<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 March 31, 2000
OR
[ ] 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.
(Exact name of registrant as specified in its charter)
Delaware 74-2559866
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12961 Park Central, Suite 1300
San Antonio, Texas 78216
(Address of principal executive offices)
(Zip Code)
(210) 495-8787
(Registrant's telephone number, including area code)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
---------------
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
On May 8, 2000, there were outstanding 11,096,492 shares of Common Stock,
$.001 par value, of the registrant.
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DEXTERITY SURGICAL, INC. AND SUBSIDIARY
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1: Consolidated Financial Statements - (Unaudited)
Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations - For the Three Months
Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 2000 and 1999 5
Condensed Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
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 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 119,437 $ 113,384
Accounts receivable (net of allowance for doubtful accounts of
$95,889 in 2000 and $105,000 in 1999) 1,150,230 2,865,824
Accounts receivable from related party 38,250 41,066
Inventories, net 2,127,136 2,315,875
Prepaid and other assets 445,633 120,006
------------ ------------
Total current assets 3,880,686 5,456,155
------------ ------------
Property, Plant and Equipment, net 601,422 647,174
Investments, at cost 1,202,500 1,202,500
Deferred finance charges 271,618 290,326
Intangible Assets:
Licensed technology rights & other, net 16,644,465 17,030,212
Goodwill, net 1,450,141 1,464,406
------------ ------------
Total assets $ 24,050,832 $ 26,090,773
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,487,577 $ 2,847,579
Accrued liabilities 351,061 782,359
Current portion of long-term obligations 1,580,612 2,569,378
------------ ------------
Total current liabilities 4,419,250 6,199,316
Long-term notes payable 1,000,000 1,000,000
Convertible Debentures 2,881,788 2,970,000
Royalty Obligation 5,408,944 5,432,382
Minority Interest 106,544 106,544
Commitments and Contingencies (Note 6)
Stockholders' Equity:
Preferred Stock, $.001 par value; 2,000,000 shares authorized;
shares issued and outstanding: 2,045 (2000) and 2,195 (1999) 2 2
Common stock, $.001 par value; 50,000,000 shares authorized;
shares issued and outstanding: 11,096,492 (2000) and
10,212,742 (1999) 11,097 10,213
Additional paid-in capital 31,531,429 30,742,313
Warrants 2,370,900 2,370,900
Accumulated deficit (23,679,122) (22,740,897)
------------ ------------
Total stockholders' equity 10,234,306 10,382,531
------------ ------------
Total liabilities and stockholders' equity $ 24,050,832 $ 26,090,773
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
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DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net Sales $ 2,579,860 $ 5,926,193
------------ ------------
Cost And Expenses:
Cost of sales 999,687 3,453,521
Research and development 4,765 30,868
Selling, general and administrative 1,630,227 2,561,904
Depreciation and amortization 491,039 102,153
------------ ------------
3,125,718 6,148,446
------------ ------------
Loss From Operations (545,858) (222,253)
Other Income (Expense):
Gain (loss) on sale of assets -- 44,068
Investment income 8,819 19,234
Interest expense (360,286) (63,478)
Loss on investment in affiliate -- (30,000)
------------ ------------
Net Loss (897,325) (252,429)
Less dividend requirement on cumulative convertible
preferred stock (40,900) (43,783)
------------ ------------
Net loss applicable to common stock $ (938,225) $ (296,212)
============ ============
Basic and Diluted Loss Per Share of Common Stock $ (.09) $ (.04)
============ ============
Weighted Average Shares Used In Computing Basic and
Diluted Loss Per Share of Common Stock 10,263,511 7,646,075
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
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DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $ (897,325) $ (252,429)
Adjustments to reconcile net loss to net cash
provided by operating activities -
Depreciation and amortization 491,039 102,153
Amortization of deferred finance charges 18,708 6,464
Accretion of royalty obligation 183,378 --
Noncash interest expense 75,000 --
Deferred compensation -- 4,894
Noncash consulting expense 10,875 --
Gain on sale of fixed assets -- (44,068)
Loss on investment in affiliate -- 30,000
Changes in operating assets and liabilities-
Decrease (increase) in accounts receivable, net 1,715,594 (1,106,474)
Decrease in accounts receivable from related party 2,816 131
Decrease (increase) in inventories, net 188,739 (1,098,788)
Increase in prepaid and other assets (21,500) (39,898)
Increase (decrease) in accounts payable (360,002) 3,377,646
Decrease in accrued expenses (431,298) (52,706)
----------- -----------
Net cash provided by operating activities 976,024 926,925
----------- -----------
