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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 December 31, 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 February 4, 2021 was 13,755,611.

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	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27
PART II.   OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	29
SIGNATURES		30

2

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Financial Statements

Surmodics, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

	December 31,		September 30,
	2020		2020
(In thousands, except per share data)	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	35,754	$	30,785
Available-for-sale securities		18,120		30,313
Accounts receivable, net of allowances of $123 and $130 as of    December 31, 2020 and September 30, 2020, respectively		8,065		7,675
Contract assets — royalties and license fees		6,566		6,108
Inventories, net		6,261		5,966
Income tax receivable		2,544		2,391
Prepaids and other		3,553		3,370
Total Current Assets		80,863		86,608
Property and equipment, net		30,346		30,103
Deferred income taxes		7,004		7,315
Intangible assets, net		12,945		13,283
Goodwill		27,864		27,185
Other assets		4,534		4,269
Total Assets	$	163,556	$	168,763
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	863	$	1,515
Accrued liabilities:
Compensation		2,944		6,630
Accrued other		4,086		5,547
Deferred revenue		4,553		5,200
Total Current Liabilities		12,446		18,892
Deferred revenue, less current portion		10,073		10,796
Other long-term liabilities		7,630		8,020
Total Liabilities		30,149		37,708
Commitments and Contingencies (Note 17)
Stockholders’ Equity:
Series A Preferred stock — $.05 par value, 450 shares authorized; no shares    issued and outstanding		—		—
Common stock — $.05 par value, 45,000 shares authorized; 13,739 and    13,672 shares issued and outstanding as of December 31, 2020 and    September 30, 2020, respectively		687		684
Additional paid-in capital		16,160		15,369
Accumulated other comprehensive income		5,006		3,174
Retained earnings		111,554		111,828
Total Stockholders’ Equity		133,407		131,055
Total Liabilities and Stockholders’ Equity	$	163,556	$	168,763

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
	December 31,
	2020			2019
(In thousands, except per share data)	(Unaudited)
Revenue:
Product sales	$	10,102		$	9,974
Royalties and license fees		9,334			10,148
Research, development and other		2,861			2,494
Total revenue		22,297			22,616
Operating costs and expenses:
Product costs		3,743			3,203
Research and development		10,882			12,142
Selling, general and administrative		7,023			6,943
Acquired intangible asset amortization		556			594
Total operating costs and expenses		22,204			22,882
Operating income (loss)		93			(266	)
Other (expense) income:
Investment income, net		41			250
Interest expense		(60	)		(40	)
Foreign exchange loss		(180	)		(47	)
Other		—			1
Other (expense) income		(199	)		164
Loss before income taxes		(106	)		(102	)
Income tax (provision) benefit		(168	)		250
Net (loss) income	$	(274	)	$	148
Basic net (loss) income per share	$	(0.02	)	$	0.01
Diluted net (loss) income per share	$	(0.02	)	$	0.01
Weighted average number of shares outstanding:
Basic		13,668			13,469
Diluted		13,668			13,769

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,
	2020			2019
(In thousands)	(Unaudited)
Net (loss) income	$	(274	)	$	148
Other comprehensive income:
Net changes related to available-for-sale securities, net of tax		—			(5	)
Foreign currency translation adjustments		1,832			1,041
Other comprehensive income		1,832			1,036
Comprehensive income	$	1,558		$	1,184

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 December 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, 2020		13,672		$	684		$	15,369		$	3,174	$	111,828		$	131,055
Net loss		—			—			—			—		(274	)		(274	)
Other comprehensive income, net of tax		—			—			—			1,832		—			1,832
Issuance of common stock		81			4			(4	)		—		—			—
Common stock options exercised, net		3			—			6			—		—			6
Purchase of common stock to pay employee taxes		(17	)		(1	)		(644	)		—		—			(645	)
Stock-based compensation		—			—			1,433			—		—			1,433
Balance at December 31, 2020		13,739		$	687		$	16,160		$	5,006	$	111,554		$	133,407
Balance at September 30, 2019		13,504		$	675		$	10,740		$	396	$	110,705		$	122,516
Net income		—			—			—			—		148			148
Other comprehensive income, net of tax		—			—			—			1,036		—			1,036
Issuance of common stock		125			7			(7	)		—		—			—
Common stock options exercised, net		8			—			91			—		—			91
Purchase of common stock to pay employee taxes		(44	)		(2	)		(1,856	)		—		—			(1,858	)
Stock-based compensation		—			—			1,393			—		—			1,393
Balance at December 31, 2019		13,593		$	680		$	10,361		$	1,432	$	110,853		$	123,326

