UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-QSB
(Mark One)
| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended September 30, 2003
OR
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period From to
Commission File Number 0-20532
DEXTERITY SURGICAL, INC.
| Delaware (State or other jurisdiction of incorporation or organization) | 74-2559866 (I.R.S. Employer Identification No.) |
12961 Park Central, Suite 1300
San Antonio, Texas 78216
(Address of principal executive offices)
(Zip Code)
(210) 495-8787
(Issuer’s telephone number)
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
On November 7,2003, there were outstanding 12,121,492 shares of common stock, $.001 par value, of the registrant.
Transitional Small Business Disclosure Format (Check one) Yes No X
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DEXTERITY SURGICAL, INC.
FORM 10-QSB
INDEX
| Page | ||||||
| PART I. | FINANCIAL INFORMATION | |||||
| Item 1: | Financial Statements — (Unaudited): | |||||
| Balance Sheets — September 30, 2003 and December 31, 2002 | 3 | |||||
| Statements of Operations — For the Three Months and Nine Months Ended September 30, 2003 and 2002 | 4 | |||||
| Statements of Cash Flows — For the Nine Months Ended September 30, 2003 and 2002 | 5 | |||||
| Condensed Notes to Financial Statements | 6 | |||||
| Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | ||||
| Item 3: | Controls and Procedures | 13 | ||||
| PART II. | OTHER INFORMATION | |||||
| Item 1. | Legal Proceedings | 14 | ||||
| Item 2. | Changes in Securities | 14 | ||||
| Item 3. | Defaults Upon Senior Securities | 14 | ||||
| Item 4. | Submission of Matters to a Vote of Security Holders | 15 | ||||
| Item 5. | Other Information | 15 | ||||
| Item 6. | Exhibits and Reports on Form 8-K | 15 | ||||
SIGNATURES | 16 | |||||
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
DEXTERITY SURGICAL, INC.
BALANCE SHEETS
| September 30, | December 31, | |||||||||
| ASSETS | 2003 | 2002 | ||||||||
| (Unaudited) | ||||||||||
| Current Assets: | ||||||||||
| Cash and cash equivalents | $ | 49,148 | $ | 159,836 | ||||||
| Accounts receivable, trade, net | 62,250 | 310,221 | ||||||||
| Accounts receivable, related party | — | 4,924 | ||||||||
| Inventories, net | 45,838 | 79,015 | ||||||||
| Prepaid expenses | 32,422 | 98,850 | ||||||||
| Total current assets | 189,658 | 652,846 | ||||||||
| Property and Equipment, net | 130,112 | 142,098 | ||||||||
| Other Assets: | ||||||||||
| Licensed technology rights and other intangible assets, net | 1,797,192 | 2,411,636 | ||||||||
| Deferred finance charges | 9,708 | 65,832 | ||||||||
| 1,806,900 | 2,477,468 | |||||||||
| Total Assets | $ | 2,126,670 | $ | 3,272,412 | ||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||||
| Current Liabilities: | ||||||||||
| Accounts payable | $ | 2,673,227 | $ | 2,871,271 | ||||||
| Accrued liabilities | 2,067,236 | 1,429,428 | ||||||||
| Current portion of long-term debt obligations, including debt and royalty obligations in default | 10,567,694 | 9,114,144 | ||||||||
| Total current liabilities | 15,308,157 | 13,414,843 | ||||||||
| Royalty Obligation, net of current portion | 1,990,028 | 2,929,418 | ||||||||
| Minority Interest | — | 47,248 | ||||||||
| Commitments and Contingencies | ||||||||||
| Stockholders’ Deficit: | ||||||||||
| Preferred stock, $.001 par value; 2,000,000 shares authorized; 2,445 shares issued and outstanding | 2 | 2 | ||||||||
| Common stock, $.001 par value; 50,000,000 shares authorized; 12,121,492 shares issued and outstanding | 12,122 | 12,122 | ||||||||
| Additional paid-in capital | 34,733,804 | 34,733,804 | ||||||||
| Accumulated deficit | (49,917,443 | ) | (47,865,025 | ) | ||||||
| Total stockholders’ deficit | (15,171,515 | ) | (13,119,097 | ) | ||||||
| Total Liabilities and Stockholders’ Deficit | $ | 2,126,670 | $ | 3,272,412 | ||||||
See notes to financial statements.
