10-Q 1 srdx-10q_20190630.htm SRDX-Q3 2019 - 6.30.2019 srdx-10q_20190630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2019

or

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

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

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.05 par value

SRDX

Nasdaq Global Select Market

 

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  

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

Large accelerated filer

Accelerated filer

    

 

Non-accelerated filer

Smaller reporting company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

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

The number of shares of the registrant’s Common Stock, $0.05 par value per share, as of July 30, 2019 was 13,490,598

 

 

 

 

 

1


 

 

 

TABLE OF CONTENTS

 

 

2


PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Financial Statements

Surmodics, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

 

June 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

(in thousands, except share and per share data)

 

(Unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

28,916

 

 

$

23,318

 

Restricted cash

 

 

 

 

 

350

 

Available-for-sale securities

 

 

16,070

 

 

 

41,352

 

Accounts receivable, net of allowance for doubtful accounts of $206 and $147

  as of June 30, 2019 and September 30, 2018, respectively

 

 

8,381

 

 

 

8,877

 

Contract assets - royalties and license fees

 

 

8,235

 

 

 

 

Inventories, net

 

 

4,151

 

 

 

4,016

 

Income tax receivable

 

 

560

 

 

 

1,152

 

Prepaids and other

 

 

3,225

 

 

 

2,462

 

Total Current Assets

 

 

69,538

 

 

 

81,527

 

Deferred tax assets

 

 

6,067

 

 

 

6,304

 

Property and equipment, net

 

 

29,559

 

 

 

30,143

 

Intangible assets, net

 

 

15,480

 

 

 

17,683

 

Goodwill

 

 

26,737

 

 

 

27,032

 

Other assets

 

 

2,960

 

 

 

1,446

 

Total Assets

 

$

150,341

 

 

$

164,135

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,530

 

 

$

2,546

 

Accrued liabilities:

 

 

 

 

 

 

 

 

Compensation

 

 

2,599

 

 

 

5,635

 

Accrued other

 

 

3,859

 

 

 

6,265

 

Deferred revenue

 

 

5,126

 

 

 

9,646

 

Contingent consideration

 

 

3,113

 

 

 

11,041

 

Total Current Liabilities

 

 

17,227

 

 

 

35,133

 

Contingent consideration, less current portion

 

 

 

 

 

3,425

 

Deferred revenue, less current portion

 

 

9,727

 

 

 

11,247

 

Other long-term liabilities

 

 

4,755

 

 

 

5,720

 

Total Liabilities

 

 

31,709

 

 

 

55,525

 

Commitments and Contingencies (Note 15)

 

 

 

 

 

 

 

 

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; 13,490,323 and

   13,397,647 shares issued and outstanding as of June 30, 2019 and

   September 30, 2018, respectively

 

 

675

 

 

 

670

 

Additional paid-in capital

 

 

8,829

 

 

 

7,607

 

Accumulated other comprehensive income

 

 

1,977

 

 

 

2,718

 

Retained earnings

 

 

107,151

 

 

 

97,615

 

Total Stockholders’ Equity

 

 

118,632

 

 

 

108,610

 

Total Liabilities and Stockholders’ Equity

 

$

150,341

 

 

$

164,135

 

 

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

3


Surmodics, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

(In thousands, except per share data)

 

(Unaudited)

 

(Unaudited)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

 

$

9,870

 

 

$

10,475

 

 

$

29,508

 

 

$

27,249

 

Royalties and license fees

 

 

11,624

 

 

 

9,597

 

 

 

31,652

 

 

 

25,101

 

Research, development and other

 

 

2,850

 

 

 

2,155

 

 

 

8,101

 

 

 

5,948

 

Total revenue

 

 

24,344

 

 

 

22,227

 

 

 

69,261

 

 

 

58,298

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product costs

 

 

3,364

 

 

 

4,104

 

 

 

9,980

 

 

 

9,908

 

Research and development

 

 

13,321

 

 

 

9,778

 

 

 

38,362

 

 

 

28,383

 

Selling, general and administrative

 

 

5,939

 

 

 

5,977

 

 

 

16,764

 

 

 

17,606

 

Acquired in-process research and development

 

 

 

 

 

7,888

 

 

 

 

 

 

7,888

 

Acquired intangible asset amortization

 

 

599

 

 

 

624

 

 

 

1,809

 

 

 

1,878

 

Contingent consideration expense (gain)

 

 

104

 

 

 

106

 

 

 

(248

)

 

 

(1,006

)

Total operating costs and expenses

 

 

23,327

 

 

 

28,477

 

 

 

66,667

 

 

 

64,657

 

Operating income (loss)

 

 

1,017

 

 

 

(6,250

)

 

 

2,594

 

 

 

(6,359

)

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income, net

 

 

269

 

 

 

303

 

 

 

850

 

 

 

566

 

Interest expense

 

 

(38

)

 

 

 

 

 

(112

)

 

 

 

Foreign exchange (loss) gain

 

 

(42

)

 

 

652

 

 

 

99

 

 

 

113

 

Gain on strategic investment and other

 

 

 

 

 

 

 

 

9

 

 

 

177

 

