Dextera Surgical
Dextera Surgical (DXTR) is commercializing and developing the MicroCutter 5/80TM stapler based on its proprietary ‘‘staple-on-a-strip’’ technology intended for use by thoracic, pediatric, bariatric, colorectal and general surgeons. Its proprietary ‘‘staple-on-a-strip’’ technology enables it to develop products with innovative features such as consistent staple forms, significantly reduced tool shaft diameter and increased articulation. Together these advances in stapler design enable surgeons to perform procedures on a broader array of patients and to develop procedural methods previously unattainable with existing products in the market. The MicroCutter 5/80, which is currently commercially available, is a cartridge-based stapler device with a 5 millimeter shaft diameter, 80 degrees of articulation, and a 30 millimeter staple line cleared for specified indications for use in the United States, and in the European Union, or EU, for a broader range of specified indications of use. Dextera estimate that the commercially available MicroCutter 5/80, along with its additional potential products, if developed, would be suited for use in approximately 1.4 million procedures annually in the United States, involving, the company estimate, over four million staple cartridge deployments, three million of which the company believe would be deployed in laparoscopic procedures.1
In January 2016, Dextera received 510(k) clearance from the U.S. Food and Drug Administration, or FDA, to use the MicroCutter 5/80 with a white reload, to deploy staples for use in thin tissue, and in July 2016, The company received FDA 510(k) clearance to use the MicroCutter 5/80 with a blue reload, to deploy staples for use in medium thickness tissue, both for the transection and resection in open or minimally invasive urologic, thoracic, and pediatric surgical procedures. These clearances complement the existing indications for use of the MicroCutter 5/80 in surgical procedures in the small and large intestine and in the appendix. Following the 510(k) clearances, the companyconducted its evaluation of the MicroCutter 5/80, which deploys both blue and white cartridges, with selected centers of key opinion leaders in the U.S. and Europe through initial market preference testing to evaluate surgeons’ preferences and to validate the MicroCutter’s clinical benefits prior to broadening its commercial launch. the company completed its market testing of the MicroCutter 5/80 with approximately 55 procedures and 200 staple cartridge deployments. In this market preference testing, the MicroCutter 5/80 demonstrated reliable and consistent hemostasis (stopping of the blood flow). Following its successful evaluation of the MicroCutter 5/80, the company expanded its commercial launch to a select group of customers in the U.S. and Europe. The company are conducting the MicroCutter-Assisted Thoracic Surgery Hemostasis, or MATCH, registry, a post-market surveillance registry, to evaluate the hemostasis and ease-of-use for the MicroCutter 5/80. This is an open-label, multi-center registry and the company plan to enroll up to 120 patients requiring surgical stapling during a lobectomy of the lung (surgical removal of a lobe of an organ) or segmentectomy of the lung (surgical removal of a segment of a lung lobe) at leading centers in the U.S. and Europe. As of September 30, 2017, the company had enrolled 107 patients in the MATCH registry.
In May 2017, Dextera filed a 510(k) with the FDA seeking to expand the indications for use of the MicroCutter 5/80 to include surgery on solid organs, including liver, pancreas, kidney and spleen. Dextera received clearance from the FDA for this 510(k) in August 2017.
Historically, Dextera has generated revenues primarily from the sale of automated anastomotic systems; however, the company started generating revenues from the commercial sales of the MicroCutter products since its introduction in Europe in December 2012, and in the United States in March 2014, and through June 30, 2017, the company have generated $2.9 million of net product revenues from the commercial sales of the MicroCutter products. For the fiscal year ended June 30, 2017, the company generated net revenue of $3.4 million, including $1.2 million from commercial sales of its MicroCutter products $1.8 million from commercial sales of its cardiac products, and $0.4 million of license and development and royalty revenues, and incurred a net loss of $17.2 million.
Since Dextera inception, the company have incurred significant net losses, and the company expect to continue to incur net losses for at least the next several years. The company has not generated significant revenues from the MicroCutter products. To date, its C-Port and PAS-Port systems have had limited commercial adoption, and sales have not met the levels that the company had anticipated. Revenues from product sales and milestone payments were not sufficient to support the operation of its business as the company had planned. If the company fail to obtain broader commercial adoption of its C-Port and PAS-Port systems or achieve commercial adoption of its MicroCutter products, the company may be required to delay, further reduce the scope of or eliminate its commercialization efforts with respect to one or more of its products or one or more of its research and development programs. During the three months ended March 31, 2015, the company eliminated eight sales representatives, three of whom were related to selling its automated anastomotic systems and five were for MicroCutter products. The company will continue to sell its automated anastomotic systems internationally through distributors and through independent sales representatives in the United States. The company continue to sell its MicroCutter products only to a select number of key hospitals in the United States and through distributors in Europe, and intend to continue to do so until the company broadly commercially launch its MicroCutter 5/80. As such, the company anticipate that its automated anastomotic systems sales revenue will remain steady or slightly increase and its MicroCutter product sales revenue will slightly increase in the next few quarters.
