10-Q 1 srdx-10q_20151231.htm 10-Q srdx-10q_20151231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2015

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: 0-23837

 

SurModics, Inc.

(Exact name of registrant as specified in its charter)

 

 

MINNESOTA

41-1356149

(State of incorporation)

(I.R.S. Employer

Identification No.)

 

9924 West 74th Street

Eden Prairie, Minnesota 55344

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (952) 500-7000

 

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  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

o

 

Accelerated filer

x

Non-accelerated filer

o

(Do not check if a smaller reporting company)

Smaller reporting company

o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

The number of shares of the registrant’s Common Stock, $.05 par value per share, outstanding as of January 29, 2016 was 12,996,040.

 

 

 

 

 


TABLE OF CONTENTS

 

SIGNATURES

EX-12

EX-31.1

EX-31.2

EX-32.1

EX-32.2

EX-101 INSTANCE DOCUMENT

EX-101 SCHEMA DOCUMENT

EX-101 CALCULATION LINKBASE DOCUMENT

EX-101 DEFINITION LINKBASE DOCUMENT

EX-101 LABEL LINKBASE DOCUMENT

EX-101 PRESENTATION LINKBASE DOCUMENT

2


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SurModics, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

 

December 31,

 

 

September 30,

 

 

 

2015

 

 

2015

 

(in thousands, except share and per share data)

 

(Unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

42,668

 

 

$

55,588

 

Restricted cash

 

 

786

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts of $10 and $10 as of December 31, 2015 and September 30, 2015, respectively

 

 

5,522

 

 

 

7,478

 

Inventories

 

 

3,301

 

 

 

2,979

 

Deferred tax assets

 

 

 

 

 

546

 

Prepaids and other

 

 

961

 

 

 

1,198

 

Total Current Assets

 

 

53,238

 

 

 

67,789

 

Property and equipment, net

 

 

13,506

 

 

 

12,968

 

Deferred tax assets

 

 

6,497

 

 

 

6,704

 

Intangible assets, net

 

 

16,502

 

 

 

2,760

 

Goodwill

 

 

21,822

 

 

 

8,010

 

Other assets, net

 

 

650

 

 

 

479

 

Total Assets

 

$

112,215

 

 

$

98,710

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,052

 

 

$

781

 

Accrued liabilities:

 

 

 

 

 

 

 

 

Compensation

 

 

1,297

 

 

 

2,772

 

Accrued other

 

 

1,529

 

 

 

794

 

Business combination consideration payable

 

 

1,558

 

 

 

305

 

Deferred revenue

 

 

172

 

 

 

48

 

Total Current Liabilities

 

 

5,608

 

 

 

4,700

 

Contingent consideration

 

 

9,308

 

 

 

 

Deferred revenue, less current portion

 

 

208

 

 

 

217

 

Other long-term liabilities

 

 

1,818

 

 

 

1,920

 

Total Liabilities

 

 

16,942

 

 

 

6,837

 

Commitments and Contingencies (Note 16)

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Series A Preferred stock- $.05 par value, 450,000 shares authorized; no shares issued and outstanding

 

 

 

 

 

 

Common stock- $.05 par value, 45,000,000 shares authorized; 12,996,040 and 12,945,157 shares issued and outstanding, respectively

 

 

650

 

 

 

647

 

Additional paid-in capital

 

 

3,538

 

 

 

3,060

 

Accumulated other comprehensive income

 

 

411

 

 

 

5

 

Retained earnings

 

 

90,674

 

 

 

88,161

 

Total Stockholders’ Equity

 

 

95,273

 

 

 

91,873

 

Total Liabilities and Stockholders’ Equity

 

$

112,215

 

 

$

98,710

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

3


SurModics, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2015

 

 

2014

 

(In thousands, except per share data)

(Unaudited)

 

Revenue:

 

 

 

 

 

 

 

 

Royalties and license fees

 

$

7,954

 

 

$

7,275

 

Product sales

 

 

7,181

 

 

 

5,847

 

Research and development

 

 

1,406

 

 

 

1,083

 

Total revenue

 

 

16,541

 

 

 

14,205

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

Product costs

 

 

2,366

 

 

 

1,902

 

Research and development

 

 

3,634

 

 

 

3,576

 

Selling, general and administrative

 

 

3,648

 

 

 

3,542

 

Acquisition transaction, integration and other costs

 

 

2,491

 

 

 

 

Intangible asset amortization

 

 

354

 

 