Cash Flows From Investing Activities:
Additions to property and equipment (7,189) (53,435)
Investment redemptions -- 983,714
Acquisitions -- (1,751,862)
----------- -----------
Net cash used in investing activities (7,189) (821,583)
----------- -----------
Cash Flows From Financing Activities:
Dividends paid to preferred stockholders (40,900) (43,783)
Payments on debt - net (824,231) (56,310)
Payments on royalty obligation (97,651) --
Payments of deferred finance charges -- (29,000)
Issuance of preferred stock -- 25,000
----------- -----------
Net cash used in financing activities (962,782) (104,093)
----------- -----------
Net increase in cash and cash equivalents 6,053 1,249
Cash and cash equivalents, beginning of period 113,384 1,644,535
----------- -----------
Cash and cash equivalents, end of period $ 119,437 $ 1,645,784
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
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DEXTERITY SURGICAL, INC. AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2000
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Dexterity
Surgical, Inc. (the "Company") and the Company's 82% ownership interest in
ValQuest Medical, Inc. All significant intercompany accounts and transactions
have been eliminated in consolidation. The consolidated 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. In addition, all such adjustments are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with 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 consolidated financial
statements be read in conjunction with the financial statements and the notes
thereto for the fiscal year ended December 31, 1999, included in the Company's
Form 10-KSB. Certain reclassifications have been made in the prior period
financial statements to conform with the current period presentation.
The Company has obtained a waiver for certain affirmative financial covenant
requirements associated with its convertible debentures through March 31, 2000.
If the Company is unable to comply with such requirements in the future, the
Company could be found to be in technical default under the Debentures and the
holder would have the right to demand immediate repayment of the entire amount
outstanding. The Company believes that sufficient resources would be available
to fund such amounts in the event of such acceleration. The Company has also
taken steps to improve its 2000 operating results. The Company has restructured
its debt obligations, modified its royalty agreement to provide for partial
non-cash royalty payments, reduced its general and administrative costs by
converting its entire sales force from employees to independent sale
representatives and eliminated additional administrative staff. In addition,
certain officers of the Company have agreed to restructure their compensation
packages to increase short term cash flow.
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.
Product sales are recognized upon the shipment of products to the customer.
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.
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. Except for the royalty obligation
component, licensed technology rights acquired in conjunction with the merger
with Dexterity Incorporated (see "Note 5 - Merger) are amortized over a 17 year
period. The royalty obligation component of licensed technology rights is
amortized over the royalty agreement period of 7 years.
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NOTE 3 - BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share ("EPS") is computed by dividing net income
(loss) 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 months ended March 31, 2000 and 1999, Diluted EPS equals Basic EPS as
potentially dilutive common stock equivalents are antidilutive in loss periods.
NOTE 4 - INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Raw materials $ 5,458 $ 34,284
Work-in-process 342,903 338,048
Finished Goods 1,988,945 2,185,025
Allowances (210,170) (241,482)
----------- -----------
$ 2,127,136 $ 2,315,875
=========== ===========
</TABLE>
NOTE 5 - MERGER
On March 18, 1999, the Company's stockholders approved the Merger between the
Company and Dexterity Incorporated ("DI"). Contemporaneously with the Merger,
the Company changed its name to Dexterity Surgical, Inc. The Company accounted
for this business combination as a purchase. The consideration given to the
selling stockholders by the Company for the DI stock it did not previously own
consisted of an aggregate of:
(a) $1.5 million cash.
(b) Three million shares of the Company's common stock valued at
approximately $5.6 million.
(c) Warrants to purchase 1.5 million shares of the Company's common stock
valued at approximately $2.3 million.
(d) A one year, $1 million promissory note bearing interest at 12 percent.
(e) A royalty to be paid to the selling stockholders in an amount equal to
15 percent of all sales of DI products for a period of seven years.
The royalty is subject to minimum payments which aggregate
approximately $9.7 million over the seven-year royalty period, with a
net present value, discounted at 12 percent, of approximately $5.95
million.