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DEXTERITY SURGICAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months | Nine Months | ||||||||||||||||
| Ended September 30, | Ended September 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
| Net Sales | $ | 175,475 | $ | 936,822 | $ | 1,052,192 | $ | 1,395,332 | |||||||||
| Cost and Expenses: | |||||||||||||||||
| Cost of sales | 148,157 | 336,340 | 549,300 | 591,478 | |||||||||||||
| Selling, general and administrative | 301,723 | 232,941 | 773,225 | 744,912 | |||||||||||||
| Depreciation and amortization | 232,813 | 243,843 | 698,438 | 765,576 | |||||||||||||
| Impairment of investment | — | 450,934 | — | 450,934 | |||||||||||||
| Cost of litigation settlement | — | 286,903 | — | 286,903 | |||||||||||||
| 682,693 | 1,550,961 | 2,020,963 | 2,839,803 | ||||||||||||||
| Loss from Operations | (507,218 | ) | (614,139 | ) | (968,771 | ) | (1,444,471 | ) | |||||||||
| Other Income (Expense): | |||||||||||||||||
| Interest expense | (348,658 | ) | (340,740 | ) | (1,083,647 | ) | (1,057,904 | ) | |||||||||
| Net Loss | (855,876 | ) | (954,879 | ) | (2,052,418 | ) | (2,502,375 | ) | |||||||||
| Less dividend requirement on cumulative convertible preferred stockholders | 48,900 | 48,900 | 146,700 | 146,700 | |||||||||||||
| Net loss applicable to common stockholders | $ | (904,776 | ) | $ | (1,003,779 | ) | $ | (2,199,118 | ) | $ | (2,649,075 | ) | |||||
| Basic and Diluted Loss Per Share of Common Stock | $ | (.07 | ) | $ | (.08 | ) | $ | (.18 | ) | $ | (.22 | ) | |||||
| Weighted Average Shares Used In Computing Basic and Diluted Loss Per Share of Common stock | 12,121,492 | 12,121,492 | 12,121,492 | 12,121,492 | |||||||||||||
See notes to financial statements.
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DEXTERITY SURGICAL, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months | |||||||||||
| Ended September 30 | |||||||||||
| 2003 | 2002 | ||||||||||
Operating Activities | |||||||||||
| Net loss | $ | (2,052,418 | ) | $ | (2,502,375 | ) | |||||
| Adjustments to reconcile net loss to net cash (used) by operating activities: | |||||||||||
| Depreciation and amortization | 698,438 | 765,576 | |||||||||
| Accretion of royalty obligation | 395,160 | 492,465 | |||||||||
| Amortization of deferred finance charges | 56,124 | 56,124 | |||||||||
| Impairment of investment | — | 450,934 | |||||||||
| Adjustment due to dissolution of subsidiary | (47,248 | ) | — | ||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable, trade | 247,971 | (98,356 | ) | ||||||||
| Accounts receivable, related party | 4,924 | 9,384 | |||||||||
| Inventories | 33,177 | 70,277 | |||||||||
| Prepaid and other assets | 73,425 | 83,664 | |||||||||
| Accounts payable | (198,044 | ) | 238,024 | ||||||||
| Accrued liabilities | 637,808 | 431,085 | |||||||||
| Net cash (used) by operating activities | (150,683 | ) | (3,198 | ) | |||||||
Investing Activities | |||||||||||
| Purchase of property and equipment | (79,005 | ) | — | ||||||||
| Net cash (used) by investing activities | (79,005 | ) | — | ||||||||
Financing Activities | |||||||||||
| Borrowings from line of credit | 119,000 | — | |||||||||
| Net cash provided by financing activities | 119,000 | — | |||||||||
| Change in cash and cash equivalents | (110,688 | ) | (3,198 | ) | |||||||
| Cash and cash equivalents, beginning of period | 159,836 | 59,008 | |||||||||
Cash and Cash Equivalents, End of Period | $ | 49,148 | $ | 55,810 | |||||||
See notes to financial statements.
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DEXTERITY SURGICAL, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 2003
NOTE 1 — BASIS OF PRESENTATION
The financial statements include the accounts of Dexterity Surgical, Inc. (the “Company”). The financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. However, all adjustments have been made which are, in the opinion of the Company, necessary for a fair presentation of the results of operations for the periods covered. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is recommended that these financial statements be read in conjunction with the audited financial statements and the notes thereto for the fiscal year ended December 31, 2002, included in the Company’s Form 10–KSB.