 

151

 

Contingent consideration accretion expense

 

 

109

 

 

 

 

Total operating costs and expenses

 

 

12,602

 

 

 

9,171

 

Operating income

 

 

3,939

 

 

 

5,034

 

Other (loss) income:

 

 

 

 

 

 

 

 

Investment income, net

 

 

1

 

 

 

57

 

Foreign exchange loss

 

 

(135

)

 

 

 

Other loss, net

 

 

 

 

 

(7

)

Other (loss) income, net

 

 

(134

)

 

 

50

 

Income  before income taxes

 

 

3,805

 

 

 

5,084

 

Income tax provision

 

 

(1,292

)

 

 

(1,470

)

Net income

 

$

2,513

 

 

$

3,614

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.19

 

 

$

0.27

 

Diluted net income per share

 

$

0.19

 

 

$

0.27

 

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

12,966

 

 

 

13,225

 

Diluted

 

 

13,186

 

 

 

13,423

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

4


SurModics, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2015

 

 

2014

 

(In thousands)

 

(Unaudited)

 

Net income

 

$

2,513

 

 

$

3,614

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

Unrealized holding losses on available-for-sale securities arising during the period

 

 

(2

)

 

 

(1,089

)

Reclassification adjustment for realized gains included in net income

 

 

 

 

 

7

 

Foreign currency translation adjustments

 

 

408

 

 

 

 

Other comprehensive income (loss)

 

 

406

 

 

 

(1,082

)

Comprehensive income

 

$

2,919

 

 

$

2,532

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

5


SurModics, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2015

 

 

2014

 

(in thousands)

 

(Unaudited)

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income

 

$

2,513

 

 

$

3,614

 

Adjustments to reconcile net income to net cash provided by operating activities from continuing operations:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

909

 

 

 

683

 

Stock-based compensation

 

 

684

 

 

 

525

 

Contingent consideration accretion and unrealized foreign exchange loss

 

 

244

 

 

 

 

Deferred taxes

 

 

753

 

 

 

1,025

 

Loss on sales of available-for-sale securities and strategic investments

 

 

 

 

 

7

 

Excess tax benefit from stock-based compensation plans

 

 

(140

)

 

 

(453

)

Other

 

 

(3

)

 

 

(39

)

Change in operating assets and liabilities, net of acquisition:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,194

 

 

 

309

 

Inventories

 

 

(83

)

 

 

(12

)

Prepaids and other

 

 

(75

)

 

 

(34

)

Accounts payable and accrued liabilities

 

 

(1,354

)

 

 

(508

)

Income taxes

 

 

496

 

 

 

413

 

Net cash provided by operating activities from continuing operations

 

 

6,138

 

 

 

5,530

 

Investing Activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(384

)

 

 

(41

)

Cash proceeds from sales of property and equipment

 

 

 

 

 

41

 

Payments for acquisition, net of cash acquired

 

 

(18,166

)

 

 

 

Purchases of available-for-sale securities

 

 

 

 

 

(3,252

)

Sales and maturities of available-for-sale securities

 

 

 

 

 

973

 

Cash transferred to discontinued operations

 

 

 

 

 

(45

)

Net cash used in investing activities from continuing operations

 

 

(18,550

)

 

 

(2,324

)

Financing Activities:

 

 

 

 

 

 

 

 

Excess tax benefit from stock-based compensation plans

 

 

140

 

 

 

453

 

Issuance of common stock

 

 

10

 

 

 

115

 

Repurchase of common stock

 

 

 

 

 

(20,000

)

Purchase of common stock to pay employee taxes

 

 

(353

)

 

 

(725

)

Payment of contingent consideration

 

 

(305

)

 

 

 

Net cash used in financing activities from continuing operations

 

 

(508

)

 

 

(20,157

)

Net cash used in continuing operations

 

 

(12,920

)

 

 

(16,951

)

Discontinued Operations:

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

 

 

 

(45

)

Net cash provided by financing activities

 

 

 

 

 

45

 

Net cash provided by discontinued operations

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(12,920

)

 

 

(16,951

)

Cash and Cash Equivalents:

 

 

 

 

 

 

 

 

Beginning of period

 

 

55,588

 

 

 

43,511

 

End of period

 

$

42,668

 

 

$

26,560

 

Supplemental Information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

42

 

 

$

31

 

Noncash transactions from investing and financing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment on account

 

$

54

 

 

$

12

 