As of June 30, 2017, the company had approximately $6.0 million of cash and cash equivalents, and $4.0 million of debt principal outstanding. In April 2014, the company sold 3,737,500 shares of its common stock at $8.50 per share, and 191,474 shares of convertible preferred stock Series A at $85 per share. All of the convertible preferred stock Series A has been converted into common stock. In May 2017 the company sold 8,000 shares of convertible preferred stock Series B for $1,000 per share. Each share of convertible preferred stock Series B is convertible into 3,704 shares of common stock. In addition, each share of convertible preferred stock Series B included a Series 1 warrant to purchase 3,704 shares of common stock at $0.27 per share until May 2022 and a Series 2 warrant to purchase 1,852 shares of common stock at $0.27 per share until May 2018.
Dextera believe that its existing cash and cash equivalents will be sufficient to meet its anticipated cash needs to enable it to conduct its business substantially as currently conducted at least through the end of December 2017. The company may be able to extend this time period to the extent that the company decrease its planned expenditures, or raise additional capital. The company have based its estimate as to the sufficiency of its cash resources on assumptions that may prove to be wrong, including assumptions with respect to the level of revenue from product sales and the cost of product development. The sufficiency of its current cash resources and its need for additional capital, and the timing thereof, will depend on many factors, including the extent of its ongoing research and development programs and related costs, including costs related to continued development of the MicroCutter 5/80, its ability to enter into additional license, development and/or collaboration agreements with respect to its technology, and the terms thereof, market acceptance and adoption of its current products or any future products that the company may develop or commercialize, its level of revenues, costs associated with its sales and marketing initiatives and manufacturing activities, costs and timing of obtaining and maintaining FDA, and other regulatory clearances or approvals for its products and potential additional products, securing, maintaining and enforcing intellectual property rights and the costs thereof, and the effects of competing technological and market developments. If the company are not able to raise additional funds on a timely basis, the company will be required to cease operations.
Dextera may seek to sell additional equity or debt securities, obtain a credit facility, enter into product development, license or distribution agreements with third parties or divest one or more of its commercialized products or products in development. The sale of additional equity or convertible debt securities could result in significant dilution to its stockholders, particularly in light of the prices at which its common stock has been recently trading. In addition, if the company raise additional funds through the sale of equity securities, new investors could have rights superior to its existing stockholders. If additional funds are raised through the issuance of debt securities, these securities could have rights senior to those associated with its common stock and could contain covenants that would restrict its operations. Any product development, licensing, distribution or sale agreements that the company enter into may require it to relinquish valuable rights, including with respect to commercialized products or products in development that the company would otherwise seek to commercialize or develop itselves. The company may not be able to obtain sufficient additional financing or enter into a strategic transaction in a timely manner, in which case the company would need to cease operations. Its need to raise capital may require it to accept terms that may harm its business or be disadvantageous to its current stockholders.
Agreements with Century
On September 2, 2011, the company signed a distribution agreement, or the Distribution Agreement, with Century, with respect to distribution of its planned MicroCutter products in Japan. Under the terms of a secured note purchase agreement entered into at the time of the Distribution Agreement, Century agreed to loan it an aggregate of up to $4.0 million, with principal due on September 30, 2016, subject to certain conditions, which principal due date was extended to September 30, 2018, effective July 1, 2014. Under this facility, the company received $2.0 million on September 30, 2011, and the remaining $2.0 million on December 27, 2011. The note bears 5% annual interest which is payable quarterly in arrears.
In August 2016, Century asserted that Dextera had an obligation to prepay Century’s loan in the amount of $4.0 million within ten days of receiving net proceeds from financing of over $44.0 million in April 2014, notwithstanding that the company entered into an agreement with Century in July 2014 to extend the due date to September 30, 2018. Century further asserted that the company owed Century penalty interest at the incremental rate of 7% per annum. The company did not agree with Century’s assertions as the company believe it had notified Century of the financing that occurred in April 2014 and that the extension of the due date of the note agreement effectively waived the prepayment provisions of the loan.
Subsequent to June 30, 2017, the company and Century signed an amendment pursuant to which (1) the company agreed to make partial principal payments on the loan in the amount of $125,000 on each of September 30, 2017, December 31, 2017, March 31, 2018, and June 30, 2018, (2) the parties waived any and all claims based on, or relating to, Century’s allegation that the earlier payment was due, and (3) the parties agreed that no penalty interest was due. The remaining $3.5 million principal balance is due on September 30, 2018.
In return for the loan commitment, the company granted Century distribution rights to its planned MicroCutter product line in Japan, and a right of first negotiation for distribution rights in Japan to future products. Century is responsible for securing regulatory approval from the Ministry of Health in Japan for MicroCutter products. After approval for marketing in Japan, the company would sell MicroCutter units to Century, which would then sell the MicroCutter devices to their customers in Japan.
