Dextera Liquidation (DXTR) – Liquidation – 100% Upside

Current Price – $0.035

Expected Liquidation Distribution - $0.06-$0.07

Upside – 100%

Expiration Date – TBD

Liquidation Plan

This idea was shared by Eric.

 

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.

Bankruptcy court docket is here, including February and March Monthly Operating Reports.

The latest liquidation plan can be found here. 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.

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

  • Non-current cash for $2m – the asset purchase agreement, as written, created an indemnification trust which required $2m to be held for two years to secure any potential breaches 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 difference between the shareholder equity from the February to March MOR is mostly attributed to former management getting paid their severances;
  • Bankers have already been paid;
  • US Treasury has already been paid;
  • 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 in here. 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. Taking into account indemnification trust leaves us with c. $3m to be distributed this year, and the remaining amount two years from now assuming there’s no breach of reps and warranties.

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

Liquidation expectations

*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. 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.

15 COMMENTS

  1. Michael Lax

    Stock up heavily with no news I could find. Anyone have insight?

  2. efurey

    No insight. It’s thinly traded so 1.4m is a meaningful day. The $ volume is still quite light (~$50k – $55k).

    The symbol changed yesterday after the close to DXTRQ.

    I’d continue to monitor the court docket for any updates.

    1. Patrick Conlin

      The reason it was up is because this analysis was posted and some like me bought the stock.

  3. Michael Lax

    Today it looks like the stock did not trade at all. Wonder what is up?

  4. dt

    Btw, liquidation seems to be delayed due to ongoing negotiations with warrant holders.

    “13. Unfortunately, three holders of Series 1 Warrants filed claims against the Debtor and its estate in the collective amount of approximately $2.86 million (the “Warrant Claims”).

    14. The Debtor disputes the validity and amount of the Warrant Claims and expected to reserve for the full amount of the Warrant Claims and to negotiate, or if necessary litigate, a resolution of the Debtor’s objections to the Warrant Claims. Unfortunately, the holders of the Warrant Claims filed their claims in such grossly excessive amounts that the Debtor is unable to move forward with the Plan in its current form, so the hearing on the Disclosure Statement has been continued.

    15. The Debtor is currently in discussion with the holders of the Warrant Claims in an attempt to consensually resolve the Debtor’s objections to the Warrant Claims. If the Debtor is able to consensually resolve its objections to the Warrant Claims, it will pursue its Plan as drafted. If not, the Debtor will modify the current Plan so that it can move forward to confirm a liquidating plan, but reserve the parties’ respective positions as to the Warrant Claims.”

    http://www.omnimgt.com/cmsvol2/pub_47225/676956_353.pdf

  5. dt

    I am puzzled by the newly issued liquidation plan which indicates equity recovery in the range of $0.009 – $ 0.066 per share. If anyone is still following, would appreciate if you shared your insights.

    Latest liquidation plan: https://www.omnimgt.com/CMSVol2/pub_47225/686823_424.pdf
    July MOR: https://www.omnimgt.com/CMSVol2/pub_47225/685896_412.pdf

    Based on July MOR equity value stands at $4.57m ($0.093/share) including indemnification Escrow amounts. Total provisioned expenses/liabilities are $4.3m including $1.7m for disputed warrants.

    Warrants dispute has been settled (pending court approval) with total expected payment of $0.85m, which reduced July MOR liabilities to $3.46m.

    Looking at liquidation plan total pending claims before equity interest amount to $4.5m – where did this $1m of incremental claims came from?

    Now even with this incremental $1m of claims, equity value should have been $3.57m ($0.073/share). Excluding net indemnification trust balance equity would stand at $1.84m (0.0375/share).

    So even by deducting this unexplained $1m of incremental claims I still do not arrive at company’s liquidation estimate of $0.009 – $0.066 per share.

    Any thoughts on why such a large difference, especially at the low end? And where did the additional $1m of claims suddenly appear?

    1. W51W52

      There is a $1.627 million Post-Effective Date Wind-Down Reserve on the high-end, and $1.036 million on the low-end (my feel is that the low-end, or maybe even a number lower than the low-end is more reasonable). You need to go to Exhibit B of the Disclosure Statement to see the more detailed breakout. Basically, total general unsecured claim pool is $2.786 million, which is inclusive of $850,000 for the warrant claim. Now, according to the claims register, I calculate about $375,000 of general unsecured claims and unsecured tax claims. Add that to the $850,000 for the warrant claim settlement, there’s a gap of $1.56 million or so from “…approximately 77 claims scheduled as non-contingent, liquidated, and non-disputed for which no proof of claim was filed.”

      1. dt

        Does that mean that $1.56m of claims will not need to be paid? Or that this part was not counted in July MOR?

        On wind-down reserve, I am surprised by the size of it. Since March equity already decreased by $1.5m due to ongoing wind-down expenses and now they will need a further $1.6m?

        Getting back on differences between liquidation plan and July MOR:
        - July MOR total liabilities of $3.14m (adjusting for warrant settlement and excluding charge against indemnification escrow)
        - Adding wind-down reserve $1.63m, gives a total of $4.77m
        - This compares to liquidation plan total estimated payouts to creditors $6.14m (scenario A).

        This seems to suggest that some claims included in the liquidation plan were not part of July MOR. The difference is also quite close to the $1.56m figure given by W51W52 above.

  6. BPstyler

    The anticipated recovery on account of Allowed Common Stock is
    from $0.009 to $0.066 per share of Common Stock.

    & recovery for warrants = NONE

    1. dt

      Warrants holders received settlement:

      “Following good faith and arm’s length settlement negotiations, the Debtor resolved all disputes and differences with the Warrant Holders. The Debtor’s resolution with the Warrant Holders is subject to Bankruptcy Court approval.

      On August 27, 2018, the Debtor served and filed the Motion of the Debtor for Entry of an Order Approving Stipulations by and among the Debtor and Alpha Capital Anstalt, Sabby Healthcare Master Fund, Ltd. and Sabby Volatility Warrant Master Fund, Ltd. Resolving Objections to Disputed Claims (the “Settlement Motion”) [Docket No. 420]. If the Settlement Motion is approved, the Disputed Warrant Claims will be reduced and Allowed as General Unsecured Claims in the collective, total amount of $850,000.”

  7. BPstyler

    “Post-Effective Date Wind-down Reserve” (1,036,000).
    Page 113 of https://www.omnimgt.com/CMSVol2/pub_47225/686811_422.pdf

    I don’t think this was in the NAV previously. Barring unforeseen additional costs/expenses, would this reserve eventually be part of a second liquidation distribution since the expected wind up costs are in the amended NAV?

  8. Joe Hill

    Does anyone have updated thoughts on this? I see there was a fair amount of volume yesterday below $0.03. And someone picked up 200k shares at $0.0191

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