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, 2021

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 1, 2022 was 13,976,000.

TABLE OF CONTENTS

PART I.   FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II.   OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30
SIGNATURES		31

2

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

Surmodics, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

	December 31,		September 30,
	2021		2021
(In thousands, except per share data)	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	26,650	$	31,153
Available-for-sale securities		5,693		7,717
Accounts receivable, net of allowances of $124 and $119 as of    December 31, 2021 and September 30, 2021, respectively		8,010		9,169
Contract assets — royalties and license fees		6,668		7,091
Inventories, net		8,290		6,760
Income tax receivable		1,916		1,912
Prepaids and other		7,689		6,453
Total Current Assets		64,916		70,255
Property and equipment, net		29,319		30,090
Available-for-sale securities		—		2,002
Deferred income taxes		6,372		5,867
Intangible assets, net		35,238		37,054
Goodwill		44,900		45,606
Other assets		4,121		3,718
Total Assets	$	184,866	$	194,592
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,845	$	1,783
Accrued liabilities:
Compensation		3,292		8,480
Accrued other		6,076		4,905
Short-term borrowings		10,000		10,000
Deferred revenue		4,430		4,647
Total Current Liabilities		25,643		29,815
Deferred revenue, less current portion		9,292		10,301
Deferred income taxes		2,547		2,742
Other long-term liabilities		10,713		11,649
Total Liabilities		48,195		54,507
Commitments and Contingencies (Note 10)
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; 13,975 and    13,899 shares issued and outstanding as of December 31, 2021 and    September 30, 2021, respectively		699		695
Additional paid-in capital		22,644		21,598
Accumulated other comprehensive income		75		1,727
Retained earnings		113,253		116,065
Total Stockholders’ Equity		136,671		140,085
Total Liabilities and Stockholders’ Equity	$	184,866	$	194,592

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,
	2021			2020
(In thousands, except per share data)	(Unaudited)
Revenue:
Product sales	$	12,344		$	10,102
Royalties and license fees		8,099			9,334
Research, development and other		2,560			2,861
Total revenue		23,003			22,297
Operating costs and expenses:
Product costs		4,497			3,743
Research and development		11,663			10,882
Selling, general and administrative		9,192			7,023
Acquired intangible asset amortization		1,089			556
Contingent consideration expense		3			—
Total operating costs and expenses		26,444			22,204
Operating (loss) income		(3,441	)		93
Other expense:
Investment income, net		26			41
Interest expense		(136	)		(60	)
Foreign exchange gain (loss)		33			(180	)
Other expense		(77	)		(199	)
Loss before income taxes		(3,518	)		(106	)
Income tax benefit (provision)		706			(168	)
Net loss	$	(2,812	)	$	(274	)
Basic net loss per share	$	(0.20	)	$	(0.02	)
Diluted net loss per share	$	(0.20	)	$	(0.02	)
Weighted average number of shares outstanding:
Basic		13,878			13,668
Diluted		13,878			13,668

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

4

Surmodics, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive (Loss) Income

	Three Months Ended
	December 31,
	2021			2020
(In thousands)	(Unaudited)
Net loss	$	(2,812	)	$	(274	)
Other comprehensive (loss) income:
Net changes related to available-for-sale securities, net of tax		(5	)		—
Foreign currency translation adjustments		(1,647	)		1,832
Other comprehensive (loss) income		(1,652	)		1,832
Comprehensive (loss) income	$	(4,464	)	$	1,558

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, 2021 and 2020
	(Unaudited)									Accumulated
							Additional			Other						Total
	Common Stock						Paid-In			Comprehensive			Retained			Stockholders’
(In thousands)	Shares			Amount			Capital			Income			Earnings			Equity
Balance at September 30, 2021		13,899		$	695		$	21,598		$	1,727		$	116,065		$	140,085
Net loss		—			—			—			—			(2,812	)		(2,812	)
Other comprehensive loss, net of tax		—			—			—			(1,652	)		—			(1,652	)
Issuance of common stock		81			4			(4	)		—			—			—
Common stock options exercised, net		14			1			229			—			—			230
Purchase of common stock to pay employee taxes		(19	)		(1	)		(859	)		—			—			(860	)
Stock-based compensation		—			—			1,680			—			—			1,680
Balance at December 31, 2021		13,975		$	699		$	22,644		$	75		$	113,253		$	136,671
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