Other income, net

 

 

189

 

 

 

955

 

 

 

846

 

 

 

856

 

Income (loss) before income taxes

 

 

1,206

 

 

 

(5,295

)

 

 

3,440

 

 

 

(5,503

)

Income tax benefit

 

 

260

 

 

 

2,613

 

 

 

598

 

 

 

2,799

 

Net income (loss)

 

$

1,466

 

 

$

(2,682

)

 

$

4,038

 

 

$

(2,704

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per share

 

$

0.11

 

 

$

(0.20

)

 

$

0.30

 

 

$

(0.21

)

Diluted net income (loss) per share

 

$

0.11

 

 

$

(0.20

)

 

$

0.29

 

 

$

(0.21

)

Weighted average number of shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

13,394

 

 

 

13,203

 

 

 

13,384

 

 

 

13,117

 

Diluted

 

 

13,726

 

 

 

13,203

 

 

 

13,776

 

 

 

13,117

 

 

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 (Loss)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

(In thousands)

 

(Unaudited)

 

 

(Unaudited)

 

Net income (loss)

 

$

1,466

 

 

$

(2,682

)

 

$

4,038

 

 

$

(2,704

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) on available-for-sale securities, net of tax

 

 

13

 

 

 

 

 

 

57

 

 

 

(41

)

Foreign currency translation adjustments

 

 

520

 

 

 

(2,231

)

 

 

(798

)

 

 

(394

)

Other comprehensive income (loss)

 

 

533

 

 

 

(2,231

)

 

 

(741

)

 

 

(435

)

Comprehensive income (loss)

 

$

1,999

 

 

$

(4,913

)

 

$

3,297

 

 

$

(3,139

)

 

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

5


Surmodics, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

 

 

Three Months Ended June 30, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Retained

 

 

Stockholders’

 

(In thousands)

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Earnings

 

 

Equity

 

Balance at March 31, 2019

 

 

13,489

 

 

$

674

 

 

$

7,510

 

 

$

1,444

 

 

$

105,685

 

 

$

115,313

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,466

 

 

 

1,466

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

533

 

 

 

 

 

 

533

 

Issuance of common stock

 

 

1

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

1

 

Common stock options exercised, net

 

 

1

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

12

 

Purchase of common stock to pay employee taxes

 

 

(1

)

 

 

 

 

 

(12

)

 

 

 

 

 

 

 

 

(12

)

Stock-based compensation

 

 

 

 

 

 

 

 

1,319

 

 

 

 

 

 

 

 

 

1,319

 

Balance at June 30, 2019

 

 

13,490

 

 

$

675

 

 

$

8,829

 

 

$

1,977

 

 

$

107,151

 

 

$

118,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

 

13,247

 

 

$

662

 

 

$

5,431

 

 

$

5,213

 

 

$

102,050

 

 

$

113,356

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,682

)

 

 

(2,682

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

(2,231

)

 

 

 

 

 

(2,231

)

Issuance of common stock

 

 

1

 

 

 

 

 

 

0

 

 

 

 

 

 

 

 

 

 

Common stock options exercised, net

 

 

214

 

 

 

11

 

 

 

1,005

 

 

 

 

 

 

 

 

 

1,016

 

Purchase of common stock to pay employee taxes

 

 

(113

)

 

 

(6

)

 

 

(2,001

)

 

 

 

 

 

 

 

 

(2,007

)

Stock-based compensation

 

 

 

 

 

 

 

 

1,293

 

 

 

 

 

 

 

 

 

1,293

 

Balance at June 30, 2018

 

 

13,349

 

 

$

667

 

 

$

5,728

 

 

$

2,982

 

 

$

99,368

 

 

$

108,745

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended June 30, 2019 and 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Common Stock

 

 

Paid-In

 

 

Comprehensive

 

 

Retained

 

 

Stockholders’

 

(In thousands)

 

Shares

 

 

Amount

 

 

Capital

 

 

Income

 

 

Earnings

 

 

Equity

 

Balance at September 30, 2018

 

 

13,398

 

 

$

670

 

 

$

7,607

 

 

$

2,718

 

 

$

97,615

 

 

$

108,610

 

Net impact from adoption of ASC Topic 606 (Note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,498

 

 

 

5,498

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,038

 

 

 

4,038

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

(741

)

 

 

 

 

 

(741

)

Issuance of common stock

 

 

135

 

 

 

7

 

 

 

203

 

 

 

 

 

 

 

 

 

210

 

Common stock options exercised, net

 

 

3

 

 

 

0

 

 

 

67

 

 

 

 

 

 

 

 

 

67

 

Purchase of common stock to pay employee taxes

 

 

(46

)

 

 

(2

)

 

 

(2,557

)

 

 

 

 

 

 

 

 

(2,559

)

Stock-based compensation

 

 

 

 

 

 

 

 

3,509

 

 

 

 

 

 

 

 

 

3,509

 

Balance at June 30, 2019

 

 

13,490

 

 

$

675

 

 

$

8,829

 

 

$

1,977

 

 

$

107,151

 

 

$

118,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2017

 

 

13,095

 

 