At September 30, 2003, the Company had an accumulated deficit of approximately $49,917,000. During the quarter ended September 30, 2003, the Company incurred a net loss of approximately $856,000 compared to a net loss of approximately $955,000 during the quarter ended September 30, 2002. It is likely that the Company will continue to incur losses. There can be no assurance that the Company will be able to raise cash as necessary to fund operations or that the Company will ever achieve profitability. The Company’s cumulative losses have been funded primarily through its initial public offering of common stock, private sales of common stock and preferred stock, debt financing, and the sale of convertible Debentures. As discussed in Note 6, the Company is in default with respect to all its debt and other long-term obligations in the total amount of approximately $12,558,000 at September 30, 2003, and does not have sufficient resources to satisfy any of these obligations. The Company is in negotiations attempting to restructure its debt and other long-term obligations. However, there can be no assurance that the Company will be able to restructure these obligations. IF THE RESTRUCTURING IS NOT SUCCESSFUL WE WOULD LIKELY BE REQUIRED TO SEEK PROTECTION UNDER THE UNITED STATES BANKRUPTCY LAWS.
During the past several years, the Company has taken steps to improve its operating results and anticipated cash flows by reducing selling, general, and administrative costs. The Company has also been attempting to negotiate new agreements to satisfy certain obligations with equity instruments. Based on current projections, management believes that the Company’s operating results will not generate sufficient working capital to sustain its operations throughout the next 12 months.
The medical devices industry in which the Company competes is highly competitive and dominated by a relatively small number of competitors with financial and other resources much greater than those possessed by the Company. The Company’s ability to achieve increases in sales or to sustain current sales levels depends in part on the ability of the Company’s suppliers to provide products in the quantities the Company requires.
The Company’s common stock (trading symbol: DEXT) was delisted from the NASDAQ SmallCap Market on October 24, 2000. Trading in the common stock is now conducted on the National Association of Securities Dealer’s “Electronic Bulletin Board.” Consequently, the liquidity of the Company’s common stock is impaired, not only in the number of shares bought and sold, but also through delays in the timing of the transactions, reduction in security analysts’ and the news media’s coverage.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition:The Company recognizes revenue when each of the following four criteria are met: 1) a contract or sales arrangement exists; 2) products have been shipped or services have been rendered; 3) the price of the products or services is fixed or determinable; and 4) collectibility is reasonably assured.
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Commissions earned are recognized when customer orders are placed with product suppliers. Customers may return products in the event of product defect or inaccurate order fulfillment. The Company maintains an allowance for sales returns based upon a historical analysis of returns. Substantially all returns relate to inaccurate order fulfillment, and generally are not significant.
Licensed Technology Rights:Licensed technology rights are amortized upon the commencement of commercial sales of the underlying products. The carrying value of the licensed technology is periodically reviewed by the Company with impairments being recognized when the expected future operating cash flows derived from such licensed technology rights is less than their carrying value.
NOTE 3 — BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) applicable to common stock holders by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. As the Company had a net loss for the three and nine months ended September 30, 2003 and 2002, Diluted EPS equals Basic EPS as potentially dilutive common stock equivalents are antidilutive in loss periods.
NOTE 4 — TERMINATION OF NEGOTIATIONS FOR SALE OF MAJOR ASSET AND LITIGATION SETTLEMENT
On June 3, 2003, the Company announced that Davol, Inc. and the Company had broken off negotiations related to the previously announced sale of substantially all assets of the Company relating to the Protractor line in consideration for cash of $7 million.
On September 11, 2002, the Company had entered into an agreement with United States Surgical Corporation (U.S. Surgical), a division of Tyco Healthcare Group LP, to ultimately settle all claims and counter claims between the two parties. The pertinent terms of the settlement agreement were as follows:
| • | The Company represented and warranted it was in the process of negotiating the sale of the Dexterity Protractor line. |
| • | Within seven (7) days of the closing of the sale, but no later than April 21, 2003, the Company would pay U.S. Surgical $800,000 in full settlement of the $2,500,000 trade accounts payable to U.S. Surgical currently recorded on the Company’s books and records. Cost of litigation settlement of $287,000 was recorded in September 2002. |
Because the sale of the asset did not take place, U.S. Surgical may enforce a Stipulated Judgment, filed by the Company and U.S. Surgical on September 30, 2002, for $2,500,000 in its favor.
As stated above, the Company was required to pay U.S. Surgical $800,000 no later than April 21, 2003. The Company has not made the $800,000 payment to U.S. Surgical. Accordingly, U.S. Surgical may enforce its $2,500,000 judgment at any time. The Company is currently negotiating a new settlement agreement; however, there can be no assurance that U.S. Surgical will enter into another settlement agreement with the Company or that U.S. Surgical will not decide to enforce its judgment.
NOTE 5 — COMMITMENTS AND CONTINGENCIES
On July 17, 2003, Medical Creative Technologies, Inc., and Robert D. Rambo filed a lawsuit in the United States District Court for the Eastern District of Pennsylvania, against the Company alleging breach of contract with regards to several of the Company’s operative agreements. The plaintiffs are seeking approximately $270,000 cash and return of all rights to the Dexterity® Pneumo Sleeve® and the Dexterity® Protractor®. The Company believes this lawsuit is without merit and intends to vigorously defend its position.
