p

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, 2020

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 or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

9924 West 74th Street, Eden Prairie, Minnesota 55344

(Address of principal executive offices) (Zip Code)

(952) 500-7000

(Registrant’s telephone number, including area code)

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

Title of each class	Trading Symbol	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 31, 2020 was 13,650,235.

TABLE OF CONTENTS

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	31
Item 4.	Controls and Procedures	32
PART II.   OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	35
SIGNATURES		36

2

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Financial Statements

Surmodics, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

	June 30,		September 30,
	2020		2019
(in thousands, except share and per share data)	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	36,386	$	30,361
Available-for-sale securities		24,178		24,931
Accounts receivable, net of allowance for doubtful accounts of $133 and $200 as of June 30, 2020 and September 30, 2019, respectively		8,657		8,993
Contract assets — royalties and license fees		4,248		8,210
Inventories, net		5,872		4,501
Income tax receivable		4,867		558
Prepaids and other		3,594		3,866
Total Current Assets		87,802		81,420
Property and equipment, net		28,939		29,748
Deferred income taxes		5,585		6,176
Intangible assets, net		12,585		14,226
Goodwill		26,563		26,171
Other assets		5,024		2,124
Total Assets	$	166,498	$	159,865
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,375	$	2,085
Accrued liabilities:
Compensation		4,320		4,581
Accrued other		4,703		4,790
Deferred revenue		5,229		5,553
Contingent consideration		—		3,200
Total Current Liabilities		15,627		20,209
Deferred revenue, less current portion		12,423		11,628
Other long-term liabilities		7,865		5,512
Total Liabilities		35,915		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; 13,645,174 and    13,504,102 shares issued and outstanding as of June 30, 2020 and    September 30, 2019, respectively		682		675
Additional paid-in capital		13,658		10,740
Accumulated other comprehensive income		1,469		396
Retained earnings		114,774		110,705
Total Stockholders’ Equity		130,583		122,516
Total Liabilities and Stockholders’ Equity	$	166,498	$	159,865

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,
	2020			2019				2020			2019
(In thousands, except per share data)	(Unaudited)						(Unaudited)
Revenue:
Product sales	$	11,987		$	9,870			$	33,731		$	29,508
Royalties and license fees		12,398			11,624				30,767			31,652
Research, development and other		2,498			2,850				7,823			8,101
Total revenue		26,883			24,344				72,321			69,261
Operating costs and expenses:
Product costs		4,443			3,364				11,415			9,980
Research and development		13,324			13,321				37,401			38,362
Selling, general and administrative		7,416			5,939				21,092			16,764
Acquired intangible asset amortization		536			599				1,671			1,809
Contingent consideration expense (gain)		—			104				—			(248	)
Total operating costs and expenses		25,719			23,327				71,579			66,667
Operating income		1,164			1,017				742			2,594
Other income (expense):
Investment income, net		124			269				584			850
Interest expense		(29	)		(38	)			(99	)		(112	)
Foreign exchange (loss) gain		(48	)		(42	)			(125	)		99
Impairment loss on strategic investment		—			—				(479	)		—
Other		—			—				1			9
Other income (expense)		47			189				(118	)		846
Income before income taxes		1,211			1,206				624			3,440
Income tax benefit		1,248			260				3,445			598
Net income	$	2,459		$	1,466			$	4,069		$	4,038
Basic net income per share	$	0.18		$	0.11			$	0.30		$	0.30
Diluted net income per share	$	0.18		$	0.11			$	0.30		$	0.29
Weighted average number of shares outstanding:
Basic		13,601			13,394				13,577			13,384
Diluted		13,786			13,726				13,775			13,776

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				Nine Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
(In thousands)	(Unaudited)				(Unaudited)
Net income	$	2,459	$	1,466	$	4,069	$	4,038
Other comprehensive income (loss):
Unrealized holding gains on available-for-    sale securities, net of tax		185		13		6		57
Foreign currency translation adjustments		794		520		1,067		(798	)
Other comprehensive income (loss)		979		533		1,073		(741	)
Comprehensive income	$	3,438	$	1,999	$	5,142	$	3,297

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, 2020 and 2019
										Accumulated
							Additional			Other				Total
	Common Stock						Paid-In			Comprehensive		Retained		Stockholders’
(In thousands)	Shares			Amount			Capital			Income		Earnings		Equity
Balance at March 31, 2020		13,609		$	680		$	11,481		$	490	$	112,315	$	124,966
Net income		—			—			—			—		2,459		2,459
Other comprehensive income, net of tax		—			—			—			979		—		979
Issuance of common stock		3			—			—			—		—		—
Common stock options exercised, net		33			2			849			—		—		851
Purchase of common stock to pay employee taxes		—			—			(12	)		—		—		(12	)
Stock-based compensation		—			—			1,340			—		—		1,340
Balance at June 30, 2020		13,645		$	682		$	13,658		$	1,469	$	114,774	$	130,583
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
	Nine Months Ended June 30, 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		—			—			—			—		4,069		4,069
Other comprehensive income, net of tax		—			—			—			1,073		—		1,073
Issuance of common stock		133			7			211			—		—		218
Common stock options exercised, net		53			2			949			—		—		951
Purchase of common stock to pay employee taxes		(45	)		(2	)		(2,279	)		—		—		(2,281	)
Stock-based compensation		—			—			4,037			—		—		4,037
Balance at June 30, 2020		13,645		$	682		$	13,658		$	1,469	$	114,774	$	130,583
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