The results of operations for the three months ended March 31, 2000 and 1999,
include the operations of Dexterity Incorporated from March 18, 1999. Unaudited
pro forma consolidated results of operations for the three months ended March
31, 1999, assuming the Dexterity Incorporated merger had occurred at January 1,
1999, would have been as follows:
<TABLE>
<S> <C>
Net sales $ 5,946,276
Net loss (948,860)
Basic and diluted loss per share of common stock $ (.10)
</TABLE>
The foregoing pro forma information is presented in response to applicable
accounting rules relating to business acquisitions and is not necessarily
indicative of the actual results that would have been achieved had the Dexterity
Incorporated merger occurred at the beginning of 1999, nor is it indicative of
future results of operations.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company is 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 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
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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 7 - OBLIGATIONS
The Company had the following current and long-term obligations:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Unsecured notes payable related to Dexterity acquisition, bearing interest
at 12 percent, interest due quarterly, maturing October 18, 2001 1,000,000 1,000,000
Revolving line of credit secured by accounts receivable, inventories and
intangible assets bearing interest at prime rate plus 1.5 percent. The
line of credit has a maximum of $5 million and expires in 2003 998,221 1,822,452
Royalty obligation related to Dexterity acquisition, subject to annual minimum
payments over a period of seven years discounted at 12%. The minimum payments
aggregate approximately $9.7 million over the seven year royalty period 5,873,123 6,149,308
Convertible Debentures, see Note 8 3,000,000 3,000,000
----------- -----------
Total obligations 10,871,344 11,971,760
Less - Current portion 1,580,612 2,569,378
----------- -----------
Long-term obligations $ 9,290,732 $ 9,402,382
=========== ===========
</TABLE>
In March 2000, the Company modified several of its obligations to provide for
payment of interest and minimum royalties in shares of Common Stock, valued at
$1.00 per share. The Company issued 120,000 shares of Common Stock in advance of
interest due on the unsecured notes payable through December 31, 2000, and
400,000 shares of Common Stock in advance of minimum royalty payments due in
2000.
The carrying amount of the Company's debt approximates the fair value of the
debt. This determination is based on management's estimate of the fair value at
which such instruments could be sold or obtained in a third-party transaction.
NOTE 8 - CONVERTIBLE DEBENTURES
In December 1997, the Company sold 250,000 shares of Common Stock to Renaissance
in a private placement for aggregate proceeds of $1,000,000 and placed
$3,000,000 in 9% Convertible Debentures (the "Debentures") with Renaissance. The
proceeds from the private placement were used to repay the Company's line of
credit with another financial institution, to make the January 1998 equity
investment in Dexterity, and for working capital purposes. The Debentures are
secured by substantially all of the assets of the Company and require monthly
payments of interest and, unless sooner paid, redeemed or converted, require
monthly principal payments commencing in December 2000 of $10 per $1000 of the
then remaining principal amount. The remaining principal balance will mature in
December 2004. In March 2000, the Debentures were modified to provide that the
interest payable between February 1, 2000 through January 31, 2001 shall be paid
in shares of Common Stock, valued at $1.00 per share. Upon modification, 270,000
shares of Common Stock valued at $270,000 were issued in advance of interest due
through January 31, 2001.
The Debentures currently require the Company to comply with the following
financial covenants: (i) a Debt to Net Worth Ratio of no greater than .95:1;
(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 .70:1. The Company is
currently not in compliance and has obtained a waiver from Renaissance to
suspend the Interest Coverage Ratio and the Debt Coverage Ratio through March
31, 2000. If the Company is unable to comply with these covenants in the future,
the Company could be found to be in technical default under the Debentures and
the holders thereof would have the right to demand the immediate repayment of
the entire amount
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outstanding. The Company believes that sufficient resources would be available
to fund such amounts in the event of such acceleration.
The holders of the Debentures have the option to convert at any time all or a
portion of the Debentures into shares of Common Stock at an initial price of
$1.00 per share of Common Stock. The conversion price is subject to downward
revision if the Company sells shares of its Common Stock, or securities
convertible into 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.