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On February 25, 2003, Surgical Visions I, Inc. and various individuals, including two former directors of the Company, filed a lawsuit in the 166th Judicial District Court in Bexar County, Texas, against the Company, Teleflex, Inc., and certain of the Company’s officers and directors alleging, among other things, conspiracy to defraud minority shareholders, breach of fiduciary duty, falsification of corporate minutes, issuance of false and misleading public filings and press releases, and bribery. The plaintiffs are seeking unspecified compensatory damages. The Company believes this lawsuit is without merit and intends to vigorously defend its position.
The Company is also a party to claims and legal proceedings arising in the ordinary course of business. The Company believes it is unlikely that the final outcome of any of the other claims or proceedings to which the Company is a party would have a material adverse effect on the Company’s financial statements; however, due to the inherent uncertainty of litigation, the range of possible loss, if any, cannot be estimated with a reasonable degree of precision and there can be no assurance that the resolution of any particular claim or proceeding would not have an adverse effect on the Company’s results of operations for the interim period in which such resolution occurred.
NOTE 6 — DEBT AND OTHER LONG-TERM OBLIGATIONS
All of the Company’s debt and other long-term obligations are in default. Amounts outstanding are as follows:
| September 30, | December 31, | |||||||
| 2003 | 2002 | |||||||
| (1) Dexterity notes | $ | 1,000,000 | $ | 1,000,000 | ||||
| (2) Line of credit | 764,995 | 645,995 | ||||||
| (3) Royalty obligations | 8,160,164 | 7,765,004 | ||||||
| (4) Convertible Debentures | 2,632,563 | 2,632,563 | ||||||
| Total long-term debt and other obligations | 12,557,722 | 12,043,562 | ||||||
| Less current portion | 10,567,694 | 9,114,144 | ||||||
| Total long-term portion of debt and other obligations | $ | 1,990,028 | $ | 2,929,418 | ||||
(1) Unsecured notes payable related to Dexterity acquisition, bearing interest at 12%, interest due quarterly, matured in October 2001. The Company is in default with respect to this obligation and does not have sufficient resources to satisfy this obligation in the event of demand for payment.
(2) Revolving line of credit secured by accounts receivable, inventories, and intangible assets. In May 2001, Teleflex, Inc., a major stockholder in the Company, purchased this instrument from the previous lender. The outstanding balance accrues interest at prime plus 1.5%, plus an additional 3% due to the Company’s default on the line of credit. There are no additional funds available under the current borrowing base. The Company is in default with respect to this obligation and does not have sufficient resources to satisfy this obligation in the event of demand for payment.
(3) Royalty obligations related to Dexterity acquisition, subject to annual minimum payments over a period of seven years commencing in 1999 and discounted at 12%, plus an additional 12% on royalties not paid when due. The minimum payments aggregate approximately $9.7 million over the seven-year royalty period. The Company is in default with respect to this obligation and does not have sufficient resources to satisfy this obligation in the event of demand for payment.
(4) In December 1997, the Company sold 250,000 shares of common stock to affiliates of Renaissance Capital Group, Inc. (Renaissance), in a private placement for aggregate proceeds of $1,000,000, and placed $3,000,000 in 9% convertible Debentures with Renaissance. The Debentures are secured by substantially all assets of the Company and require monthly payments of interest. The Company is in default with respect to this obligation and demand has been made for payment. As such, the entire balance due of $2,632,563 has been classified as a current liability at September 30, 2003
The Debentures are convertible into shares of the Company’s common stock, in whole or in part, at any time at the option of the holder at a price of $1.00 per share of common stock. The conversion price is subject to downward revision if the Company
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sells shares of its common stock, or securities convertible into shares of its common stock, at a price less than $1.00 per share of common stock, subject to certain allowed exceptions, during the term of the Debentures.
NOTE 7 — PREFERRED STOCK PLACEMENTS AND PREFERRED DIVIDENDS IN ARREARS
The Company has authorized 2,000,000 shares of preferred stock of which 2,445 shares are outstanding at September 30, 2003. Please refer to the Company’s Form 10-KSB as of December 31, 2002 for a full description of these placements.