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

6

Surmodics, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

	Three Months Ended
	December 31,
	2020			2019
(in thousands)	(Unaudited)
Operating Activities:
Net (loss) income	$	(274	)	$	148
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization		1,860			1,804
Stock-based compensation		1,433			1,393
Payment of contingent consideration obligations in excess of    acquisition-date value		—			(608	)
Deferred taxes		310			(194	)
Provision for credit losses		(7	)		(27	)
Other		87			50
Change in operating assets and liabilities:
Accounts receivable and contract asset		(830	)		1,726
Inventories		(236	)		(413	)
Prepaids and other		(357	)		(800	)
Accounts payable		(485	)		529
Accrued liabilities		(4,236	)		(3,112	)
Income taxes		(165	)		(59	)
Deferred revenue		(1,370	)		(1,346	)
Net cash used in operating activities		(4,270	)		(909	)
Investing Activities:
Purchases of property and equipment		(1,319	)		(1,671	)
Payment for acquisition of intangible assets		(1,000	)		—
Purchases of available-for-sale securities		(5,820	)		(21,758	)
Maturities of available-for-sale securities		18,013			7,425
Net cash provided by (used in) investing activities		9,874			(16,004	)
Financing Activities:
Issuance of common stock		6			91
Payments for taxes related to net share settlement of equity awards		(646	)		(1,964	)
Payment of contingent consideration obligations		—			(2,592	)
Payments for acquisition of in-process research and development		(150	)		—
Net cash used in financing activities		(790	)		(4,465	)
Effect of exchange rate changes on cash		155			23
Net change in cash and cash equivalents		4,969			(21,355	)
Cash and Cash Equivalents:
Beginning of period		30,785			30,361
End of period	$	35,754		$	9,006
Supplemental Information:
Cash paid for income taxes	$	9		$	4
Noncash investing and financing activities:
Acquisition of property and equipment, net of refundable credits in other current assets     and liabilities		82			167
Right-of-use assets obtained in exchange for new operating lease liabilities		44			—

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 December 31, 2020

(Unaudited)

1. Basis of Presentation

Overview

Surmodics, Inc. and subsidiaries (“Surmodics,” the “Company,” “we,” “us,” “our” and other like terms) is a leading provider of surface modification technologies for intravascular medical devices and chemical components for in vitro diagnostic (“IVD”) immunoassay tests and microarrays. Surmodics is pursuing development and commercialization of highly differentiated medical devices that are designed to address unmet clinical needs and engineered to the most demanding requirements. This key growth strategy leverages the combination of the Company’s expertise in proprietary surface technologies, along with enhanced device design, development, and manufacturing capabilities. The Company mission remains to improve the detection and treatment of disease. Surmodics is headquartered in Eden Prairie, Minnesota.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include all accounts and wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). All intercompany transactions have been eliminated. The Company operates on a fiscal year ending on September 30. 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, 2020, and notes thereto included in our Annual Report on Form 10-K as filed with the SEC.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from those estimates. The results of operations for the three months ended December 31, 2020 are not necessarily indicative of the results that may be expected for the entire 2021 fiscal year.

Risk and Uncertainties

The COVID-19 pandemic is having, and will likely continue to have, an adverse effect on our business, results of operations, financial condition, and cash flows, and its future impacts remain highly uncertain and unpredictable. The Company has considered the disruptions caused by COVID-19, including lower than forecasted sales and customer demand and macroeconomic factors, that may impact its estimates. The Company has assessed the potential impact of the pandemic on certain accounting matters including, but not limited to, estimated sales-based royalties revenue; allowance for doubtful accounts; inventory reserves; and the valuation of goodwill, intangible assets, other long-lived assets and investments, as of December 31, 2020 and through the date of this Quarterly Report on Form 10-Q. As of the date of issuance of these unaudited 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 our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.

New Accounting Pronouncements

Recently Adopted

In June 2016, the FASB issued ASU 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. We adopted this guidance using the modified respective method in the first quarter of fiscal 2021. The adoption of this guidance did not have a material impact Company’s condensed consolidated financial statements.

8

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the approach for intraperiod tax allocation and to the methodology for calculating taxes during the quarters, as well as clarifies the accounting for enacted changes in tax laws. We adopted this guidance using a prospective approach in the first quarter of fiscal 2021. The adoption of this guidance did not have a material impact Company’s condensed consolidated financial statements.

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.

2. Revenue

The following table presents the Company’s revenues disaggregated by product classification and by reportable segment.

	Three Months Ended
	December 31,
(In thousands)	2020		2019
Medical Device
Product sales	$	4,561	$	5,023
Royalties		7,909		8,898
Research, development and other		2,301		2,234
License fees		1,425		1,249
Total Revenue — Medical Device		16,196		17,404
In Vitro Diagnostics
Product sales		5,541		4,952
Research, development and other		560		260
Total Revenue — In Vitro Diagnostics		6,101		5,212
Total Revenue	$	22,297	$	22,616

Contract assets totaled $6.6 million and $6.1 million as of December 31, 2020 and September 30, 2020, respectively. Fluctuations in the balance of contract assets result primarily from changes in sales-based and minimum royalties earned, but not collected at each balance sheet date due to payment timing and contractual changes in the normal course of business. For discussion of contract liability (deferred revenue) balances and remaining performance obligations, see Note 3 Collaborative Arrangements.