Contingent consideration and debt assumed in Creagh Medical transaction

 

$

9,857

 

 

$

 

Issuance of performance shares, restricted and deferred stock units

 

$

1,073

 

 

$

2,063

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

6


SurModics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Period Ended December 31, 2015

(Unaudited)

 

1. Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.”) (“GAAP”) and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, needed to fairly present the financial results of SurModics, Inc. and subsidiaries (“SurModics” or the “Company”) for the periods presented. These financial statements include some amounts that are based on management’s best estimates and judgments. These estimates may be adjusted as more information becomes available, and any adjustment could be significant. The impact of any change in estimates is included in the determination of net income in the period in which the change in estimate is identified. The results of operations for the three months ended December 31, 2015 are not necessarily indicative of the results that may be expected for the entire 2016 fiscal year.

In accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), the Company has omitted footnote disclosures that would substantially duplicate the disclosures contained in the audited consolidated financial statements of the Company. These unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements for the fiscal year ended September 30, 2015, and footnotes thereto included in the Company’s Form 10-K as filed with the SEC on December 4, 2015.

 

 

2. New Accounting Pronouncements

Accounting Standards to be Implemented

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). Principles of this guidance require entities to recognize revenue in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration an entity expects to be entitled to in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This accounting standard will be effective for the Company beginning in the first quarter of fiscal year 2019 (October 1, 2018) using one of two prescribed retrospective methods. The Company is currently evaluating the impact that the adoption of this standard will have on the Company’s results of operations, cash flows and financial position.

Accounting Standards Implemented

In September 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.  The update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amounts as if the accounting had been completed at the acquisition date. The adjustments related to previous reporting periods since the acquisition date must be disclosed by income statement line item either on the face of the income statement or in the notes. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years, with early adoption permitted.  The Company adopted the ASU in the first quarter of fiscal 2016 without any material impact on the Company’s financial position or financial results.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which eliminates the current requirement to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, entities will be required to classify all deferred tax assets and liabilities as noncurrent. This ASU will be effective for the Company beginning in its first quarter of fiscal year 2018 and early implementation is permitted using either the prospectively or retroactive adoption method. The Company prospectively adopted this ASU in the first quarter of fiscal 2016.

No other new accounting pronouncement issued or effective has had, or is expected to have, a material impact on the Company’s consolidated financial statements.

 

 

3. Business Combinations

For all business combinations, the Company records all assets and liabilities of the acquired business, including goodwill and other identified intangible assets, generally at their fair values starting in the period when the acquisition is completed. Contingent consideration, if any, is recognized at its fair value on the acquisition date and changes in fair value are recognized in earnings until settlement. Acquisition-related transaction costs are expensed as incurred.

7


 

Creagh Medical Ltd.

On November 20, 2015, the Company acquired 100% of the outstanding common shares and voting shares of Creagh Medical Ltd. (“Creagh Medical”) located in Ballinasloe, Ireland. The results of Creagh Medical’s operations have been included in the Company’s condensed consolidated financial statements as of the Creagh Medical acquisition date. The acquisition was financed with cash on hand. The Company acquired Creagh Medical for up to €30 million (approximately $32 million as of the acquisition date), including an upfront payment of €18 million (approximate as of the acquisition date $19.3 million), and up to €12 million (approximate as of the acquisition date $12.8 million) based on achievement of revenue and value-creating operational milestones through September 30, 2018. The payment of the milestones will occur in the quarter ending December 31, 2018. As of December 31, 2015, the Company has paid $18.5 million in cash for this acquisition, including $0.8 million to an escrow account to fund the repurchase of certain Creagh Medical debt classified securities during fiscal 2016. As these securities have not been legally defeased by the establishment of the escrow fund, the Company has recorded a corresponding restricted cash and business combination consideration payable.  It is expected that these securities will be repaid in the third quarter of fiscal 2016. The Company also assumed $0.8 million of debt that was repaid in the second quarter of fiscal 2016 that is also classified as business combination consideration payable on the balance sheet. Total transaction, integration and other costs associated with the Creagh Medical acquisition aggregated $2.4 million for the quarter ended December 31, 2015. Creagh Medical will be included in the Company’s Medical Device reporting segment.