The Debentures are currently convertible for an aggregate of 3,000,000 shares of
Common Stock; however, since the conversion price is subject to downward
adjustment as described above, and there is no minimum conversion price, the
maximum number of shares of Common Stock which may be issued pursuant to the
Debentures is undeterminable. The provisions of the Debentures provide that the
holders of the Debentures have an option to redeem the Debentures, in an amount
equal to an 18 percent annual yield on the principal balance, upon the
occurrence of certain events, including the delisting of Common Stock from the
NASDAQ SmallCap Market and certain "change of control" provisions, as defined in
the Debentures, as they relate to the Company. The Company may redeem the
Debentures at its option subject to certain share price and market activity
levels being obtained. The Company's right of redemption is subject to the
holder's prior right of conversion of the Debenture.
NOTE 9 - PREFERRED STOCK PLACEMENTS
Pursuant to a private placement which occurred in November 1998, the Company
issued to two affiliates of Renaissance Capital Group, Inc. (collectively,
"Renaissance") and one individual, who is an officer and director of the
Company, an aggregate of 1,025 shares of Series B Cumulative Convertible
Preferred Stock, $.001 par value ("Series B Preferred Stock") for aggregate
proceeds of $1,025,000. The Company used such proceeds for working capital. The
annual dividends on the Series B Preferred Stock are cumulative at a rate of $80
per share. The Series B Preferred Stock is currently convertible into shares of
Common Stock at a conversion price of $1.00 per share, for an aggregate of
1,025,000 shares of Common Stock. The conversion price for the Series B
Preferred Stock is subject to downward adjustment in the event the Company sells
shares of Common Stock, or securities convertible into shares of Common Stock,
at a per share price less than $1.00. The holders of Series B Preferred Stock,
are entitled to one vote per share on all matters submitted to a vote of the
stockholders of the Company, and the affirmative vote of the holders of 66 2/3%
of the votes entitled to be cast by the holders of the Series B Preferred Stock
is required in order to amend the Company's Certificate of Incorporation or
Bylaws to materially affect the rights of the holders of Series B Preferred
Stock, including authorizing and creating a class of stock having rights prior
to or senior to the Series B Preferred Stock. In the event two quarterly
dividends payable on the series B Preferred Stock are in arrears, the holders of
Series B Preferred Stock, by a majority vote, shall be entitled to designate two
additional directors to serve on the Company's Board of Directors.
In August 1998, pursuant to a private placement, the Company issued to
Renaissance and two individuals, including one who is an officer and directors
of the Company, an aggregate of 1,170 shares of series A Cumulative Convertible
Preferred Stock, $.001 par value ("Series A Preferred Stock"), for aggregate
proceeds of $1,170,000. The Company used such proceeds for working capital.
During March 2000, 150 shares of Series A Preferred stock were converted to
93,750 shares of Common Stock. Annual dividends on the Series A Preferred Stock
are cumulative at a rate of $80 per share. The Series A Preferred Stock is
currently convertible into share of Common Stock at a conversion price of $1.00
per share, for an aggregate of 1,020,000 shares of Common Stock. The conversion
price for the Series A Preferred Stock is subject to downward adjustment in the
event the Company sells shares of Common Stock, or securities convertible into
shares of common Stock, at a per share price less than $1.00. The holders of
Series A Preferred Stock are entitled to one vote per share on all matters
submitted to a vote of the stockholders of the Company, and the affirmative vote
of the holders of 66 2/3% of the votes entitled to be cast by the holders of the
Series A Preferred Stock is required in order to amend the Company's Certificate
of Incorporation or Bylaws to materially affect the rights of the holders of
Series A Preferred Stock, including authorizing and creating a class of stock
having rights prior to or senior to the Series A Preferred Stock. In the event
two quarterly dividends payable on the Series A Preferred Stock are in arrears,
the holders of Series A Preferred Stock, by a majority vote, shall be entitled
to designate two additional directors to serve on the Company's Board of
Directors.
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,
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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 Dexterity Surgical, Inc. and its subsidiary's and
affiliates' (collectively, the "Company") financial position, business strategy
and plans and objectives of management of the Company for future operations are
forward-looking statements. These forward-looking statements are based on the
beliefs of the Company's 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, the Company's ability to manufacture,
market and distribute safe and effective products on a cost-effective basis,
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, in the Company's Registration Statement on Form S-3
(File No. 333-58849) filed with the Securities and Exchange Commission ("SEC")
on October 13, 1998, 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.
