srdx-10q_20200331.htm

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.

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 April 24, 2020 was 13,605,831.

	March 31,		September 30,
	2020		2019
(in thousands, except share and per share data)	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	15,208	$	30,361
Available-for-sale securities		33,190		24,931
Accounts receivable, net of allowance for doubtful accounts of $240 and $200 as of March 31, 2020 and September 30, 2019, respectively		8,886		8,993
Contract assets — royalties and license fees		6,282		8,210
Inventories, net		5,740		4,501
Income tax receivable		4,257		558
Prepaids and other		3,738		3,866
Total Current Assets		77,301		81,420
Property and equipment, net		29,785		29,748
Deferred income taxes		4,788		6,176
Intangible assets, net		13,037		14,226
Goodwill		26,276		26,171
Other assets		4,360		2,124
Total Assets	$	155,547	$	159,865

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,658	$	2,085
Accrued liabilities:
Compensation		2,300		4,581
Accrued other		4,645		4,790
Deferred revenue		4,675		5,553
Contingent consideration		—		3,200
Total Current Liabilities		13,278		20,209
Deferred revenue, less current portion		9,861		11,628
Other long-term liabilities		7,442		5,512
Total Liabilities		30,581		37,349
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; 13,609,495 and 13,504,102 shares issued and outstanding as of March 31, 2020 and September 30, 2019, respectively		680		675
Additional paid-in capital		11,481		10,740
Accumulated other comprehensive income		490		396
Retained earnings		112,315		110,705
Total Stockholders’ Equity		124,966		122,516
Total Liabilities and Stockholders’ Equity	$	155,547	$	159,865

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

	Three Months Ended							Six Months Ended
	March 31,							March 31,
	2020			2019				2020			2019
(In thousands, except per share data)	(Unaudited)						(Unaudited)
Revenue:
Product sales	$	11,770		$	9,887			$	21,744		$	19,638
Royalties and license fees		8,221			9,932				18,369			20,028
Research, development and other		2,831			2,857				5,325			5,251
Total revenue		22,822			22,676				45,438			44,917
Operating costs and expenses:
Product costs		3,769			3,093				6,972			6,616
Research and development		11,935			13,555				24,077			25,041
Selling, general and administrative		6,733			4,876				13,676			10,825
Acquired intangible asset amortization		541			604				1,135			1,210
Contingent consideration gain		—			(317	)			—			(352	)
Total operating costs and expenses		22,978			21,811				45,860			43,340
Operating (loss) income		(156	)		865				(422	)		1,577
Other (expense) income:
Investment income, net		210			265				460			581
Interest expense		(30	)		(37	)			(70	)		(74	)
Foreign exchange (loss) gain		(30	)		5				(77	)		141
Impairment loss on strategic investment		(479	)		—				(479	)		—
Other		—			2				1			9
Other (expense) income		(329	)		235				(165	)		657
(Loss) income before income taxes		(485	)		1,100				(587	)		2,234
Income tax benefit		1,947			162				2,197			338
Net income	$	1,462		$	1,262			$	1,610		$	2,572

Basic net income per share	$	0.11		$	0.09			$	0.12		$	0.19
Diluted net income per share	$	0.11		$	0.09			$	0.12		$	0.19

Weighted average number of shares outstanding:
Basic		13,507			13,390				13,474			13,379
Diluted		13,751			13,785				13,779			13,816

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

	Three Months Ended March 31, 2020 and 2019
										Accumulated
							Additional			Other					Total
	Common Stock						Paid-In			Comprehensive			Retained		Stockholders’
(In thousands)	Shares			Amount			Capital			Income			Earnings		Equity
Balance at December 31, 2019		13,593		$	680		$	10,361		$	1,432		$	110,853	$	123,326
Net income		—			—			—			—			1,462		1,462
Other comprehensive loss, net of tax		—			—			—			(942	)		—		(942	)
Issuance of common stock		5			—			218			—			—		218
Common stock options exercised, net		12			—			9			—			—		9
Purchase of common stock to pay employee taxes		(1	)		—			(411	)		—			—		(411	)
Stock-based compensation		—			—			1,304			—			—		1,304
Balance at March 31, 2020		13,609		$	680		$	11,481		$	490		$	112,315	$	124,966

