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,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 July 30, 2021February 1, 2022 was 13,872,000.13,976,000.
TABLE OF CONTENTS
| ||
Item 1. | 3 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 |
Item 3. |
| |
Item 4. |
| |
|
| |
Item 1. |
| |
Item 1A. |
| |
Item 2. |
| |
Item 3. |
| |
Item 4. |
| |
Item 5. |
| |
Item 6. |
| |
|
|
2
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Surmodics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
|
| June 30, |
|
| September 30, |
|
| December 31, |
|
| September 30, |
| ||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2021 |
| ||||
(In thousands, except per share data) |
| (Unaudited) |
|
| (Unaudited) |
| ||||||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 62,177 |
|
| $ | 30,785 |
|
| $ | 26,650 |
|
| $ | 31,153 |
|
Available-for-sale securities |
|
| 5,741 |
|
|
| 30,313 |
|
|
| 5,693 |
|
|
| 7,717 |
|
Accounts receivable, net of allowances of $118 and $130 as of June 30, 2021 and September 30, 2020, respectively |
|
| 8,601 |
|
|
| 7,675 |
| ||||||||
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 |
|
| 7,043 |
|
|
| 6,108 |
|
|
| 6,668 |
|
|
| 7,091 |
|
Inventories, net |
|
| 6,316 |
|
|
| 5,966 |
|
|
| 8,290 |
|
|
| 6,760 |
|
Income tax receivable |
|
| 1,136 |
|
|
| 2,391 |
|
|
| 1,916 |
|
|
| 1,912 |
|
Prepaids and other |
|
| 3,098 |
|
|
| 3,370 |
|
|
| 7,689 |
|
|
| 6,453 |
|
Total Current Assets |
|
| 94,112 |
|
|
| 86,608 |
|
|
| 64,916 |
|
|
| 70,255 |
|
Property and equipment, net |
|
| 29,112 |
|
|
| 30,103 |
|
|
| 29,319 |
|
|
| 30,090 |
|
Available-for-sale securities |
|
| 4,050 |
|
|
| — |
|
|
| — |
|
|
| 2,002 |
|
Deferred income taxes |
|
| 6,368 |
|
|
| 7,315 |
|
|
| 6,372 |
|
|
| 5,867 |
|
Intangible assets, net |
|
| 11,482 |
|
|
| 13,283 |
|
|
| 35,238 |
|
|
| 37,054 |
|
Goodwill |
|
| 27,379 |
|
|
| 27,185 |
|
|
| 44,900 |
|
|
| 45,606 |
|
Other assets |
|
| 4,696 |
|
|
| 4,269 |
|
|
| 4,121 |
|
|
| 3,718 |
|
Total Assets |
| $ | 177,199 |
|
| $ | 168,763 |
|
| $ | 184,866 |
|
| $ | 194,592 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 1,519 |
|
| $ | 1,515 |
|
| $ | 1,845 |
|
| $ | 1,783 |
|
Accrued liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation |
|
| 6,689 |
|
|
| 6,630 |
|
|
| 3,292 |
|
|
| 8,480 |
|
Accrued other |
|
| 4,303 |
|
|
| 5,547 |
|
|
| 6,076 |
|
|
| 4,905 |
|
Short-term borrowings |
|
| 10,000 |
|
|
| 10,000 |
| ||||||||
Deferred revenue |
|
| 5,151 |
|
|
| 5,200 |
|
|
| 4,430 |
|
|
| 4,647 |
|
Total Current Liabilities |
|
| 17,662 |
|
|
| 18,892 |
|
|
| 25,643 |
|
|
| 29,815 |
|
Deferred revenue, less current portion |
|
| 11,035 |
|
|
| 10,796 |
|
|
| 9,292 |
|
|
| 10,301 |
|
Deferred income taxes |
|
| 2,547 |
|
|
| 2,742 |
| ||||||||
Other long-term liabilities |
|
| 7,670 |
|
|
| 8,020 |
|
|
| 10,713 |
|
|
| 11,649 |
|
Total Liabilities |
|
| 36,367 |
|
|
| 37,708 |
|
|
| 48,195 |
|
|
| 54,507 |
|
Commitments and Contingencies (Note 17) |
|
|
|
|
|
|
|
| ||||||||
Commitments and Contingencies (Note 10) |
|
|
|
|
|
|
|
| ||||||||
Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred stock — $.05 par value, 450 shares authorized; 0 shares issued and outstanding |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Common stock — $.05 par value, 45,000 shares authorized; 13,872 and 13,672 shares issued and outstanding as of June 30, 2021 and September 30, 2020, respectively |