Creagh Medical is a provider of innovative, efficient and cost-effective design and manufacture of high-quality percutaneous transluminal angioplasty (“PTA”) balloon catheters. Since 2006, Creagh Medical has grown its technical and product capability with PTA products approved throughout the world, including Europe, the United States, and Japan. With these resources, the Company is uniquely positioned to offer a total solutions approach from product design and development, through in-house extrusion, balloon forming, top-assembly, packaging and regulatory capabilities to approved products for exclusive distribution. The acquisition is a major step forward in the Company’s strategy to transform its Medical Device segment from being a provider of coatings technologies, to offering whole-product solutions to medical device customers in the large and growing global interventional vascular market.

The purchase price of Creagh Medical consisted of the following:

 

(Dollars in thousands)

 

 

 

 

Cash paid

 

$

18,417

 

Debt assumed

 

 

793

 

Contingent consideration

 

 

9,064

 

Total purchase price

 

 

28,274

 

Less cash and cash equivalents acquired

 

 

(251

)

Total purchase price, net of cash acquired

 

$

28,023

 

 

The following table summarizes the preliminary allocation of the purchase price to the fair values assigned to the assets acquired and the liabilities assumed at the date of the Creagh Medical acquisition:

 

 

 

Fair Value

(Dollars in thousands)

 

Estimated Useful Life

(In years)

Current assets

 

$

708

 

N/A

Property and equipment

 

 

634

 

1.0-10.0

Trade name

 

 

75

 

N/A

Developed technology

 

 

1,787

 

7.0

In-process research and development

 

 

942

 

N/A

Customer relationships

 

 

11,119

 

7.0-10.0

Other noncurrent assets

 

 

81

 

N/A

Current liabilities

 

 

(923

)

N/A

Deferred tax liabilities

 

 

(9

)

N/A

Net assets acquired

 

 

14,414

 

 

Goodwill

 

 

13,609

 

N/A

Total purchase price, net of cash acquired

 

$

28,023

 

 

8


 

The Creagh Medical goodwill is a result of acquiring and retaining the Creagh Medical existing workforce and expected synergies from integrating their business into SurModics. The goodwill will not be deductible for tax purposes. Purchase accounting is considered preliminary, subject to revision, mainly with respect to working capital, income taxes and goodwill, as final information was not available as of December 31, 2015.

As a result of the Creagh Medical acquisition, the Company has adopted a foreign currency translation policy. Assets and liabilities of non-U.S. dollar functional currency subsidiaries are translated into U.S. dollars at the period-end exchange rates, and revenues and expenses are translated at the average exchange rate for the period. The net effect of these translation adjustments in the condensed consolidated financial statements are recorded as a foreign currency translation adjustment, as a component of accumulated other comprehensive income. Foreign currency transaction gains and losses are included in other, income (loss) net in our Condensed Consolidated Statements of Income.

 

NorMedix, Inc.

On January 8, 2016, the Company acquired 100% of the shares of NorMedix, Inc. (“NorMedix”), a privately owned design and development company focused on ultra thin-walled, minimally invasive catheter technologies based in Plymouth, Minnesota. The acquisition was financed with cash on hand. The Company acquired NorMedix for $14.0 million, including an upfront payment of $7.0 million, and up to $7.0 million based on achievement of revenue and value-creating operational milestones through September 30, 2019. Contingent consideration associated with the NorMedix transaction is payable as earned. This acquisition strengthens the Company’s vascular device expertise and Research and Development (“R&D) capabilities. This acquisition positions the Company to make significant progress on its strategy to offer whole-product solutions to medical device customers, while continuing its commitment to consistently deliver innovation in coating technologies and in vitro diagnostics. Total transaction, integration and other costs associated with the NorMedix acquisition aggregated $0.1 million for the quarter ended December 31, 2015. NorMedix will be included in the Company’s Medical Device reporting segment.  Goodwill associated with this transaction will not be deductible for income tax purposes.   

These strategic acquisitions combine the best-in-class capabilities of NorMedix’s catheter-based technologies, Creagh Medical’s PTA balloon platform capabilities, and SurModics’ innovative coating and drug delivery technologies to develop highly differentiated delivery and therapeutic intravascular solutions. The result is an organization with unique device design and development expertise, rich technology content, manufacturing capabilities, and a state-of-the-art facility equipped for medical device R&D and manufacturing.

