DXTR

Dex Liquidation (formerly Dextera Surgical) is a company currently in liquidation. The liquidating company trades by symbol DXTR and has a market cap of $1.7m. By way of background, on December 11, 2017 they filed for Chapter 11. They commenced an asset purchase agreement on the same date to Aesculap, Inc. The court approved the sale and the deal closed on February 20th. Dextera was accruing and paying liabilities as they arose. Since the closing of the deal they have paid a tax liability which can be find on the claims docket, former management has been paid their severances, and the claims bar date has passed.

 

You can find a copy of the February and March Monthly Operating Reports here:

 

February: http://www.omnimgt.com/cmsvol2/pub_47225/662275_208.pdf

March: http://www.omnimgt.com/cmsvol2/pub_47225/667156_255.pdf

 

I want to point out a few items on the balance sheet:

 

  1. Non-current cash for $2m. This represents the amount in the indemnification trust (see below).
  2. The difference between the shareholder equity from the February to March MOR is mostly attributed to former management getting paid their severances.
  3. Bankers have already been paid.
  4. US Treasury has already been paid.
  5. The warrants are held as a liability for $1.7m. According to previous management this is the absolute maximum amount they believed they’d need to pay. However, Sabby submitted a claim for $2.1m for the warrants.

 

You can find the warrant agreement behind Sabby’s claim:

http://www.omnimgt.com/POCVol1/Dextera/Claim%20Scan/Claims/5932000013.pdf

 

The strike price on the warrants is $0.27. The stock was trading for between $0.05-0.06 before the sale was closed. At best, I believe Sabby is entitled to the fair market option value for the warrants. Since they were so far out of the money, I believe the actual payment to Sabby will be less than $1.7m. They are also subordinating the warrant holders below the common equity holders in the liquidation plan.

 

So what’s left? Based on the March monthly operating report we have about $6.1m in shareholder equity. Let’s say Sabby gets the full $1.7m for the warrants. From here winding down the estate shouldn’t take much. They paid a bunch in professional fees in March and they also transitioned from CFO to Chief Restructruing Officer (CRO). They’ve booked a lot of these professional fees as liabilities on the balance sheet. Assuming it takes another $1.0m to wind down the estate, we are left with roughly $5.1m.

 

The shares outstanding on the common stock is 48.26m. The liquidation plan allows for the preferred to be converted common. Par on the preferred stock is $1,000 and they are allowing a conversion rate of 0.27/preferred so another 3,703 common shares per preferred. There were 172 preferred outstanding so the share count goes up by 637,000 for a fully diluted share count of 48.897 shares.

 

The liquidation plan can be found here:

http://www.omnimgt.com/cmsvol2/pub_47225/666915_249.pdf

 

I expect the next version of the liquidation plan to be released shortly which will contain estimates for equity holder payouts and a budget for wind down expenses.

 

The asset purchase agreement, as written, creates an indemnification trust which requires $2m to be held for two years to secure any potential breaches of reps and warranties. This leaves $3m to be distributed this year, and the remaining amount two years from now assuming there’s no breach of reps and warranties.

 

Our conversations with former management indicated there was talk of reducing the amount held in the trust, or reducing the time period in which it was held.

 

The table below shows a matrix contemplating our base case scenario and two bear scenarios.

*The base assumption for Sabby is they are paid the $1.7m liability already booked. In the scenario to the right, I am assuming Dex needs to pay the full $2.1m claim.

 

I believe the opportunity exists because one this is a tiny liquidation so it’s only suitable for PAs.

Equity 6.179 6.179 6.179
Wind down 1 1.5 1.5
Additional Sabby* 0 0.4
Net 5.179 4.679 4.279
shares 48.997 48.997 48.997
PPS 0.1057 0.0955 0.0873
2018 0.065 0.055 0.047
Indemnification Trust 0.041 0.041 0.041

Also, if one looks at the Proofs of Claims docket you’ll see $4.3m in claims. On $6m of equity this leaves significantly less to equity holders. If you dig deeper into the claims docket one would notice most claims are by unsecured equity holders that don’t realize their claims submission are worthless. In fact, several of the claims are from equity holders that sold out of the security multiple years ago. Further, you’ll see claims by the US Treasury which have been paid and the Sabby claims are likely very over inflated.

 

The sale and wind down process thus far has been very smooth. As such, we believe a distribution in the 0.06-0.07 range is likely in 2018. I do not have a view on the indemnification trust, but at current prices, this is just upside.