Balance at December 31, 2018		13,483		$	674		$	6,340		$	2,184		$	104,423	$	113,621
Net income		—			—			—			—			1,262		1,262
Other comprehensive loss, net of tax		—			—			—			(740	)		—		(740	)
Issuance of common stock		6			—			209			—			—		209
Common stock options exercised, net		1			—			19			—			—		19
Purchase of common stock to pay employee taxes		(1	)		—			(17	)		—			—		(17	)
Stock-based compensation		—			—			959			—			—		959
Balance at March 31, 2019		13,489		$	674		$	7,510		$	1,444		$	105,685	$	115,313


	Six Months Ended March 31, 2020 and 2019
										Accumulated
							Additional			Other					Total
	Common Stock						Paid-In			Comprehensive			Retained		Stockholders’
(In thousands)	Shares			Amount			Capital			Income			Earnings		Equity
Balance at September 30, 2019		13,504		$	675		$	10,740		$	396		$	110,705	$	122,516
Net income		—			—			—			—			1,610		1,610
Other comprehensive income, net of tax		—			—			—			94			—		94
Issuance of common stock		130			7			211			—			—		218
Common stock options exercised, net		20			—			100			—			—		100
Purchase of common stock to pay employee taxes		(45	)		(2	)		(2,267	)		—			—		(2,269	)
Stock-based compensation		—			—			2,697			—			—		2,697
Balance at March 31, 2020		13,609		$	680		$	11,481		$	490		$	112,315	$	124,966

Balance at September 30, 2018		13,398		$	670		$	7,607		$	2,718		$	97,615	$	108,610
Net impact from adoption of ASC Topic 606		—			—			—			—			5,498	$	5,498
Net income		—			—			—			—			2,572		2,572
Other comprehensive loss, net of tax		—			—			—			(1,274	)		—		(1,274	)
Issuance of common stock		134			6			203			—			—		209
Common stock options exercised, net		2			—			55			—			—		55
Purchase of common stock to pay employee taxes		(45	)		(2	)		(2,545	)		—			—		(2,547	)
Stock-based compensation		—			—			2,190			—			—		2,190
Balance at March 31, 2019		13,489		$	674		$	7,510		$	1,444		$	105,685	$	115,313

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

	Six Months Ended
	March 31,
	2020			2019
(in thousands)	(Unaudited)
Operating Activities:
Net income	$	1,610		$	2,572
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		3,600			3,575
Stock-based compensation		2,697			2,190
Payment of contingent consideration obligations in excess of acquisition-date value		(608	)		(2,041	)
Contingent consideration gain		—			(352	)
Deferred taxes		1,388			(213	)
Losses (gains) on strategic investments		479			(7	)
Provision for bad debts		137			119
Other		108			(10	)
Change in operating assets and liabilities:
Accounts receivable and contract asset		1,914			(756	)
Inventories		(1,233	)		(355	)
Prepaids and other		(622	)		(1,430	)
Accounts payable		(128	)		1,273
Accrued liabilities		(1,826	)		(4,071	)
Income taxes		(3,615	)		(291	)
Deferred revenue		(2,644	)		(4,141	)
Net cash provided by (used in) operating activities		1,257			(3,938	)
Investing Activities:
Purchases of property and equipment		(2,311	)		(3,118	)
Purchases of available-for-sale securities		(35,863	)		(20,085	)
Maturities of available-for-sale securities		27,425			37,458
Cash proceeds from sales of property and equipment		—			10
Cash received from sale of strategic investment		—			7
Net cash (used in) provided by investing activities		(10,749	)		14,272
Financing Activities:
Issuance of common stock		318			264
Payments for taxes related to net share settlement of equity awards		(2,373	)		(2,678	)
Payment of contingent consideration obligations		(2,592	)		(9,064	)
Payments for acquisition of in process research and development		(1,000	)		—
Net cash used in financing activities		(5,647	)		(11,478	)
Effect of exchange rate changes on cash and cash equivalents		(14	)		(54	)
Net change in cash and cash equivalents		(15,153	)		(1,198	)
Cash and Cash Equivalents:
Beginning of period		30,361			23,668
End of period	$	15,208		$	22,470
Supplemental Information:
Cash paid for income taxes	$	6		$	150
Noncash transactions from investing and financing activities:
Acquisition of property and equipment, net of refundable credits in other current assets and liabilities	$	87		$	65
Right of use assets obtained in exchange for new operating lease liabilities		597			—