The Company is in arrears on its preferred stock placements as follows at September 30, 2003:
| Series C preferred stock | $ | 56,000 | |||
| Series B preferred stock | 143,500 | ||||
| Series A preferred stock | 142,800 | ||||
| Total dividends in arrears | $ | 342,300 | |||
NOTE 8 — WECK SALES DISTRIBUTION AGREEMENT
On September 29, 2000, the Company signed an exclusive agreement under which Weck Closure Systems (WCS) will distribute the Dexterity® Pneumo Sleeve® and the Dexterity® Protractor® in the United States. The agreement also covers international distribution, except in those areas for which Dexterity has signed previous exclusive sales and distribution agreements still in effect. Under the terms of the agreement, WCS (a unit of Teleflex Incorporated) is required to purchase certain minimum quantities. Also, per the agreement, WCS and the Company will combine elements of both sales forces under the WCS umbrella. The Company and WCS continue to operate as separate business entities.
In September 2001, the Company and WCS amended the agreement, which adjusted various aspects of the contract to more accurately reflect current existing market conditions. Effective July 1, 2001, WCS continued its exclusive right to distribute the Dexterity® Protractor®; however, WCS distributes the Dexterity® Pneumo Sleeve® on a non-exclusive basis. Also, certain guaranteed minimum purchase requirements by WCS, which originally were scheduled to expire December 31, 2001, were extended until December 31, 2003.
Sales to WCS and affiliates represented 0% of the Company’s net sales for the quarter ended September 30, 2003 and 45% for the nine months ended September 30, 2003. There were no sales to WCS during the quarter because the Company is in the process of changing manufacturers of its proprietary products and was therefore unable to ship products to WCS. The Company expects sales to WCS to recommence in the 4th quarter of 2003. At September 30, 2003, the Company had a total backlog of $776,000 in sales orders from WCS.
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NOTE 9 — FAIR VALUE OF STOCK OPTIONS
At September 30, 2003, the Company has a stock-based employee compensation plan which is described more fully in Note D, “Stockholder’s Equity,” to the December 31, 2002 audited consolidated financial statements contained in the Company’s annual report of Form 10-KSB. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost related to stock options is reflected in net income, as all options granted under the plan had an exercise price equal to, or greater than, the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation for the nine month periods ended September 30:
| Three Months | Nine Months | ||||||||||||||||
| Ended September 30 | Ended September 30 | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
| Net (loss) applicable to common stockholders, as reported | $ | (904,776 | ) | $ | (1,003,779 | ) | $ | (2,199,118 | ) | $ | (2,649,075 | ) | |||||
| Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects | — | (24,500 | ) | (7,844 | ) | (73,500 | ) | ||||||||||
| Pro forma (loss) | $ | (904,776 | ) | $ | (1,028,279 | ) | $ | (2,206,962 | ) | $ | (2,722,575 | ) | |||||
| (Loss) per common share: | |||||||||||||||||
| Basic and diluted, as reported | $ | (.07 | ) | $ | (.08 | ) | $ | (.18 | ) | $ | (.22 | ) | |||||
| Basic and diluted, pro forma | $ | (.07 | ) | $ | (.08 | ) | $ | (.18 | ) | $ | (.22 | ) | |||||
Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Certain statements contained in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Specifically, all statements other than statements of historical fact included in this Item 2 regarding the Company’s financial position, business strategy and plans and objectives of management for future operations are forward-looking statements. These forward-looking statements are based on the beliefs of management, as well as assumptions made by and information currently available to the Company’s management. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect” and “intend” and words or phrases of similar import, as they relate to the Company or Company’s management are intended to identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions related to certain factors including, without limitation, dependence on third parties for manufacturing, marketing and distribution, future capital requirements, the Company’s ability to obtain additional funding, the Company’s ability to restructure its cash obligation, demand for and acceptance of the Company’s products, the level of competition in the marketplace, the ability of the Company’s customers to be reimbursed by third-party payors, competitive factors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, product introductions and acceptance, technological change, changes in industry practices, one-time events and other factors described herein, and in the Company’s annual, quarterly and other reports filed with the SEC (collectively “cautionary statements”). Although the Company believes that its expectations are reasonable, it can give no assurance that such expectations will prove to be correct. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the applicable cautionary statements. The Company does not intend to update these forward-looking statements.
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Overview
From inception through December 31, 1995, the Company was a development stage enterprise whose efforts and resources were devoted primarily to research and development activities related to its initial products. During this development stage, the Company generated minimal operating revenues and, thus, was unprofitable. In 1996, the Company reduced investment in research and development related to such technologies and focused its efforts on acquiring and distributing minimally invasive surgical devices. As of September 30, 2003, the Company had an accumulated deficit of approximately $49,917,000. The Company will likely continue to incur losses. There can be no assurance that the Company will ever achieve profitability.
The Company’s future operating results will depend on many factors, including dependence on third parties for manufacturing, marketing and distribution, future capital requirements, the Company’s ability to obtain additional funding, the Company’s ability to restructure its cash obligation, demand for and acceptance of the Company’s products, the level of competition in the marketplace, the ability of the Company’s customers to be reimbursed by third-party payors, competitive factors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, product introductions and acceptance, technological change, changes in industry practices, one-time events and other factors described in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2002.
