergies, there has been no focus whatsoever and I would say no progress made on the rationalization of the synergies of that acquisition.

We brought them in. We sustained the engine blowout and a leadership change and we focused on all hands on deck and that the values of the synergies of that acquisition remain untapped other than a few administrative integration points.

Okay.

But I mean, you're on the job now for a month, Mark, but you've been with the Company for four years and you're an operator. I mean, your credentials are in operations.

Yes.

Do you still see those manufacturing and operating synergies?

I will be at Astromec tomorrow. I've spent a few days with our engineering resources here during those four weeks.

I will be at Astromec tomorrow, I've spent about a day and a half with Ray Gustafson our General Manager of Astromec and at this point, the motors that are being manufactured by Astromec are not qualified at this moment to go into the hand pieces that are manufactured by Santa Ana. What's involved in resolving that and the excruciating detail, I haven't gotten to yet.

So starting tomorrow morning my next priority to kind of start the detailed rationalization evaluation of do those synergies exist? What does it take to get at them? What are they worth and, therefore, what's the return on investment of getting them?

So I stand informationless to answer your question now, Michael, but certainly, in another 90 days we'll have much more information.

Okay.

I mean, I have to assume before the Board of Directors approved this acquisition that a presentation was made to them from the former CEO with regards to the efficiencies that the Company hoped to achievement

That is correct. There was significant due diligence on both the, that the Board conducted on the financial and business turns of the acquisition based on the presentation that there were technical synergies.

The technical synergies assumed that the motor was a plug in place replacement, not assumed that it was a plug in place, but that's exactly the type of motors that Astromec makes.

Uh-huh.

During the actual timing of that acquisition closing, completely unrelated to Astromec, we start having hand pieces failing and some of those failures are related to leakages that are affecting motor components. So the actual motor components and how they're made and how they're sealed and how they're UL engineered and everything changed.

I mean, the bar went up and so we go back to Astromec and say, well now you've got to make this and that requires certain investments by Astromec and there's nobody in the Company at that point who is kind of driving the synergy issues. What Santa Ana is trying to solve is what's the fastest way to get a motor to satisfy the customer and if that's Astromec, great, and if it's not, I've got customers that I've got to solve.

So the commitment to say, you know, what will it take to use an Astromec motor just hasn't been present. And that's where we are and we've got to go back and when you buy a company and you bring it in and you say, that's great, operations are running well and our customers are happy and that's why we bought the Company and the leadership is stable and here's what we're going to do. We're going to write an integration plan, we're going to go through sales and marketing and manufacturing and engineering, we're going to find all of the juice and we're going to start squeezing the juice out, that's what you do.

But when you buy a Company and three weeks later your operations start revealing quality issues and your senior leadership changes, you make a different decision and you say, Astromec run as a standalone business because the last thing we want to do is degrade your profitability or suck you into this problem. Beaverton, you know, OMS, motion control, run your business, optimize your profits, we're going to isolate the issues to Santa Ana and, frankly, it was a great decision because Beaverton is what pulled off the profitability for the year.

Now that we're back into stable condition, it's time to go back and second only to rebuilding the value proposition execution, the synergies of the three platforms is my second priority to explore and exploit.

Do you still believe that they're present?

I'm trying to say as tactfully as I can, I don't know. I just don't know until I get up there and look at it. I don't want to sit here and say, absolutely, and find out that they're not and I don't want to say today that they're not and find out that they are.

I just, I don't want to make the same mistake twice. We thought they were present before, we haven't realized them, so we're going to wait and do the research and make a responsible answer.

Okay.

On the IntraFlow side, where does that acquisition currently stand? Is that operation cash flowing? What are the revenue, what's the revenue run rate? Can you break that out a little bit?

Don't have numbers. I'd say that it's still in the start-up mode, significant, that's a pioneering effort, which you know is a heavy sales and marketing investment and a conversion of a mentality of a relatively established thinking marketplace. And so we've got some pretty exciting, you know, white papers and endodontists and things who are interested the product and a brand new CD that's eight minutes long that describes, video that describes how it works and great and exciting news that has not even come close to translating into any numbers that a shareholder would be interested in yet.

So I think that it's moving but in terms of talking about cash flow or getting to that level, nothing that we can report that would show on a radar screen.

Is it at least cash flow breakeven or is it still running at a loss?

We're making greater investments in it than the revenue that it's generating. No question about that. Where those we're conscience, sales and marketing, tradeshow, research, white paper-type investments that we either knew we had to make when we brought it on and if we don't make it, then it's like when the Palm Pilot came out and people used the white scratch pad. Until they created a market for that new product everybody's going to continue to use the scratch pad.

So that's the nature of that beast. We either believe in it, invest in it or we stop it.

Okay. Mark, please don't take it that I'm kicking you in the shins, I'm not. But you know --

I can feel the love, Michael. I can feel it.

I want you to succeed because I do own a lot of stock. I've gotten destroyed on my investment. Primarily, yes, bad luck, perhaps a perfect storm, but from awfully poor management, as well.

But I will say that, I just want to say that Jeff did an excellent job as interim CEO.

Thanks. And as far as I'm concerned, really helped communicate the issues and helped me get around, my arms around the situation as well. I won't continue.

I just have one more thing and then I'll get off line or get back in the queue.

There's been no insider buying in this Company for a long time. The Board of Directors, there's some directors that don't own any stock at all. And generally speaking, the insiders own a fairly small percentage of the shares outstanding.

We're right off of 52-week low, I would love to see the insiders step up if they believe in the Company. If they don't believe in the Company they should get off the Board. But if they truly believe in the Company and if the Company's on the right path, there's no better signal than people putting their money up where their mouth is.

I understand.

All right, guys.

Thank you very much.

Yes.

Thank you, Michael.

[OPERATOR INSTRUCTIONS] At this time, Mr. Murphy, there are no questions. Did you have any closing remarks?

Just to say thank you all for your questions and for the candor and we appreciate your support and we'll do everything we can to maximize our investment. Have a great day.

This concludes today's conference call. You may now disconnect.