|
| 694 |
|
|
| 684 |
| ||||||||
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 |
|
| 20,025 |
|
|
| 15,369 |
|
|
| 22,644 |
|
|
| 21,598 |
|
Accumulated other comprehensive income |
|
| 3,759 |
|
|
| 3,174 |
|
|
| 75 |
|
|
| 1,727 |
|
Retained earnings |
|
| 116,354 |
|
|
| 111,828 |
|
|
| 113,253 |
|
|
| 116,065 |
|
Total Stockholders’ Equity |
|
| 140,832 |
|
|
| 131,055 |
|
|
| 136,671 |
|
|
| 140,085 |
|
Total Liabilities and Stockholders’ Equity |
| $ | 177,199 |
|
| $ | 168,763 |
|
| $ | 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 |
|
| Nine Months Ended |
|
| Three Months Ended |
| |||||||||||||||
|
| June 30, |
|
| June 30, |
|
| December 31, |
| |||||||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||
(In thousands, except per share data) |
| (Unaudited) |
| (Unaudited) |
|
| (Unaudited) |
| ||||||||||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
| $ | 12,084 |
|
| $ | 11,987 |
|
| $ | 33,969 |
|
| $ | 33,731 |
|
| $ | 12,344 |
|
| $ | 10,102 |
|
Royalties and license fees |
|
| 8,796 |
|
|
| 12,398 |
|
|
| 38,182 |
|
|
| 30,767 |
|
|
| 8,099 |
|
|
| 9,334 |
|
Research, development and other |
|
| 2,993 |
|
|
| 2,498 |
|
|
| 9,014 |
|
|
| 7,823 |
|
|
| 2,560 |
|
|
| 2,861 |
|
Total revenue |
|
| 23,873 |
|
|
| 26,883 |
|
|
| 81,165 |
|
|
| 72,321 |
|
|
| 23,003 |
|
|
| 22,297 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product costs |
|
| 5,105 |
|
|
| 4,443 |
|
|
| 13,018 |
|
|
| 11,415 |
|
|
| 4,497 |
|
|
| 3,743 |
|
Research and development |
|
| 12,246 |
|
|
| 13,324 |
|
|
| 36,003 |
|
|
| 37,401 |
|
|
| 11,663 |
|
|
| 10,882 |
|
Selling, general and administrative |
|
| 7,885 |
|
|
| 7,416 |
|
|
| 22,815 |
|
|
| 21,092 |
|
|
| 9,192 |
|
|
| 7,023 |
|
Acquired intangible asset amortization |
|
| 560 |
|
|
| 536 |
|
|
| 1,676 |
|
|
| 1,671 |
|
|
| 1,089 |
|
|
| 556 |
|
Acquisition transaction, integration and other costs |
|
| 461 |
|
|
| — |
|
|
| 461 |
|
|
| — |
| ||||||||
Contingent consideration expense |
|
| 3 |
|
|
| — |
| ||||||||||||||||
Total operating costs and expenses |
|
| 26,257 |
|
|
| 25,719 |
|
|
| 73,973 |
|
|
| 71,579 |
|
|
| 26,444 |
|
|
| 22,204 |
|
Operating (loss) income |
|
| (2,384 | ) |
|
| 1,164 |
|
|
| 7,192 |
|
|
| 742 |
|
|
| (3,441 | ) |
|
| 93 |
|
Other (expense) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Other expense: |
|
|
|
|
|
|
|
| ||||||||||||||||
Investment income, net |
|
| 26 |
|
|
| 124 |
|
|
| 95 |
|
|
| 584 |
|
|
| 26 |
|
|
| 41 |
|
Interest expense |
|
| (59 | ) |
|
| (29 | ) |
|
| (178 | ) |
|
| (99 | ) |
|
| (136 | ) |
|
| (60 | ) |
Foreign exchange loss |
|
| (94 | ) |
|
| (48 | ) |
|
| (201 | ) |
|
| (125 | ) | ||||||||
Impairment loss on strategic investment and other |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (478 | ) | ||||||||
Other (expense) income |
|
| (127 | ) |
|
| 47 |
|
|
| (284 | ) |
|
| (118 | ) | ||||||||
(Loss) income before income taxes |
|
| (2,511 | ) |
|
| 1,211 |
|
|
| 6,908 |
|
|
| 624 |
| ||||||||
Income tax (provision) benefit |
|
| (776 | ) |
|
| 1,248 |
|
|
| (2,382 | ) |
|
| 3,445 |
| ||||||||
Net (loss) income |
| $ | (3,287 | ) |
| $ | 2,459 |
|
| $ | 4,526 |
|
| $ | 4,069 |
| ||||||||
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) income per share |