$

655

 

 

$

5,413

 

 

$

3,417

 

 

$

102,072

 

 

$

111,557

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,704

)

 

 

(2,704

)

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

(435

)

 

 

 

 

 

(435

)

Issuance of common stock

 

 

127

 

 

 

6

 

 

 

160

 

 

 

 

 

 

 

 

 

166

 

Common stock options exercised, net

 

 

385

 

 

 

19

 

 

 

1,215

 

 

 

 

 

 

 

 

 

1,234

 

Purchase of common stock to pay employee taxes

 

 

(258

)

 

 

(13

)

 

 

(4,357

)

 

 

 

 

 

 

 

 

(4,370

)

Stock-based compensation

 

 

 

 

 

 

 

 

3,297

 

 

 

 

 

 

 

 

 

3,297

 

Balance at June 30, 2018

 

 

13,349

 

 

$

667

 

 

$

5,728

 

 

$

2,982

 

 

$

99,368

 

 

$

108,745

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6


Surmodics, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

 

 

 

Nine Months Ended

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

(in thousands)

 

(Unaudited)

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

4,038

 

 

$

(2,704

)

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,462

 

 

 

4,711

 

Stock-based compensation

 

 

3,509

 

 

 

3,297

 

Payment of contingent consideration obligations in excess of acquisition-date value

 

 

(2,041

)

 

 

 

Contingent consideration gain

 

 

(248

)

 

 

(1,006

)

Unrealized foreign exchange gain

 

 

 

 

 

(74

)

Acquired in-process research and development

 

 

 

 

 

7,888

 

Deferred taxes (1)

 

 

(979

)

 

 

(1,954

)

Gain on strategic investment

 

 

(7

)

 

 

(177

)

Provision for bad debts

 

 

142

 

 

 

33

 

Other

 

 

(11

)

 

 

19

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable and contract asset (1)

 

 

(1,009

)

 

 

(1,142

)

Inventories

 

 

(148

)

 

 

(465

)

Prepaids and other

 

 

(2,184

)

 

 

(2,107

)

Accounts payable

 

 

(219

)

 

 

 

Accrued liabilities

 

 

(5,143

)

 

 

870

 

Deferred revenue (1)

 

 

(5,840

)

 

 

22,902

 

Income taxes (1)

 

 

196

 

 

 

(869

)

Net cash (used in) provided by operating activities

 

 

(4,482

)

 

 

29,222

 

Investing Activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(4,135

)

 

 

(6,915

)

Purchases of available-for-sale securities

 

 

(26,117

)

 

 

(59,578

)

Maturities of available-for-sale securities

 

 

51,458

 

 

 

56,581

 

Cash proceeds from sales of property and equipment

 

 

10

 

 

 

4

 

Cash received from sale of strategic investment

 

 

7

 

 

 

177

 

Purchase of in-process research and development (Note 15)

 

 

 

 

 

(4,500

)

Net cash provided by (used in) investing activities

 

 

21,223

 

 

 

(14,231

)

Financing Activities:

 

 

 

 

 

 

 

 

Issuance of common stock

 

 

277

 

 

 

1,387

 

Payments for taxes related to net share settlement of equity awards

 

 

(2,688

)

 

 

(4,356

)

Payment of contingent consideration obligations

 

 

(9,064

)

 

 

(925

)

Net cash used in financing activities

 

 

(11,475

)

 

 

(3,894

)

Effect of exchange rate changes on cash, restricted cash and cash equivalents

 

 

(18

)

 

 

(8

)

Net change in cash, restricted cash and cash equivalents

 

 

5,248

 

 

 

11,089

 

Cash, Restricted Cash and Cash Equivalents:

 

 

 

 

 

 

 

 

Beginning of period

 

 

23,668

 

 

 

16,534

 

End of period

 

$

28,916

 

 

$

27,623

 

Supplemental Information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

155

 

 

$

893

 

Noncash transactions from investing and financing activities:

 

 

 

 

 

 

 

 

Acquisition of property and equipment, net of refundable credits in other current assets

    and liabilities

 

$

180

 

 

$

965

 

Accrued taxes related to net share settlement of equity awards

 

 

 

 

 

3,388

 

 

(1)

Amounts presented are net of impact from adoption of ASC Topic 606.

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

7


Surmodics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Period Ended June 30, 2019

(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 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 (loss) in the period in which the change in estimate is identified. The results of operations for the three and nine months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the entire 2019 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, 2018, and footnotes thereto included in the Company’s Form 10-K as filed with the SEC on November 30, 2018.

New Accounting Pronouncements

Recently Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) issued Update No. 2014-09, Revenue from Contracts with Customers (“ASC Topic 606”). The core principal of ASC Topic 606 is 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, as well as significant judgements and changes in judgements, which are described in Note 2 to the condensed consolidated financial statements. The Company adopted ASC Topic 606 in the first quarter of fiscal year 2019 using the modified retrospective method and applied the new revenue standard to all new customer contracts initiated on or after the effective date and contracts which had remaining performance obligations as of the effective date.

The adoption of ASC Topic 606 resulted in an acceleration of minimum license fees and sales-based