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

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 (referred to as “Surmodics”, the “Company”, “we,” “us,” “our” and other like terms) for the periods presented. 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, 2019, and footnotes thereto included in the Company’s Annual Report on Form 10-K as filed with the SEC on December 3, 2019.

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 in the period in which the change in estimate is identified. The results of operations for the three and six months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the entire 2020 fiscal year.

We are subject to risks and uncertainties as a result of the COVID-19 pandemic caused by a novel strain of coronavirus first identified in Wuhan, China in December 2019. On March 18, 2020, the Centers for Medicare & Medicaid Services (“CMS”) released guidance for U.S. healthcare providers to limit all elective medical procedures in order to conserve personal protective equipment and limit exposure to COVID-19 during the pendency of the pandemic. In addition to limiting elective medical procedures, many hospitals and other healthcare providers have strictly limited access to their facilities during the pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and healthcare delivery, led to social distancing recommendations, and created significant volatility in financial markets.

Many of our customers use our licensed technology and purchased materials to manufacture products used in procedures impacted by the CMS guidance to limit elective procedures. In addition, our customers and business partners need access to healthcare providers and facilities to effectively market, distribute and sell products incorporating our coating and device technologies, as well as our whole-product solutions. Likewise, we and our business partners need access to healthcare providers and facilities to conduct clinical trials and other activities required to achieve regulatory clearing for our products under development.

We believe reductions in elective procedures in response to CMS guidance have had, and will continue to have, an adverse impact, which may be material, to the Company's financial condition, liquidity and results of operations. The severity of the impact of the COVID-19 pandemic on our business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on our customers, all of which are uncertain and cannot be predicted. As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company's financial condition, liquidity or results of operations is uncertain. For further information, refer to “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2016-02, Leases (“ASC Topic 842”). The update maintains two classifications of leases: finance leases, which replace capital leases, and operating leases. Lessees recognize a right-of-use asset and a lease liability on the consolidated balance sheets for those leases previously classified as operating leases under the previous guidance. The liability is equal to the present value of lease payments, while the asset is based on the liability, subject to adjustment, such as for direct costs.

Effective October 1, 2019, the Company adopted the new lease accounting standard using the optional transition method which allowed us to continue to apply the guidance under the lease standard in effect at the time in the comparative periods presented. In addition, the Company elected the package of practical expedients, including opting not to reassess whether any existing contracts contain a lease, historical lease classification as operating or finance leases, or initial direct costs. The Company has also elected the practical expedient to not separate the lease and non-lease components for all classes of underlying assets. The Company elected the short-term lease recognition exemption for all leases that qualified and has accordingly excluded short-term leases from the recognition of right-of-use assets and lease liabilities.

As a result of adoption of ASC Topic 842, we recorded operating lease right-of-use assets and corresponding operating lease liabilities of approximately $1.7 million and $2.9 million, respectively, as of October 1, 2019 with no impact on retained earnings. In addition, deferred rent liabilities related to escalating rent payments and tenant incentives totaling approximately $1.2 million were eliminated upon adoption, as these items are netted against right-of-use assets. The condensed consolidated balance sheets for reporting periods beginning on or after October 1, 2019 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.

In June 2016, the FASB issued ASU No 2016-13, Financial Instruments – Credit Losses, Measurement of Credit Losses on Financial Statements. This ASU requires a financial asset (or a group of financial assets) measured at an amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The accounting standard will be effective for the Company beginning in the first quarter of fiscal 2021 (October 1, 2020). Early adoption is permitted and the guidance will be applied using a modified retrospective approach. 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.

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

MINNESOTA	41-1356149
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.05 par value	SRDX	Nasdaq Global Select Market

PART I. FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	31
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	34
SIGNATURES		35

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐	Emerging Growth Company	☐