PDEX - Pro-Dex Inc.

[Guest Worlds Within the Margin]

Whopper Investments article is out, http://seekingalpha.com/article/1728502-follow-the-pros-into-pro-dex.

[myvalueedge]

If you controlled a company and wanted to increase your ownership stake, how would you do it?  Make open market purchases or issue a tender offer are the first options that come to mind.  How about a rights offering?

 

I think this is the story behind the S-3 filed by PDEX at the end of December last year.  Please note the rights offering has not commenced yet.

 

Price = $2.42/share

dS/O = 3,343,499

MC = $8.09M

Avg. volume approx. 43K

 

So you have a micro cap with limited trading volume, which limits your ability to acquire additional ownership, especially over a short period of time.  If you were to issue a tender offer it would most likely have to be at a premium to current market prices.  Now what if you went with a rights offering at below market prices?  You would most likely scare off retail investors raising equity at lower prices, who would sell or choose not to exercise the Subscription Right.  The stock will most likely fall to around the Subscription Right price to reflect the discount that equity capital is being raised at.

 

In the S-3 it is noted that the rights will be non-transferrable, and the only beneficiaries to the unsubscribed shares will be AO Partners (Nicholas Swenson) and Farnam Street Capital (Raymond Cabillot).  Both managers are directors on the board and own 21.6% and 10.6% of the company, respectively.  So assuming a portion of the rights is unsubscribed then AO Partners and Farnam Street Capital will acquire additional ownership at a lower price.

I will not go into details surrounding the valuation or investment thesis as they have been well covered by Whopper Investments and recently written up on Seeking Alpha.  I encourage you to do a bit of your own work considering the changes that have occurred in the business over the past year.

 

http://seekingalpha.com/article/1959701-pro-dex-potential-insider-buys-suggest-dramatic-stock-rise

 

I will just note that AO Partners and Farnam Street Partners aggressively purchased shares in the open market between May and August of last year.  The company has a share repurchase program for over 20% of the company.  SG&A has fallen over 30% year of year due to the cost reduction program initiated so the numbers for the next 3 quarters will reflect the reduced cost structure.  Book value is over $8M, company has over $2.3M in cash and marketable securities and no debt.  And from the Q2FY14 conference call there are some near term catalysts with new revenue generating projects:

As we have previously publicly discussed, much of our activity this fiscal year relates to the engineering phase of projects to develop a next-generation platform for powered surgical instruments that we believe will result in manufacturing revenues commencing at the end of fiscal 2014 or early fiscal 2015.

 

[whiterose]

https://traviswiedower.com/2017/01/03/pro-dex-should-have-another-good-year/