The purchase price of NorMedix consisted of the following:

 

(Dollars in thousands)

 

 

 

 

Cash paid

 

$

7,000

 

Contingent consideration

 

 

3,740

 

Total purchase price

 

 

10,740

 

Less cash and cash equivalents acquired

 

 

(17

)

Total purchase price, net of cash acquired

 

$

10,723

 

 

 

 

 

 

 

The following table summarizes the allocation of the preliminary purchase price to the fair values assigned to the assets acquired and the liabilities assumed at the date of the NorMedix acquisition:

 

 

 

Fair Value                     (Dollars in thousands)

 

Estimated Useful Life (In years)

Net current assets

 

$

46

 

N/A

Property and equipment

 

 

76

 

N/A

Developed technology

 

 

6,850

 

10.0-14.0

Customer relationships

 

 

900

 

4.0

Deferred tax asset

 

 

544

 

N/A

Other noncurrent asset

 

 

12

 

N/A

Deferred tax liabilities

 

 

(2,474

)

N/A

Net assets acquired

 

 

5,954

 

 

Goodwill

 

 

4,769

 

N/A

Total purchase price, net of cash acquired

 

$

10,723

 

 

9


The NorMedix goodwill is a result of acquiring and retaining the NorMedix existing workforce and expected synergies from integrating their business into SurModics. The goodwill will not be deductible for tax purposes. Purchase accounting is considered preliminary, subject to revision, mainly with respect to working capital, income taxes, intangible asset and contingent consideration valuations, as final information was not available as the filing of this Form 10-Q.

 

Pro Forma Results

 

The following unaudited pro forma financial information presents the combined results of operation of the Company as if the acquisitions of Creagh Medical and NorMedix had occurred as of October 1, 2014.  The Company has realized $0.5 million of revenue and a loss of $0.3 million from the Creagh Medical operations since it was acquired on November 20, 2015.

 

The fiscal 2016 pro forma financial information includes adjustments for additional amortization expense on identifiable intangible assets of $0.4 million and contingent consideration accretion expense of $0.3 million, eliminating non-recurring transactional professional fees of $2.5 million, and tax effect impact of $0.3 million.

 

The fiscal 2015 pro forma financial information includes adjustments for additional amortization expense on identifiable intangible assets of $0.6 million and contingent consideration accretion expense of $0.4 million and tax effect impact of $0.2 million.

 

The tax impact of the adjustments in all periods reflects no tax benefit from contingent consideration accretion as well as a significant portion of our transaction related costs in fiscal 2016 as they are not deductible for tax purposes.  Further, Creagh Medical amortization expense does not reflect an Irish tax benefit as we acquired a net operating loss carryforward as of the acquisition date that was offset in the aggregate by deferred tax liabilities and valuation allowance.  Therefore, the amortization of Creagh Medical intangible assets results in a decrease in deferred tax liabilities with a corresponding increase to a deferred tax valuation allowance. NorMedix amortization expense reflects a tax benefit based on our incremental U.S. tax rate.

 

The unaudited pro forma financial information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the acquisition occurred at the beginning of each year.  Additionally, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined company.

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2015

 

 

2014

 

(In thousands, except per share data)

(Unaudited)

 

Revenue

 

$

17,643

 

 

$

14,796

 

Net income

 

$

4,189

 

 

$

2,263

 

 

 

 

 

 

 

 

 

 

Per share amounts:

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.32

 

 

$

0.17

 

Diluted net income per share

 

$

0.32

 

 

$

0.17

 

 

 

4. Fair Value Measurements

The accounting guidance on fair value measurements defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The guidance is applicable for all financial assets and financial liabilities and for all nonfinancial assets and nonfinancial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Fair value is defined as the exchange price that would be received from selling an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and also considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.

Fair Value Hierarchy

Accounting guidance on fair value measurements requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1 — Quoted (unadjusted) prices in active markets for identical assets or liabilities.

The Company did not have any Level 1 assets as of December 31, 2015 and September 30, 2015.  

10


Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

The Company’s Level 2 assets for the quarter ended December 31, 2015 consisted of money market funds and commercial paper instruments. Fair market values for these assets are based on quoted vendor prices and broker pricing where all significant inputs are observable. To ensure the accuracy of quoted vendor prices and broker pricing, the Company performs regular reviews of investment returns to industry benchmarks and sample tests of individual securities to validate quoted vendor prices with other available market data.

Level 3 — Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.

Included in Level 3 liabilities at December 31, 2015 was a $9.3 million contingent consideration liability related to achievement of revenue and value-creating milestones. There were no Level 3 instruments as of September 30, 2015 or December 31, 2014.