| $ | (0.24 | ) |
| $ | 0.18 |
|
| $ | 0.33 |
|
| $ | 0.30 |
| ||||||||
Diluted net (loss) income per share |
| $ | (0.24 | ) |
| $ | 0.18 |
|
| $ | 0.32 |
|
| $ | 0.30 |
| ||||||||
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 |
|
| 13,837 |
|
|
| 13,601 |
|
|
| 13,740 |
|
|
| 13,577 |
|
|
| 13,878 |
|
|
| 13,668 |
|
Diluted |
|
| 13,837 |
|
|
| 13,786 |
|
|
| 13,959 |
|
|
| 13,775 |
|
|
| 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 |
|
| Nine Months Ended |
|
| Three Months Ended |
| |||||||||||||||
|
| June 30, |
|
| June 30, |
|
| December 31, |
| |||||||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||
(In thousands) |
| (Unaudited) |
|
| (Unaudited) |
|
| (Unaudited) |
| |||||||||||||||
Net (loss) income |
| $ | (3,287 | ) |
| $ | 2,459 |
|
| $ | 4,526 |
|
| $ | 4,069 |
| ||||||||
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net loss |
| $ | (2,812 | ) |
| $ | (274 | ) | ||||||||||||||||
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
| ||||||||||||||||
Net changes related to available-for-sale securities, net of tax |
|
| 4 |
|
|
| 185 |
|
|
| (3 | ) |
|
| 6 |
|
|
| (5 | ) |
|
| — |
|
Foreign currency translation adjustments |
|
| 524 |
|
|
| 794 |
|
|
| 588 |
|
|
| 1,067 |
|
|
| (1,647 | ) |
|
| 1,832 |
|
Other comprehensive income |
|
| 528 |
|
|
| 979 |
|
|
| 585 |
|
|
| 1,073 |
| ||||||||
Other comprehensive (loss) income |
|
| (1,652 | ) |
|
| 1,832 |
| ||||||||||||||||
Comprehensive (loss) income |
| $ | (2,759 | ) |
| $ | 3,438 |
|
| $ | 5,111 |
|
| $ | 5,142 |
|
| $ | (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 June 30, 2021 and 2020 |
|
| Three Months Ended December 31, 2021 and 2020 |
| ||||||||||||||||||||||||||||||||||||||||||
|
| (Unaudited) |
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
| (Unaudited) |
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
| Additional |
|
| Other |
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
| Additional |
|
| Other |
|
|
|
|
|
| Total |
| ||||||
|
| Common Stock |
|
| Paid-In |
|
| Comprehensive |
|
| Retained |
|
| Stockholders’ |
|
| Common Stock |
|
| Paid-In |
|
| Comprehensive |
|
| Retained |
|
| Stockholders’ |
| ||||||||||||||||||
(In thousands) |
| Shares |
|
| Amount |
|
| Capital |
|
| Income |
|
| Earnings |
|
| Equity |
|
| Shares |
|
| Amount |
|
| Capital |
|
| Income |
|
| Earnings |
|
| Equity |
| ||||||||||||
Balance at March 31, 2021 |
|
| 13,868 |
|
| $ | 693 |
|
| $ | 18,516 |
|
| $ | 3,231 |
|
| $ | 119,641 |
|
| $ | 142,081 |
| ||||||||||||||||||||||||
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 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,287 | ) |
|
| (3,287 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (274 | ) |
|
| (274 | ) |
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 528 |
|
|
| — |
|
|
| 528 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,832 |
|
|
| — |
|
|
| 1,832 |
|
Issuance of common stock |
|
| 2 |
|
|
| 1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1 |
|
|
| 81 |
|
|
| 4 |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Common stock options exercised, net |
|
| 2 |
|
|
| — |
|
|
| 90 |
|
|
| — |
|
|
| — |
|
|
| 90 |
|
|
| 3 |
|
|
| — |
|
|
| 6 |
|
|
| — |
|
|
| — |
|
|
| 6 |
|
Purchase of common stock to pay employee taxes |
|
| — |