3. Collaborative Arrangement

On February 26, 2018, the Company entered into an agreement with Abbott Vascular, Inc. (“Abbott”) whereby Abbott has exclusive worldwide commercialization rights for Surmodics' SurVeil^TM drug-coated balloon (“DCB”) (the “Abbott Agreement”). Our SurVeil DCB is used to treat peripheral arterial disease in the upper leg (superficial femoral artery) and is currently being evaluated in our TRANSEND pivotal clinical trial. Abbott also received the option to negotiate an agreement for Surmodics' below-the-knee Sundance^TM DCB product, which is currently in development. Surmodics is responsible for conducting all necessary clinical trials and other activities required to achieve U.S. regulatory clearance for the SurVeil DCB, including completion of the ongoing TRANSCEND pivotal clinical trial. Abbott and Surmodics participate on a joint development committee charged with providing guidance on the Company’s clinical and regulatory activities with regard to the SurVeil DCB product. Upon receipt of regulatory approval for our SurVeil DCB, Abbott will have the right to purchase commercial units from the Company and Surmodics will realize revenue from product sales to Abbott at an agreed-upon transfer price, as well as a share of net profits resulting from third-party product sales by Abbott. To account for the Abbott Agreement, the Company applied the guidance in ASC Topic 808 (Collaborative Arrangements) as the parties are active participants and are exposed to significant risks and rewards dependent on commercial success of the collaborative activity.

9

As of December 31, 2020, the Company has received payments totaling $45.8 million under the Abbott Agreement, which consist of the following: $25 million upfront fee in fiscal 2018, $10.0 million milestone payment in fiscal 2019, and $10.8 million milestone payment in the third quarter of fiscal 2020. As of December 31, 2020, the Company may receive up to $45 million of additional contingent milestone payments, pursuant to the terms of the Abbott Agreement, consisting of: (i) $15 million following receipt by Abbott of the clinical study report and related materials from the TRANSCEND pivotal trial demonstrating that the primary safety and primary clinical endpoints are non-inferior to the control device and (ii) $30 million upon premarket approval (“PMA”) of our SurVeil DCB by the U.S. Food and Drug Administration. As of December 31, 2020, consideration from these potential clinical and regulatory milestones was fully constrained and excluded from the contract price, due to the high level of uncertainty of their achievement as of December 31, 2020.

Revenue recognized from the Abbott agreement totaled $1.3 million in both the three months ended December 31, 2020 and 2019. Revenue recognized from the Abbott Agreement, which was included in the respective beginning of fiscal year balances of deferred revenue on the condensed consolidated balance sheets, totaled $1.3 million for both the three months ended December 31, 2020 and 2019.

As of December 31, 2020 and September 30, 2020, deferred revenue from the upfront and milestone payments received under the Abbott Agreement of $14.6 million and $15.9 million, respectively, was recorded in the condensed consolidated balance sheets.

As of December 31, 2020, the estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied for executed contracts with an original duration of one year or more totaled $14.6 million. These remaining performance obligations relate to the Abbott Agreement, exclude potential contingent milestone payments under the Abbott Agreement, and are expected to be recognized over the next five years through fiscal 2025 as services, principally the TRANSCEND clinical trial, are completed.

4. Fair Value Measurements

Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

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

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.

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. In valuing Level 3 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 by level of the fair value hierarchy were as follows:

	December 31, 2020
(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
Assets
Cash equivalents	$	—	$	24,865	$	—	$	24,865
Available-for-sale securities		—		18,120		—		18,120
Total assets	$	—	$	42,985	$	—	$	42,985

10

	September 30, 2020
(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
Assets
Cash equivalents	$	—	$	18,634	$	—	$	18,634
Available-for-sale securities		—		30,313		—	$	30,313
Total assets	$	—	$	48,947	$	—	$	48,947

There were no transfers of assets between amounts measured using Level 3 fair value measurements during the three months ended December 31, 2020 and 2019.

5. Investments

The amortized cost, unrealized holding gains and losses, and fair value of available-for-sale securities were as follows:

	December 31, 2020
(In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Commercial paper and corporate bonds	$	18,120	$	5	$	(5	)	$	18,120
Total	$	18,120	$	5	$	(5	)	$	18,120

	September 30, 2020
(In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Commercial paper and corporate bonds	$	30,313	$	19	$	(19	)	$	30,313
Total	$	30,313	$	19	$	(19	)	$	30,313

6. Inventories

Inventories consisted of the following components:

	December 31,		September 30,
(In thousands)	2020		2020
Raw materials	$	4,147	$	3,758
Work-in process