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 decided to reduce continuing investment
in research and development related to such technologies and to focus its
efforts on acquiring and distributing minimally invasive surgical devices.
Accordingly, during the last four fiscal years, the Company has continued to
decrease its engagement in Company sponsored research and development. As of
March 31, 2000, the Company had an accumulated deficit of approximately
$23,679,000. There can be no assurance that the Company will not continue to
incur losses, 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 future operating results will depend on many factors,
including the Company's ability to manufacture, market and distribute safe and
effective products on a cost-effective basis, demand for and acceptance of the
Company's products, the level of competition in the marketplace, the ability of
the Company to create, obtain and maintain scientifically advanced technology,
the ability of the Company's customers to be reimbursed by third-party payors
and other factors described on Form 10-KSB for the year ended December 31, 1999.
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 effectiveness of
the Dexterity Merger, the Company changed its name to Dexterity Surgical, Inc.
Under the terms of the Dexterity Agreement, which was approved by the
stockholders of the Company at a special meeting held March 18, 1999, the
Dexterity stockholders, other than the Company, received an aggregate of:
o $1,500,000;
o 3,000,000 shares of Common Stock;
o warrants to purchase an aggregate of 1,500,000 shares of Common Stock,
at an exercise price per share of $2.00 (the "Warrants");
o promissory notes in the aggregate amount of $1,000,000 (the "Notes");
and
o a royalty for seven years in an amount equal to 15% of all sales of
Dexterity products (the "Royalty") pursuant to a royalty agreement
(the "Royalty Agreement") among the Company and the Dexterity
stockholders, other
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than the Company. The Royalty is subject to minimum annual payments
which aggregate, over the seven years of the Royalty Agreement,
approximately $9,695,095.
The Company determined the fair market value of the above consideration to be
approximately $16,000,000. The Company launched distribution of Dexterity's
primary products, the Dexterity(R) Pneumo Sleeve and Dexterity(R) Protractor, in
March 1998. The Dexterity Merger was accounted for using the purchase method of
accounting.
LIQUIDITY AND CAPITAL RESOURCES
In March 2000, the Warrants, Notes and Royalty Agreement were restructured.
The maturity date of the Notes was extended by 19 months to October 18, 2001.
The interest payable on the Notes for the year 2000 shall be paid in shares of
Common Stock at a per share price of $1.00. The Warrants have been amended to
reflect an exercise price per share of Common Stock of $1.00. In addition, the
Royalty Agreement has been restructured to allow the Company to pay the first
$400,000 in Royalty due for 2000 in shares of Common Stock, valued at $1.00 per
share.
At March 31, 2000, the Company had current assets of $3,881,000 and current
liabilities of $4,419,000 resulting in a working capital deficit of $538,000.
This compares to a working capital deficit of $743,000 at December 31, 1999. The
improvement in working capital position is primarily due to the restructuring
discussed in the previous paragraph.
In April 1999, the Company acquired a new maximum $5,000,000 revolving line
of credit from a financial institution whereby all inventories, accounts
receivable and intangibles of the Company are pledged as collateral. At March
31, 2000, the outstanding balance due on such line of credit was $998,000 and an
additional $453,000 was available under the current borrowing base.
Pursuant to a private placement which occurred in November 1998, the
Company issued to two affiliates of Renaissance Capital Group, Inc.
(collectively, "Renaissance") and one individual, who is an officer and director
of the Company, an aggregate of 1,025 shares of Series B Cumulative Convertible
Preferred Stock, $.001 par value ("Series B Preferred Stock") for aggregate
proceeds of $1,025,000. The Company used such proceeds for working capital. The
annual dividends on the Series B Preferred Stock are cumulative at a rate of $80
per share. The Series B Preferred Stock is currently convertible into shares of
Common Stock at a conversion price of $1.00 per share, for an aggregate of
1,025,000 shares of Common Stock. The conversion price for the Series B
Preferred Stock is subject to downward adjustment in the event the Company sells
shares of Common Stock, or securities convertible into shares of Common Stock,
at a per share price less than $1.00. The holders of Series B Preferred Stock,
are entitled to one vote per share on all matters submitted to a vote of the
stockholders of the Company, and the affirmative vote of the holders of 66 2/3%
of the votes entitled to be cast by the holders of the Series B Preferred Stock
is required in order to amend the Company's Certificate of Incorporation or
Bylaws to materially affect the rights of the holders of Series B Preferred
Stock, including authorizing and creating a class of stock having rights prior
to or senior to the Series B Preferred Stock. In the event two quarterly
dividends payable on the series B Preferred Stock are in arrears, the holders of
Series B Preferred Stock, by a majority vote, shall be entitled to designate two
additional directors to serve on the Company's Board of Directors.