|
|
| — |
|
|
| (37 | ) |
|
| — |
|
|
| — |
|
|
| (37 | ) |
|
| (17 | ) |
|
| (1 | ) |
|
| (644 | ) |
|
| — |
|
|
| — |
|
|
| (645 | ) |
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 1,456 |
|
|
| — |
|
|
| — |
|
|
| 1,456 |
|
|
| — |
|
|
| — |
|
|
| 1,433 |
|
|
| — |
|
|
| — |
|
|
| 1,433 |
|
Balance at June 30, 2021 |
|
| 13,872 |
|
| $ | 694 |
|
| $ | 20,025 |
|
| $ | 3,759 |
|
| $ | 116,354 |
|
| $ | 140,832 |
| ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
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 |
| ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
|
| Nine Months Ended June 30, 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, 2020 |
|
| 13,672 |
|
| $ | 684 |
|
| $ | 15,369 |
|
| $ | 3,174 |
|
| $ | 111,828 |
|
| $ | 131,055 |
| ||||||||||||||||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,526 |
|
|
| 4,526 |
| ||||||||||||||||||||||||
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 585 |
|
|
| — |
|
|
| 585 |
| ||||||||||||||||||||||||
Issuance of common stock |
|
| 91 |
|
|
| 5 |
|
|
| 292 |
|
|
| — |
|
|
| — |
|
|
| 297 |
| ||||||||||||||||||||||||
Common stock options exercised, net |
|
| 127 |
|
|
| 6 |
|
|
| 2,324 |
|
|
| — |
|
|
| — |
|
|
| 2,330 |
| ||||||||||||||||||||||||
Purchase of common stock to pay employee taxes |
|
| (18 | ) |
|
| (1 | ) |
|
| (2,278 | ) |
|
| — |
|
|
| — |
|
|
| (2,279 | ) | ||||||||||||||||||||||||
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 4,318 |
|
|
| — |
|
|
| — |
|
|
| 4,318 |
| ||||||||||||||||||||||||
Balance at June 30, 2021 |
|
| 13,872 |
|
| $ | 694 |
|
| $ | 20,025 |
|
| $ | 3,759 |
|
| $ | 116,354 |
|
| $ | 140,832 |
| ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
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 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
|
| Nine Months Ended |
|
| Three Months Ended |
| ||||||||||
|
| June 30, |
|
| December 31, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
(In thousands) |
| (Unaudited) |
|
| (Unaudited) |
| ||||||||||
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 4,526 |
|
| $ | 4,069 |
| ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Net loss |
| $ | (2,812 | ) |
| $ | (274 | ) | ||||||||
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization |
|
| 5,610 |
|
|
| 5,390 |
|
|
| 2,376 |
|
|
| 1,860 |
|
Stock-based compensation |
|
| 4,318 |
|
|
| 4,037 |
|
|
| 1,680 |
|
|
| 1,433 |
|
Payment of contingent consideration obligations in excess of acquisition-date value |
|
| — |
|
|
| (608 | ) | ||||||||
Noncash lease expense |
|
| 91 |
|
|
| 74 |
| ||||||||
Provision for credit losses |
|
| 4 |
|
|
| (7 | ) | ||||||||
Deferred taxes |
|
| 947 |
|
|
| 592 |
|
|
| (640 | ) |
|
| 310 |
|
Loss on strategic investment |
|
| — |
|
|
| 479 |
| ||||||||
Provision for credit losses |
|
| (11 | ) |
|
| 30 |
| ||||||||
Other |
|
| 260 |
|
|
| 176 |
|
|
| 77 |
|
|
| 13 |
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable and contract asset |
|
| (1,809 | ) |
|
| 4,303 |
| ||||||||
Accounts receivable and contract assets |
|
| 1,547 |
|
|
| (830 | ) | ||||||||
Inventories |
|
| (338 | ) |
|
| (1,333 | ) |
|
| (1,570 | ) |
|
| (236 | ) |
Prepaids and other |
|
| (59 | ) |
|
| (432 | ) |
|
| (1,432 | ) |
|
| (357 | ) |
Accounts payable |
|
| (27 | ) |
|
| (489 | ) |
|
| 200 |
|
|