In valuing assets and liabilities, the Company is required to maximize the use of quoted market prices and minimize the use of unobservable inputs.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2015:

 

(Dollars in thousands)

 

Quoted Prices in

Active Markets

for Identical

Instruments

(Level 1)

 

 

Significant Other Observable Inputs

(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

 

Total Fair

Value as of

December 31,

2015

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

 

 

$

33,603

 

 

$

 

 

$

33,603

 

Total assets

 

$

 

 

$

33,603

 

 

$

 

 

$

33,603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

(9,308

)

 

$

(9,308

)

Total liabilities

 

$

 

 

$

 

 

$

(9,308

)

 

$

(9,308

)

 

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2015:

 

(Dollars in thousands)

 

Quoted Prices in

Active Markets

for Identical

Instruments

(Level 1)

 

 

Significant Other Observable Inputs

(Level 2)

 

 

Significant Unobservable Inputs

(Level 3)

 

 

Total Fair

Value as of

September 30,

2015

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

 

 

$

53,591

 

 

$

 

 

$

53,591

 

Total assets measured at fair value

 

$

 

 

$

53,591

 

 

$

 

 

$

53,591

 

 

Included in Level 3 fair value measurements as of December 31, 2015 was a $9.3 million contingent consideration liability related to achievement of revenue and value-creating milestones associated with the Creagh Medical acquisition. The following table summarizes the changes in the contingent consideration liability for the quarter ended December 31, 2015:

11


 

(Dollars in thousands)

 

 

 

 

Contingent consideration liability at September 30, 2015

 

$

 

Additions

 

 

9,064

 

Fair value adjustments

 

 

 

Settlements

 

 

 

Interest accretion

 

 

109

 

Foreign currency translation

 

 

135

 

Contingent consideration liability at December 31, 2015

 

$

9,308

 

Valuation Techniques

The valuation techniques used to measure the fair value of assets are as follows:

Cash equivalents — These assets are classified as Level 2 and are carried at historical cost which is a reasonable estimate of fair value because of the relatively short time between origination of the instrument and its expected realization.

Contingent consideration — The contingent consideration liabilities were determined based on discounted cash flow analyses that included revenue estimates, probability of strategic milestone achievement and a discount rate, which are considered significant unobservable inputs as of the acquisition date and December 31, 2015. For the revenue based milestones, the Company discounted forecasted revenue by 13.9%, which represents the Company’s weighted average cost of capital adjusted for the short-term nature of the cash flows. The resulting present value of revenue was used as an input into an option pricing approach, which also considered the Company’s risk of non-payment of the revenue-based milestones.  Non-revenue milestones are assumed to have an 80-95% probability of achievement and related payments were discounted using the Company’s estimated cost of debt, or 5.9%.  To the extent that these assumptions were to change, the fair value of the contingent consideration liabilities could change significantly. Included in the condensed consolidated statement of income for the three months ended December 31, 2015 is $0.1 million of expense related to the accretion of the contingent consideration. The €12 million contingent consideration related to the Creagh Medical acquisition is denominated in Euros and is not hedged.  The Company recorded a $0.1 million foreign currency exchange loss in the first quarter of fiscal 2016 related to this contingent consideration.

 

 

5. Investments

During the year ended September 30, 2015, the Company liquidated its investment portfolio and was invested solely in cash equivalents. Investments made during 2014 consisted principally of U.S. government and government agency obligations, mortgage-backed securities and corporate and municipal debt securities and were classified as available-for-sale at December 31, 2014. Available-for-sale securities were reported at fair value with unrealized gains and losses, net of tax, excluded from the condensed consolidated statements of income and reported in the condensed consolidated statements of comprehensive income as well as a separate component of stockholders’ equity in the condensed consolidated balance sheets, except for other-than-temporary impairments, which are reported as a charge to current earnings. A loss would be recognized when there is an other-than-temporary impairment in the fair value of any individual security classified as available-for-sale, with the associated net unrealized loss reclassified out of accumulated other comprehensive income with a corresponding adjustment to other income. This adjustment results in a new cost basis for the investment.  Interest earned on debt securities, including amortization of premiums and accretion of discounts, is included in other income. Realized gains and losses from the sales of debt securities, which are included in other income, are determined using the specific identification method.

During the year ended September 30, 2015, the Company liquidated its investment portfolio to support corporate initiatives, as a result the ending balance of available-for-sale investments at December 31, 2015 was zero.