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,
	2021			2020
(In thousands)	(Unaudited)
Operating Activities:
Net loss	$	(2,812	)	$	(274	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,376			1,860
Stock-based compensation		1,680			1,433
Noncash lease expense		91			74
Provision for credit losses		4			(7	)
Deferred taxes		(640	)		310
Other		77			13
Change in operating assets and liabilities:
Accounts receivable and contract assets		1,547			(830	)
Inventories		(1,570	)		(236	)
Prepaids and other		(1,432	)		(357	)
Accounts payable		200			(485	)
Accrued liabilities		(5,227	)		(4,236	)
Income taxes		(95	)		(165	)
Deferred revenue		(1,225	)		(1,370	)
Net cash used in operating activities		(7,026	)		(4,270	)
Investing Activities:
Purchases of property and equipment		(782	)		(1,319	)
Payment for acquisition of intangible assets		—			(1,000	)
Purchases of available-for-sale securities		—			(5,820	)
Maturities of available-for-sale securities		4,000			18,013
Net cash provided by investing activities		3,218			9,874
Financing Activities:
Issuance of common stock		230			6
Payments for taxes related to net share settlement of equity awards		(853	)		(646	)
Payments for acquisition of in-process research and development		—			(150	)
Net cash used in financing activities		(623	)		(790	)
Effect of exchange rate changes on cash		(72	)		155
Net change in cash and cash equivalents		(4,503	)		4,969
Cash and Cash Equivalents:
Beginning of period		31,153			30,785
End of period	$	26,650		$	35,754
Supplemental Information:
Cash paid for income taxes	$	3		$	9
Cash paid for interest		82			—
Noncash investing and financing activities:
Acquisition of property and equipment, net of refundable credits in other current assets     and liabilities		137			82
Right-of-use assets obtained in exchange for new operating lease liabilities		350			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, 2021

(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, 2021, 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 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, 2021 are not necessarily indicative of the results that may be expected for the entire 2022 fiscal year.

Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the current year presentation.

New Accounting Pronouncements

No 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)	2021		2020
Medical Device
Product sales	$	6,788	$	4,561
Royalties		6,886		7,909
License fees		1,213		1,425
Research, development and other		2,021		2,301
Medical Device Revenue		16,908		16,196
In Vitro Diagnostics
Product sales		5,556		5,541
Research, development and other		539		560
In Vitro Diagnostics Revenue		6,095		6,101
Total Revenue	$	23,003	$	22,297

8

Contract assets totaled $6.7 million and $7.1 million as of December 31, 2021 and September 30, 2021, 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 Arrangement.

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”) to treat the superficial femoral artery (the “Abbott Agreement”). A premarket approval application (“PMA”) for the SurVeil DCB was being evaluated by the U.S. Food and Drug Administration (“FDA”) as of December 31, 2021. Separately, Abbott also received the option to negotiate an agreement for Surmodics' below-the-knee Sundance^TM DCB product. As of December 31, 2021, six-month patient follow-up visits are complete for the SWING first-in-human, 35-patient clinical study of the Sundance DCB, and we are evaluating the results. 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.

As of December 31, 2021, the Company has received payments totaling $60.8 million under the Abbott Agreement, which consist of the following: (i) $25 million upfront fee in fiscal 2018, (ii) $10 million milestone payment in fiscal 2019, (iii) $10.8 million milestone payment in fiscal 2020, and (iv) $15 million milestone payment in the second quarter of fiscal 2021. As of December 31, 2021, the Company may receive an additional contingent milestone payment of up to $30 million, pursuant to the terms of the Abbott Agreement, upon PMA of our SurVeil DCB by the FDA. As of December 31, 2021, consideration from this potential regulatory milestone was excluded from the contract price (i.e., deemed fully constrained), due to the high level of uncertainty of achievement as of December 31, 2021.

Revenue recognized from the Abbott agreement totaled $1.2 million and $1.3 million for the three months ended December 31, 2021 and 2020, respectively, all of which was included in the respective beginning of fiscal year balances of deferred revenue on the condensed consolidated balance sheets.

As of December 31, 2021 and September 30, 2021, deferred revenue from the upfront and milestone payments received under the Abbott Agreement of $13.7 million and $14.9 million, respectively, was recorded on the condensed consolidated balance sheets.

As of December 31, 2021, 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 $13.7 million. These remaining performance obligations relate to the Abbott Agreement, exclude the potential contingent milestone payment under the Abbott Agreement, and are expected to be recognized over the next four years through fiscal 2025 as services, principally the TRANSCEND clinical trial, are completed.

9

4. Fair Value Measurements

Assets measured at fair value on a recurring basis by level of the fair value hierarchy were as follows:

	December 31, 2021
(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 (1)	$	—	$	2,333	$	—	$	2,333
Available-for-sale securities (1)		—		5,693		—		5,693
Total assets	$	—	$	8,026	$	—	$	8,026
Liabilities
Contingent consideration (2)	$	—	$	—	$	820	$	820
Total liabilities	$	—	$	—	$	820	$	820

	September 30, 2021
(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 (1)	$	—	$	5,308	$	—	$	5,308
Available-for-sale investments (1)		—		9,719		—		9,719
Total assets	$	—	$	15,027	$	—	$	15,027
Liabilities
Contingent consideration (2)	$	—	$	—	$	817