| (485 | ) |
Accrued liabilities |
|
| (435 | ) |
|
| 116 |
|
|
| (5,227 | ) |
|
| (4,236 | ) |
Income taxes |
|
| 1,327 |
|
|
| (4,105 | ) |
|
| (95 | ) |
|
| (165 | ) |
Deferred revenue |
|
| 191 |
|
|
| 471 |
|
|
| (1,225 | ) |
|
| (1,370 | ) |
Net cash provided by operating activities |
|
| 14,500 |
|
|
| 12,696 |
| ||||||||
Net cash used in operating activities |
|
| (7,026 | ) |
|
| (4,270 | ) | ||||||||
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
| (2,874 | ) |
|
| (2,627 | ) |
|
| (782 | ) |
|
| (1,319 | ) |
Payment for acquisition of intangible assets |
|
| (1,000 | ) |
|
| — |
|
|
| — |
|
|
| (1,000 | ) |
Purchases of available-for-sale securities |
|
| (22,799 | ) |
|
| (45,766 | ) |
|
| — |
|
|
| (5,820 | ) |
Maturities of available-for-sale securities |
|
| 43,317 |
|
|
| 46,522 |
|
|
| 4,000 |
|
|
| 18,013 |
|
Net cash provided by (used in) investing activities |
|
| 16,644 |
|
|
| (1,871 | ) | ||||||||
Net cash provided by investing activities |
|
| 3,218 |
|
|
| 9,874 |
| ||||||||
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
| 2,627 |
|
|
| 1,169 |
|
|
| 230 |
|
|
| 6 |
|
Payments for taxes related to net share settlement of equity awards |
|
| (2,279 | ) |
|
| (2,385 | ) |
|
| (853 | ) |
|
| (646 | ) |
Payment of contingent consideration obligations |
|
| — |
|
|
| (2,592 | ) | ||||||||
Payments for acquisition of in-process research and development |
|
| (150 | ) |
|
| (1,000 | ) |
|
| — |
|
|
| (150 | ) |
Net cash provided by (used in) financing activities |
|
| 198 |
|
|
| (4,808 | ) | ||||||||
Net cash used in financing activities |
|
| (623 | ) |
|
| (790 | ) | ||||||||
Effect of exchange rate changes on cash |
|
| 50 |
|
|
| 8 |
|
|
| (72 | ) |
|
| 155 |
|
Net change in cash and cash equivalents |
|
| 31,392 |
|
|
| 6,025 |
|
|
| (4,503 | ) |
|
| 4,969 |
|
Cash and Cash Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
| 30,785 |
|
|
| 30,361 |
|
|
| 31,153 |
|
|
| 30,785 |
|
End of period |
| $ | 62,177 |
|
| $ | 36,386 |
|
| $ | 26,650 |
|
| $ | 35,754 |
|
Supplemental Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
| $ | 35 |
|
| $ | 9 |
|
| $ | 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 |
|
| 345 |
|
|
| 395 |
|
|
| 137 |
|
|
| 82 |
|
Right-of-use assets obtained in exchange for new operating lease liabilities |
|
| 234 |
|
|
| 1,012 |
|
|
| 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 June 30,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, 2020,2021, 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 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 and nine months ended June 30,December 31, 2021 are not necessarily indicative of the results that may be expected for the entire 20212022 fiscal year.
Risk and Uncertainties
The COVID-19 pandemic is having, and may continueCertain reclassifications have been made 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 credit losses; inventory reserves; and the valuation of goodwill, intangible assets, other long-lived assets and investments, as of June 30, 2021 and through the date of this Quarterly Report on Form 10-Q. As of the date of issuance of these unaudited condensedprior year's consolidated financial statements to conform to 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 fiscalcurrent year ended September 30, 2020.presentation.