 

The following table summarizes sales of available-for-sale debt securities:

 

 

Three Months Ended

 

 

December 31,

 

(Dollars in thousands)

2015

 

 

2014

 

Proceeds from sales

$

 

 

$

973

 

Gross realized gains

$

 

 

$

 

Gross realized losses

$

 

 

$

(7

)

 

 

12


6. Inventories

Inventories are principally stated at the lower of cost or market using the specific identification method and include direct labor, materials and overhead, with cost of product sales determined on a first-in, first-out basis. Inventories consisted of the following components:

 

 

 

December 31,

 

 

September 30,

 

(Dollars in thousands)

 

2015

 

 

2015

 

Raw materials

 

$

1,221

 

 

$

1,264

 

Finished products

 

 

2,080

 

 

 

1,715

 

Total

 

$

3,301

 

 

$

2,979

 

 

 

7. Other Assets

Other assets consist principally of the following:

 

 

 

December 31,

 

 

September 30,

 

(Dollars in thousands)

 

2015

 

 

2015

 

ViaCyte, Inc.

 

$

479

 

 

$

479

 

Other noncurrent assets

 

 

171

 

 

 

 

Other assets, net

 

$

650

 

 

$

479

 

The Company has invested a total of $5.3 million in ViaCyte, Inc. (“ViaCyte”), a privately-held California-based biotechnology firm that is developing a unique treatment for diabetes using coated islet cells, the cells that produce insulin in the human body. The balance of the investment of $0.5 million, which is net of previously recorded other-than-temporary impairments of $4.8 million is accounted for under the cost method and represents less than a 1% ownership interest. The Company does not exert significant influence over ViaCyte’s operating or financial activities.

The carrying value of each cost method investment is reviewed quarterly for changes in circumstances or the occurrence of events that suggest the Company’s investment may not be recoverable. The fair value of cost method investments is not adjusted if there are no identified events or changes in circumstances that may have a material adverse effect on the fair value of the investment.

 

 

8. Intangible Assets

Intangible assets consist principally of acquired patents and technology, customer relationships, licenses and trademarks. During the three months ended December 31, 2015, the Company acquired 100% of the shares of Creagh Medical. The Company recorded amortization expense of $0.4 million and $0.2 million for the three months ended December 31, 2015 and 2014, respectively.

Intangible assets consisted of the following:

 

 

December 31, 2015

 

(Dollars in thousands)

 

Weighted Average Original Life (Years)

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net

 

Definite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer lists and relationships

 

7.0-10.0

 

 

$

16,417

 

 

$

(4,674

)

 

$

11,743

 

Core technology

 

 

8.0

 

 

 

530

 

 

 

(530

)

 

 

 

Developed technology

 

 

7.0

 

 

 

1,814

 

 

 

(29

)

 

 

1,785

 

Non-compete

 

 

5.0

 

 

 

230

 

 

 

(23

)

 

 

207

 

Patents and other

 

 

16.8

 

 

 

2,321

 

 

 

(1,166

)

 

 

1,155

 

Subtotal

 

 

 

 

 

 

21,312

 

 

 

(6,422

)

 

 

14,890

 

Unamortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In-process research and development

 

 

 

 

 

 

956

 

 

 

 

 

 

956

 

Trademarks and trade names

 

 

 

 

 

 

656

 

 

 

 

 

 

656

 

Total

 

 

 

 

 

$

22,924

 

 

$

(6,422

)

 

$

16,502

 

13


 

 

 

September 30, 2015

 

(Dollars in thousands)

 

Weighted Average Original Life (Years)

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Net

 

Definite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer lists

 

 

9.0

 

 

$

5,132

 

 

$

(4,363

)

 

$

769

 

Core technology

 

 

8.0

 

 

 

530

 

 

 

(530

)

 

 

 

Non-compete

 

 

5.0

 

 

 

230

 

 

 

(12

)

 

 

218

 

Patents and other

 

 

16.8

 

 

 

2,321

 

 

 

(1,128

)

 

 

1,193

 

Subtotal

 

 

 

 

 

 

8,213

 

 

 

(6,033

)

 

 

2,180

 

Unamortized intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

 

 

 

 

 

580

 

 

 

 

 

 

580

 

Total

 

 

 

 

 

$

8,793

 

 

$

(6,033

)

 

$

2,760

 

 

Based on the intangible assets in service as of December 31, 2015 and the projected completion of in-process research and development assets in fiscal 2017, estimated amortization expense for the remainder of fiscal 2016 and each of the next five fiscal years is as follows:

 

(Dollars in thousands)

 

 

 

 

Remainder of 2016

 

$

1,885

 

2017

 

 

2,194

 

2018

 

 

1,783

 

2019

 

 

1,737

 

2020

 

 

1,737

 

2021

 

 

1,685

 

 

Future amortization amounts presented above are estimates.  Actual future amortization expense may be different, as a result of completion of the purchase price allocation for Creagh Medical, future acquisitions, impairments, completion of in-process research and development (“IPR&D”) intangible assets, changes in amortization periods, or other factors. As described in Note 3 to these financials, we acquired NorMedix on January 8, 2016 and the above table has not been updated to reflect this acquisition.