Effective October 24, 2000, following the delisting of the Company’s common stock from trading on the NASDAQ SmallCap Market, the Company’s common stock began trading on the National Association of Securities Dealer’s “Electronic Bulletin Board.” Consequently, the liquidity of the Company’s common stock is impaired, not only in the number of shares which can be bought and sold, but also through delays in the timing of the transactions, reduction in security analysts’ and the news media’s coverage, if any, of the Company and lower prices for the Company’s securities than might otherwise prevail.
As the Company’s common stock was delisted from trading on the Nasdaq SmallCap Market and the trading price of the common stock is below $5.00 per share, trading in the common stock is subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosures by broker-dealers in connection with any trades involving a stock defined as a penny stock (generally, any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors (which are generally institutions). For these types of transactions, the broker-dealer must make a special suitability determination for the purchase and have received the purchaser’s written consent to the transaction prior to the sale. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in the common stock which could severely limit the market liquidity of common stock and the ability of stockholders to sell their shares of common stock in the secondary market.
In January 1998, the Company acquired approximately 20% of the common stock of Dexterity Incorporated (“Dexterity”), a business development subsidiary of Teleflex, Inc. In March 1999, the Company acquired the remaining common stock of Dexterity by merging Dexterity into the Company (the “Dexterity Merger”) pursuant to a Plan of Merger and Acquisition agreement between the Company and Dexterity (the “Dexterity Agreement”). Simultaneous with the merger, the Company changed its name to Dexterity Surgical, Inc.
On September 29, 2000, the Company announced it had signed an exclusive agreement with Weck Closure Systems (WCS) to distribute the Dexterity® Pneumo Sleeve® and the Dexterity® Protractor® in the United States. The agreement also covers international distribution, except in those areas for which Dexterity has signed previous exclusive sales and distribution agreements still in effect. Under the terms of the agreement, WCS (a unit of Teleflex Incorporated) is required to purchase certain minimum quantities. Also, per the agreement, WCS and the Company combined elements of both sales forces under the WCS umbrella. The Company and WCS continue to operate as separate business entities.
In September 2001, the Company and WCS amended the agreement, which adjusted various aspects of the contract to more accurately reflect current existing market conditions. Effective July 1, 2001, WCS continued its exclusive right to distribute the Dexterity® Protractor®; however, WCS distributes the Dexterity® Pneumo Sleeve® on a non-exclusive basis. Also, certain guaranteed minimum purchase requirements by WCS, which originally were scheduled to expire December 31, 2001, were extended until December 31, 2003.
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Liquidity and Capital Resources
On June 3, 2003, the Company announced that Davol, Inc. and the Company had broken off negotiations related to the previously announced sale of substantially all assets of the Company relating to the Protractor line in consideration for cash of $7 million.
On September 11, 2002, the Company had entered into an agreement with United States Surgical Corporation (U.S. Surgical), a division of Tyco Healthcare Group LP, to ultimately settle all claims and counter claims between the two parties. The pertinent terms of the settlement agreement were as follows:
| • | The Company represented and warranted it was in the process of negotiating the sale of the Dexterity Protractor line. |
| • | Within seven (7) days of the closing of the sale, but no later than April 21, 2003, the Company would pay U.S. Surgical $800,000 in full settlement of the $2,500,000 trade accounts payable to U.S. Surgical currently recorded on the Company’s books and records. Cost of litigation settlement of $287,000 was recorded in September 2002. |
Because the sale of the asset did not take place, U.S. Surgical may enforce a Stipulated Judgment, filed by the Company and U.S. Surgical on September 30, 2002, for $2,500,000 in its favor.
On July 17, 2003, Medical Creative Technologies, Inc., and Robert D. Rambo filed a lawsuit in the United States District Court for the Eastern District of Pennsylvania, against the Company alleging breach of contract with regards to several of the Company’s operative agreements. The plaintiffs are seeking approximately $267,562 cash and return of all rights to the Dexterity® Pneumo Sleeve® and the Dexterity® Protractor®. The Company believes this lawsuit is without merit and intends to vigorously defend its position.
All of the Company’s debt and other long-term debt obligations are in default, totaling $12,558,000 at September 30, 2003. See note 6 to the financial statements for a more detailed discussion. The Company does not have sufficient resources to satisfy these obligations in the event of demand for payment.