In August 1998, pursuant to a private placement, the Company issued to
Renaissance and two individuals, including one who is an officer and director of
the Company, an aggregate of 1,170 shares of series A Cumulative Convertible
Preferred Stock, $.001 par value ("Series A Preferred Stock"), for aggregate
proceeds of $1,170,000. The Company used such proceeds for working capital.
During March 2000, 150 shares of Series A Preferred Stock were converted to
93,750 shares of Common Stock. Annual dividends on the Series A Preferred Stock
are cumulative at a rate of $80 per share. The Series A Preferred Stock is
currently convertible into share of Common Stock at a conversion price of $1.00
per share, for an aggregate of 1,020,000 shares of Common Stock. The conversion
price for the Series A Preferred Stock is subject to downward adjustment in the
event the Company sells shares of Common Stock, or securities convertible into
shares of common Stock, at a per share price less than $1.00. The holders of
Series A Preferred Stock are entitled to one vote per share on all matters
submitted to a vote of the stockholders of the Company, and the affirmative vote
of the holders of 66 2/3% of the votes entitled to be cast by the holders of the
Series A Preferred Stock is required in order to amend the Company's Certificate
of Incorporation or Bylaws to materially affect the rights of the holders of
Series A Preferred Stock, including authorizing and creating a class of stock
having rights prior to or senior to the Series A Preferred Stock. In the event
two quarterly dividends payable on the Series A Preferred Stock are in arrears,
the holders of Series A Preferred Stock, by a majority vote, shall be entitled
to designate two additional directors to serve on the Company's Board of
Directors.
-11-
<PAGE> 12
In December 1997, the Company sold 250,000 shares of Common Stock to
Renaissance in a private placement for aggregate proceeds of $1,000,000 and
placed $3,000,000 in 9% Convertible Debentures (the "Debentures") with
Renaissance. The proceeds from the private placement were used to repay the
Company's line of credit with another financial institution, to make the January
1998 equity investment in Dexterity, and for working capital purposes. The
Debentures are secured by substantially all of the assets of the Company and
require monthly payments of interest and, unless sooner paid, redeemed or
converted, require monthly principal payments commencing in December 2000 of $10
per $1000 of the then remaining principal amount. The remaining principal
balance will mature in December 2004. In March 2000, the Debentures were
modified to provide that the interest payable between February 1, 2000 through
January 31, 2001 shall be paid in shares of Common Stock, valued at $1.00 per
share. Upon modification, 270,000 shares of Common Stock valued at $270,000 were
issued in advance of interest due through January 31, 2001.
The Debentures currently require the Company to comply with the following
financial covenants: (i) a Debt to Net Worth Ratio of no greater than .95:1;
(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 .70:1. The Company is
currently not in compliance and has obtained a waiver from Renaissance to
suspend the Interest Coverage Ratio and the Debt Coverage Ratio through March
31, 2000. If the Company is unable to comply with these covenants in the future,
the Company could be found to be in technical default under the Debentures and
the holders thereof would have the right to demand the immediate repayment of
the entire amount outstanding. The Company believes that sufficient resources
would be available to fund such amounts in the event of such acceleration.
The holders of the Debentures have the option to convert at any time all or
a portion of the Debentures into shares of Common Stock at an initial price of
$1.00 per share of Common Stock. The conversion price is subject to downward
revision if the Company sells shares of its Common Stock, or securities
convertible into 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.
The Debentures are currently convertible for an aggregate of 3,000,000 shares of
Common Stock; however, since the conversion price is subject to downward
adjustment as described above, and there is no minimum conversion price, the
maximum number of shares of Common Stock which may be issued pursuant to the
Debentures is undeterminable. The provisions of the Debentures provide that the
holders of the Debentures have an option to redeem the Debentures, in an amount
equal to an 18 percent annual yield on the principal balance, upon the
occurrence of certain events, including the delisting of Common Stock from the
NASDAQ SmallCap Market and certain "change of control" provisions, as defined in
the Debentures, as they relate to the Company. The Company may redeem the
Debentures at its option subject to certain share price and market activity
levels being obtained. The Company's right of redemption is subject to the
holder's prior right of conversion of the Debenture.