 

The Company defines IPR&D as the value of technology acquired for which the related projects have substance and are incomplete. IPR&D acquired in a business acquisition is recognized at fair value and requires the IPR&D to be capitalized as an indefinite-lived intangible asset until completion of the IPR&D project or abandonment. Upon completion of the development project (generally when regulatory approval to market the product is obtained), an impairment assessment is performed prior to amortizing the asset over its estimated useful life. If the IPR&D projects are abandoned, the related IPR&D assets would be written off.

 

 

9. Goodwill

Goodwill represents the excess of the cost of an acquired entity over the fair value assigned to the assets purchased and liabilities assumed in connection with a business acquisition. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment in accordance with accounting guidance for goodwill. The carrying amount of goodwill is evaluated annually, and between annual evaluations if events occur or circumstances change indicating that the carrying amount of goodwill may be impaired.

Goodwill at December 31, 2015 and September 30, 2015 totaled $21.8 million and $8.0 million, respectively. The $8.0 million of goodwill at September 30, 2015 is related to the In Vitro Diagnostics reporting unit and represents the gross value from the acquisition of BioFX Laboratories, Inc. (“BioFX”) in 2007.  The goodwill was not impaired based on the outcome of the fiscal 2015 annual impairment test, and there have been no events or circumstances that have occurred in the first quarter of fiscal 2016 associated with the In Vitro Diagnostics reporting unit to indicate that the goodwill has been impaired.

In the first quarter of fiscal 2016, the Company purchased Creagh Medical for €30 million or approximately $32.1 million based on acquisition date exchange rates. The purchase price of Creagh Medical exceeded the net acquisition-date amounts of the identifiable assets acquired and the liabilities assumed by $13.6 million.  The final valuation of assets acquired and liabilities assumed is expected to be completed as soon as possible, but no later than one year from the acquisition date.

 

 

14


The change in the carrying amount of goodwill by segment for the three months ended December 31, 2015 was as follows:

 

(Dollars in thousands)

 

In Vitro Diagnostics

 

 

Medical Device

 

 

Total

 

Balance as of September 30, 2015

 

$

8,010

 

 

$

 

 

$

8,010

 

Additions (See Note 3)

 

 

 

 

 

13,609

 

 

 

13,609

 

Translation adjustment

 

 

 

 

 

203

 

 

 

203

 

Balance as of December 31, 2015

 

$

8,010

 

 

$

13,812

 

 

$

21,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10. Stock-based Compensation

The Company has stock-based compensation plans under which it grants stock options, restricted stock awards, performance share awards, restricted stock units and deferred stock units. Accounting guidance requires all share-based payments to be recognized as an operating expense, based on their fair values, over the requisite service period.

The Company’s stock-based compensation expenses were allocated to the following expense categories:

 

 

 

Three Months Ended

 

 

 

December 31,

 

(Dollars in thousands)

 

2015

 

 

2014

 

Product costs

 

$

6

 

 

$

7

 

Research and development

 

 

59

 

 

 

61

 

Selling, general and administrative

 

 

619

 

 

 

457

 

Total

 

$

684

 

 

$

525

 

 

As of December 31, 2015, approximately $4.2 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 2.5 years. The unrecognized compensation costs above include $1.5 million, remaining to be expensed over the life of the awards, based on payout levels associated with performance share awards that are currently anticipated to be fully expensed because the performance conditions are expected to exceed minimum threshold levels.

Stock Option Awards  

The Company uses the Black-Scholes option pricing model to determine the weighted average grant date fair value of stock options granted. The weighted average per share fair values of stock options granted during the three months ended December 31, 2015 and 2014 were $6.87 and $7.22, respectively. The assumptions used as inputs in the model were as follows:

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2015

 

 

2014

 

Risk-free interest rates

 

 

2.0

%

 

 

1.4

%

Expected life (years)

 

 

4.6

 

 

 

4.5