At September 30, 2003, the Company had current assets of $190,000 and current liabilities of $15,308,000 resulting in a working capital deficit of $15,118,000. This compares to a working capital deficit of $12,762,000 at December 31, 2002. The increase in working capital deficit is primarily due to the operating losses during the first nine months of 2003, and reclassification of certain of its debt from long-term to current.
The Company maintains a maximum $5,000,000 revolving line of credit whereby all inventories, accounts receivable and intangibles of the Company are pledged as collateral. At September 30, 2003, the outstanding balance due on such line of credit was $765,000 and there are no additional funds available under the current borrowing base. The default under the Debentures (discussed below) triggered the cross-default clause in the line of credit agreement. Therefore, the lender has the right to demand immediate repayment of the entire amount outstanding. In May 2001, Teleflex, Inc., a major shareholder in the Company, purchased this instrument from the previous lender. The outstanding balance continues to be classified as a current liability and interest at prime rate plus 4.5% continues to accrue.
For the nine month period ended September 30, 2003, operating activities used net cash of $151,000, investment activities consumed $79,000 and borrowings on its line of credit provided $119,000.
The Company does not believe its revenues and other sources of liquidity will provide adequate funding for its current capital requirements. The Company is presently in negotiations to make arrangements to restructure certain obligations including the Debentures, line of credit and Royalty obligation. However, there can be no assurance that the Company will be able to restructure these obligations. IF THE RESTRUCTURING IS NOT SUCCESSFUL WE WOULD LIKELY BE REQUIRED TO SEEK PROTECTION UNDER THE UNITED STATES BANKRUPTCY LAWS.
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Results of Operations
For the three months ended September 30, 2003, the Company reported a loss from operations of $507,000 as compared with a loss from operations of $614,000 for the three months ended September 30, 2002. For the nine months ended September 30, 2003, the Company reported a loss from operations of $969,000 versus a loss from operations of $1,444,000 for the comparable period of 2002. The decreased loss was primarily due to impairment of investment expenses and cost of litigation settlement recorded in 2002.
Net sales decreased 81% in the third quarter 2003 and 25% in the first nine months of 2003 as compared with the same periods in 2002. Net sales were $175,000 for the third quarter of 2003 and $937,000 for the third quarter of 2002. Net sales for the first nine months of 2003 and 2002 were $1,052,000 and $1,395,000 respectively. These decreases were primarily due to the fact that the Company was in the process of changing the manufacturer of its proprietary products in the third quarter of 2003. Consequently, due to regulatory validation processing, sales of the Company’s proprietary products have been suspended during the transition to the new manufacturer. At September 30, 2003, the Company had a total backlog of $776,000 in sales orders from WCS. It is anticipated that product shipments to WCS will resume in the fourth quarter of 2003.
Gross profit from net sales in the third quarter was $27,000 in 2003 versus $601,000 in 2002. The corresponding gross profit margins decreased to 16% in 2003 from 64% in 2002. For the nine months ended September 30, gross profit was $503,000, or 48%, in 2003 and $804,000, or 58%, in 2002. The decline in gross profit margins was primarily due to the Company’s inability to sell high margin proprietary products in the quarter due to the fact that the Company is changing the manufacturer of its proprietary products.
For the third quarter, selling, general and administrative expenses, which consist primarily of sales commissions, salaries and other costs necessary to support the Company’s infrastructure, increased 30% to $302,000 in 2003 from $233,000 in 2002. For the first nine months of 2003, these expenses increased 4% to $773,000 from $745,000. The increase in these expenses for the third quarter was primarily due to legal expenses incurred related to the Medical Creative Technologies, Inc. and Surgical Visions I, Inc. legal proceedings.
Depreciation and amortization expense decreased 5% to $233,000 for the third quarter of 2003 from $244,000 for the third quarter of 2002. For the nine month period, depreciation and amortization expenses declined 9% from $766,000 in 2002 to $698,000 in 2003. The decline is primarily due to a smaller licensed technology asset base.
Interest expense was $349,000 for the quarter ended September 30, 2003 and $341,000 for the same quarter in 2002, an increase of 2%. For the nine month period, interest expense was $1,084,000 in 2003 and $1,058,000 in 2002, an increase of 3%. Interest expense includes the non-cash accretion of the minimum royalty obligation, interest on the line of credit and interest on the note payable due to the former stockholders of Dexterity.
Item 3. Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2003 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There has been no change in our internal controls over financial reporting that occurred during the three months ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
No legal proceedings were commenced by or against the Company during the three month period ended September 30, 2003 other than the previously reported lawsuit filed by Medical Creative Technologies, Inc. and Robert D. Rambo. No material developments occurred in any previously reported legal proceedings involving the Company during the same period.
Item 2. Changes in Securities
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities
All of the Company’s debt and other long-term obligations are in default.