For the three month period ended March 31, 2000, operating activities
provided cash of $976,000. Investment activities during the period utilized cash
of $7,000. During the period, the Company's financing activities used cash of
$963,000 primarily from the net decrease in the outstanding balance of the line
of credit.
For the quarter ended March 31, 1999, operating activities provided cash of
$927,000. Investment activities during the quarter utilized cash of $822,000,
primarily due to the acquisition of Dexterity. During the quarter, the Company's
financing activities utilized $104,000 primarily for repayment of debt.
The Company believes that its revenues and other sources of liquidity will
provide adequate funding for its capital requirements through at least the year
2000. However, there can be no assurance that the Company will not require
additional funding sooner or that such additional funding, if needed, will be
available on terms attractive to the Company or at all. In the event the Company
is required to raise additional funds, it does not believe it will be able to
obtain such financing from traditional commercial lenders. Rather, the Company
likely will have to conduct additional sales of its equity and/or debt
securities through public or private financings, collaborative relationships or
other arrangements. Substantial and immediate dilution to existing stockholders
likely would result from any sales of equity securities or other securities
convertible into equity securities.
RESULTS OF OPERATIONS
In February 2000, the Company's principal supplier, General Surgical
Innovations, Inc. ("GSI"), terminated its distribution agreement with the
Company. GSI supplied products which accounted for 38% of the Company's revenue
in 1999 and 50% of the Company's revenue since May 1, 1999, the effective date
of the distribution agreement. The Company has taken several steps in response
to this action. The Company has restructured its debt obligations, modified its
royalty
-12-
<PAGE> 13
agreement to provide for partial non-cash royalty payments, reduced its general
and administrative costs by converting its entire sales force from employees to
independent sale representatives and eliminated additional administrative staff.
In addition, certain officers of the Company have agreed to restructure their
compensation packages to increase short term cash flow. As a further consequence
to the cancelled GSI agreement, accounts receivable declined 60% to $1,150,000
at March 31, 2000, from $2,866,000 at December 31, 1999.
The Company reported a loss from operations of $546,000 for the quarter
ended March 31, 2000 as compared with a loss from operations of $222,000 for the
quarter ended March 31, 1999. The increased loss was primarily due to the
aforementioned cancelled GSI agreement, as well as increased noncash
amortization expense (see below).
For the three months ended March 31, 2000, the Company reported a net loss
applicable to common stock of $938,000 or $.09 per basic and diluted share. This
compares with a net loss of $296,000 for the three months ended March 31, 1999
or $.04 per basic and diluted share. Reported results for 2000 were adversely
impacted by increased noncash interest and amortization expense (see below) and
the cancelled GSI agreement.
Net sales decreased 56% in the first quarter 2000 as compared with the same
period in 1999. Net sales were $2,580,000 for the first quarter of 2000 and
$5,926,000 for the first quarter of 1999. This decrease was due primarily to the
cancelled GSI agreement.
Gross profit from net sales in the first quarter was $1,580,000 in 2000
versus $2,473,000 in 1999. The corresponding gross profit margins increased to
61% in 2000 from 42% in 1999. The improvement in gross profit margins was
primarily due to the increased proportion of the Company's proprietary products,
the Dexterity(R) Pneumo Sleeve(R) and the Dexterity(R) Protractor(R), within the
sales mix.
For the first quarter, selling, general and administrative expenses, which
consist primarily of sales commissions, salaries and other costs necessary to
support the Company's infrastructure, decreased 36% to $1,630,000 in 2000 from
$2,562,000 in 1999. The decline in these expenses was primarily due to the
previously mentioned cost cutting actions taken by the Company in response to
the cancellation of the GSI agreement. However, due to fixed expenses and the
sales decline, selling, general and administrative expenses as a percentage of
net sales increased to 63% in the first quarter 2000 from 43% in the first
quarter 1999.
Depreciation and amortization expense increased 381% to $491,000 for the
first quarter of 2000 from $102,000 for the first quarter of 1999. This increase
is due to the amortization of the licensed technology rights acquired in
conjunction with Dexterity.