Proceeds from the note and granting the distribution rights were allocated to the note based on their aggregate fair value of $2.4 million at the dates of receipt. This fair value was determined by discounting cash flows using a discount rate of 18%, which the company estimated was a market rate of borrowing that could be obtained by companies with credit risk similar to its. The remainder of the proceeds of $1.6 million was recognized as debt issuance discount and was allocated to the value of the distribution rights granted to Century under the Distribution Agreement and is included in deferred revenue. The deferred revenue will be recognized over the term of the Distribution Agreement, beginning upon the first sale by Century of MicroCutter products in Japan which had not occurred as of June 30, 2017.
In addition, its distribution agreement with Century pertaining to the PAS-Port system, originally dated June 16, 2003, as amended, was last amended effective July 1, 2014. The last amendment, among other things, renewed the contract for another five years, extending the expiration date to July 31, 2019. The note amendment was accounted for as the modification of the 2011 note agreement, as the value of the consideration provided by it in the form of additional distribution rights was estimated to be approximately equal to the reduction in the fair value of the note. Accordingly, the company reduced the carrying value of the note of $3.1 million to its post-modification fair value of $2.6 million, and recorded the resulting incremental discount of $0.5 million as deferred revenue. The company determined the fair value of the amended note using the discount rate of 18%, which the company estimated as the market rate of borrowing as of the modification date that could be obtained by companies with credit risk similar to it. The incremental discount of $0.5 million will be amortized over the remaining term of the note using the effective interest rate method. The deferred revenue will be recognized over the term of the distribution agreement beginning upon the first sale by Century of the MicroCutter products in Japan.
Agreements with Intuitive Surgical
On August 16, 2010, Dextera entered into a license agreement, or License Agreement, with Intuitive Surgical Operations, Inc., or Intuitive Surgical, pursuant to which Dextera granted to Intuitive Surgical a worldwide, sublicenseable, exclusive license to use its intellectual property in the robotics field in diagnostic or therapeutic medical procedures, but excluding vascular anastomosis applications, for an upfront license fee of $9.0 million, which was fully recognized in fiscal years ended June 30, 2011 through 2014. Dextera also eligible to receive a contingent payment if sales of any products incorporating its patent rights achieve a specified level of net sales within a specified period after the date of the License Agreement, as well as single-digit royalties on sales by Intuitive Surgical, its affiliates or its sublicensees of specified stapler and clip applier products covered by its patent rights as well as on sales of certain other products covered by its patent rights that may be developed in the future, if any. Each party has the right to terminate the License Agreement in the event of the other party’s uncured material breach or bankruptcy. Following any termination of the License Agreement, the licenses granted to Intuitive Surgical will continue, and, except in the case of termination for its uncured material breach or insolvency, Intuitive Surgical’s payment obligations will continue as well. Under the License Agreement, Intuitive Surgical has rights to improvements in its technology and intellectual property over a specified period of time.
On December 31, 2015, Dextera and Intuitive Surgical amended the license agreement to include, among other things, an agreement providing for a feasibility evaluation and potential development of a surgical stapling cartridge for use with Intuitive Surgical’s da Vinci Surgical Systems. The six-month feasibility evaluation of its MicroCutterTM technology was completed successfully and Intuitive Surgical exercised its option to initiate a joint development program for an 8-millimeters-in-diameter surgical stapling cartridge for use with the da Vinci Surgical System, and the company and Intuitive Surgical entered into a joint development program in which Intuitive Surgical will be responsible for the development work on the stapler and the company will be responsible for the development work on the stapler cartridge. Pursuant to the agreement, the company will receive further funding for development of the cartridge and tooling as well as a unit-based royalty on commercial sales, if any.
Reverse Stock Split
On February 16, 2016, the company filed an amendment to its certificate of incorporation, which amendment was effective at 12:01 a.m. eastern time on February 17, 2016, to effect a one-for-ten reverse split of its outstanding common stock (the “Reverse Split”), which had the effect of reducing the number of outstanding shares of common stock from 89,344,777 to 8,934,452. Any fractional shares of common stock resulting from the Reverse Split were settled in cash equal to the fraction of a share to which the holder was entitled. As a result of the Reverse Split, the company reclassified its consolidated balance sheets total par value of approximately $80,000 from common stock to additional paid-in capital for the reporting periods.
As described in its definitive proxy statement filed with the SEC on December 29, 2015, at its annual meeting held on January 29, 2016, its stockholders approved the Reverse Split at the specified range of ratios set forth in the definitive proxy statement. Thereafter, its Board of Directors determined to effect a one-for-ten ratio and authorized the implementation of such split and filing of a certificate of amendment with the Delaware Secretary of State.
All shares of common stock, stock options, warrants to purchase common stock, the conversion rate of preferred stock and per share information presented in the consolidated financial statements and elsewhere in this annual report have been adjusted to reflect the Reverse Split on a retroactive basis for all periods presented and all share information is rounded down to the nearest whole share after reflecting the Reverse Split.