The Company’s convertible Debentures currently require the Company to comply with the following financial covenants: (i) a Debt-to-Net Worth Ratio of no greater than .99:1; (ii) an Interest Coverage Ratio of at least .60:1; (iii) a Debt Coverage Ratio of at least .10:1; and (iv) a Current Ratio of at least .68:1. The Company is currently not in compliance with these covenants and is not current on its interest and principal repayment obligations under the Debentures and, therefore, is in default under the Debentures. The delisting of the Company’s common stock in October 2000, as discussed in Note 1 of the financial statements, also created an event of default. Under these events of default, the holders have demanded the immediate repayment of the entire amount outstanding. Accordingly, the entire balance due of $2,632,563 is classified as a current liability as of September 30, 2003. The Company is not current on its interest and principal repayment obligations and currently does not have, nor does it believe it could obtain, sufficient resources to fund these amounts.
The Company maintains a maximum $5,000,000 revolving line of credit whereby all inventories, accounts receivable and intangibles of the Company are pledged as collateral. At September 30, 2003, the outstanding balance due on such line of credit was $764,995 and there are no additional funds available under the current borrowing base. The default under the Debentures (discussed above) triggered the cross-default clause in the line of credit agreement. Therefore, the lender has the right to demand immediate repayment of the entire amount outstanding. In May 2001, Teleflex Incorporated, a major shareholder in the Company, purchased this instrument from the previous lender. Teleflex Incorporated and the Company are currently negotiating new terms and conditions for the line of credit. The outstanding balance continues to be classified as a current liability and interest at prime rate plus 4.5% continues to accrue until negotiations are completed.
The Company is currently in default in the payment of principal and interest in the aggregate amount of $1,240,000 under the Notes due October 18, 2001 issued in the Dexterity Merger and does not have the available resources to pay the guaranteed minimum royalty related to the Dexterity Merger. As of September 30, 2003, such minimum royalty and delinquent penalties in arrears was $3,785,000. The Company currently does not have sufficient resources to fund these amounts.
Royalty obligations related to Dexterity acquisition, subject to annual minimum payments over a period of seven years commencing in 1999 and discounted at 12%, plus an additional 12% on royalties not paid when due. The minimum payments aggregate approximately $9.7 million over the seven-year royalty period. The Company is in default with respect to this obligation and does not have sufficient resources to satisfy this obligation in the event of demand for payment.
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The Company has authorized 2,000,000 shares of preferred stock of which 2,445 shares were outstanding at September 30, 2003. Please refer to the Company’s Form 10-KSB as of December 31, 2002 for a full description of these placements. The Company is in arrears on its preferred stock placements as follows at September 30, 2003:
| Series C preferred stock | $ | 56,000 | |||
| Series B preferred stock | 143,500 | ||||
| Series A preferred stock | 142,800 | ||||
| Total dividends in arrears | $ | 342,300 | |||
Item 4. Submission of Matters to a Vote of Security Holders — Not Applicable
Item 5. Other Information — Not Applicable
Item 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits |
| 3.1 | Restated Certificate of Incorporation, as amended (incorporated by reference herein to Exhibit 3.1 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2000). |
| 3.2 | Bylaws of the Registrant (incorporated by reference herein to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed on August 19, 1992, Registration No. 33-49196). |
| 31.1 | Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
| 31.2 | Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as required by Sarbanes Oxley Act of 2002. |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as required by Sarbanes Oxley Act of 2002. |
| (b) | Report on Form 8-K. |
| On August 8, 2003, the Company issued a press release announcing it’s financial and operational results for the quarter ended June 30, 2003. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| DEXTERITY SURGICAL, INC. (Registrant) | ||||
| Dated: November 7, 2003 | By | /s/ RICHARD A. WOODFIELD | ||
| Richard A. Woodfield | ||||
| President and Chief Executive Officer (Principal Executive Officer) | ||||
| Dated: November 7, 2003 | By | /s/ RANDALL K. BOATRIGHT | ||
| Randall K. Boatright | ||||
| Executive Vice President and Chief Financial Officer (Principal Accounting Officer) | ||||
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INDEX TO EXHIBITS
| EXHIBIT | ||
| NUMBER | DESCRIPTION | |
| 3.1 | Restated Certificate of Incorporation, as amended (incorporated by reference herein to Exhibit 3.1 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2000) | |
| 3.2 | Bylaws of the Registrant (incorporated by reference herein to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed on August 19, 1992, Registration No. 33-49196) | |
| 31.1 | Certification by the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | |
| 31.2 | Certification by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as required by Sarbanes Oxley Act of 2002. | |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as required by Sarbanes Oxley Act of 2002. |
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