Interest expense was $360,000 for the quarter ended March 31, 2000 and
$63,000 for the comparable 1999 quarter, an increase of 468%. The increase was
due to items not present in the first quarter of 1999, including accretion of
the minimum royalty obligation, interest on the line of credit and interest on
the notes payable due to the former stockholders of Dexterity.
-13-
<PAGE> 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - Not applicable
Item 2. Changes in Securities
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
Item 3. Defaults Upon Senior Securities - Not Applicable
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:
Exhibit 11* Computation of Earnings (Loss) Per Share
Exhibit 27.1* Financial Data Schedule for the three months ended
March 31, 2000
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on January 11, 2000
reporting the cancellation of the distribution agreement with
General Surgical Innovations, Inc.
*Filed herewith
-14-
<PAGE> 15
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: May 12, 2000 By /s/ RICHARD A. WOODFIELD
------------------------
Richard A. Woodfield
President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 12, 2000 By /s/ RANDALL K. BOATRIGHT
------------------------
Randall K. Boatright
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
-15-
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
11* Computation of Earnings (Loss) Per Share
27.1* Financial Data Schedule for the three months ended
March 31, 2000
</TABLE>
*Filed herewith
<PAGE> 1
EXHIBIT 11
DEXTERITY SURGICAL, INC. AND SUBSIDIARY
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
COMPUTATION OF BASIC LOSS PER SHARE
Net loss $ (897,325) $ (252,433)
Preferred Stock Dividends $ (40,900) $ (43,783)
------------ ------------
Net loss available for common stock shareholders $ (938,225) $ (296,216)
WEIGHTED AVERAGE SHARES OF COMMON STOCK
OUTSTANDING USED FOR COMPUTATION 10,263,611 7,646,075
============ ============
BASIC LOSS PER COMMON SHARE $ (.09) $ (.04)
============ ============
COMPUTATION OF DILUTED LOSS PER SHARE:
Net loss $ (897,325) $ (252,433)
Interest on Convertible Debentures $ 67,500 $ 67,500
------------ ------------
Net loss used for computation $ (829,825) $ (228,716)
============ ============
Weighted average shares of common stock outstanding 10,263,511 7,646,075
Weighted average incremental shares outstanding upon assumed
conversion of options and other dilutive securities 230,722 5,282
Weighted average incremental shares outstanding upon assumed
Conversion of preferred stock 2,114,025 1,368,229
Weighted average incremental shares outstanding upon assumed
conversion of Convertible Debentures 3,000,000 1,875,000
------------ ------------
WEIGHTED AVERAGE SHARES OF COMMON STOCK AND
COMMON STOCK EQUIVALENTS OUTSTANDING
USED FOR COMPUTATION 15,608,258 10,894,586
============ ============
DILUTED LOSS PER COMMON SHARE AND COMMON
SHARE EQUIVALENTS (a) $ (.05) $ (.02)
============ ============
</TABLE>
(a) This calculation is submitted in accordance with Item 601(b)(11) of
Regulation S-B although it is not required by SFAS No. 128 because it
is antidilutive. As a result, it is not the amount reflected on the
statements of operations.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000 AND THE YEAR TO DATE
CONSOLIDATED STATEMENTS OF OPERATIONS FINANCIAL STATEMENTS FOR THE PERIOD THEN
ENDED.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 119,437
<SECURITIES> 0
<RECEIVABLES> 1,246,119
<ALLOWANCES> 95,889
<INVENTORY> 2,127,136
<CURRENT-ASSETS> 3,880,686
<PP&E> 1,331,888
<DEPRECIATION> 730,466
<TOTAL-ASSETS> 24,050,832
<CURRENT-LIABILITIES> 4,419,250
<BONDS> 3,881,788
0
2
<COMMON> 11,097
<OTHER-SE> 10,223,207
<TOTAL-LIABILITY-AND-EQUITY> 24,050,832
<SALES> 2,579,860
<TOTAL-REVENUES> 2,588,679
<CGS> 999,687
<TOTAL-COSTS> 3,125,718
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 360,286
<INCOME-PRETAX> (897,325)
<INCOME-TAX> 0
<INCOME-CONTINUING> (897,325)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (897,325)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