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 retrospective method in the first quarter of fiscal 2021. The adoption of this guidance did not have a material impact on the 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 on the 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) |
| 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
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
(In thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Medical Device |
|
|
|
|
|
| ||||||||||
Product sales |
| $ | 5,493 |
|
| $ | 5,763 |
|
| $ | 15,464 |
|
| $ | 16,240 |
|
Royalties |
|
| 7,752 |
|
|
| 4,752 |
|
|
| 23,135 |
|
|
| 20,365 |
|
Research, development and other |
|
| 2,466 |
|
|
| 2,353 |
|
|
| 7,212 |
|
|
| 7,215 |
|
License fees |
|
| 1,044 |
|
|
| 7,646 |
|
|
| 15,047 |
|
|
| 10,402 |
|
Total Revenue — Medical Device |
|
| 16,755 |
|
|
| 20,514 |
|
|
| 60,858 |
|
|
| 54,222 |
|
In Vitro Diagnostics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
| 6,591 |
|
|
| 6,224 |
|
|
| 18,505 |
|
|
| 17,491 |
|
Research, development and other |
|
| 527 |
|
|
| 145 |
|
|
| 1,802 |
|
|
| 608 |
|
Total Revenue — In Vitro Diagnostics |
|
| 7,118 |
|
|
| 6,369 |
|
|
| 20,307 |
|
|
| 18,099 |
|
Total Revenue |
| $ | 23,873 |
|
| $ | 26,883 |
|
| $ | 81,165 |
|
| $ | 72,321 |
|
Contract assets totaled $7.0$6.7 million and $6.1$7.1 million as of June 30,December 31, 2021 and September 30, 2020,2021, 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 Arrangements.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' SurVeilTM drug-coated balloon (“DCB”) to treat the superficial femoral artery (the “Abbott Agreement”). OurA premarket approval application (“PMA”) for the SurVeilDCB is used to treat peripheral arterial disease in the upper leg (superficial femoral artery) and is currentlywas being evaluated in our TRANSEND pivotal clinical trial.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 SundanceTM DCB product, which is currently being evaluated in aproduct. As of December 31, 2021, six-month patient follow-up visits are complete for the SWING first-in-human, trial.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 theour 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 June 30,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 the third quarter of fiscal 2020, and (iv) $15 million milestone payment in the second quarter of fiscal 2021 upon receipt by Abbott of the clinical study report and related materials from the TRANSCEND pivotal trial that demonstrated the primary safety and primary clinical endpoints are non-inferior to the control device.2021. As of June 30,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 premarket approval (“PMA”)PMA of our SurVeil DCB by the U.S. Food and Drug Administration.FDA. As of June 30,December 31, 2021, consideration from this potential regulatory milestone was fully constrained and excluded from the contract price (i.e., deemed fully constrained), due to the high level of uncertainty of achievement as of June 30,December 31, 2021.
9
Revenue recognized from the Abbott agreement totaled $1.0$1.2 million and $7.6$1.3 million for the three months ended June 30,December 31, 2021 and 2020, respectively, and $14.8 million and $10.4 million for the nine months ended June 30, 2021 and 2020, respectively. The amountall of revenue recognized from the Abbott Agreement thatwhich was included in the respective beginning of fiscal year balances of deferred revenue on the condensed consolidated balance sheets totaled $3.8 million and $3.7 million for the nine months ended June 30, 2021 and 2020, respectively.sheets.
As of June 30,December 31, 2021 and September 30, 2020,2021, deferred revenue from the upfront and milestone payments received under the Abbott Agreement of $16.1$13.7 million and $15.9$14.9 million, respectively, was recorded inon the condensed consolidated balance sheets.
As of June 30,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 $16.1$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 fivefour years through fiscal 2025 as services, principally the TRANSCEND clinical trial, are completed.
9
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 measured at fair value on a recurring basis by level of the fair value hierarchy were as follows:
|
| June 30, 2021 |
|
| 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 |
|
| 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 |
| $ | — |
|
| $ | 5,226 |
|
| $ | — |
|
| $ | 5,226 |
|
| $ | — |
|
| $ | 2,333 |
|
| $ | — |
|
| $ | 2,333 |
|
Available-for-sale securities |
|
| — |
|
|
| 9,791 |
|
|
| — |
|
|
| 9,791 |
|
|
| — |
|
|
| 5,693 |
|
|
| — |
|
|
| 5,693 |
|
Total assets |
| $ | — |
|
| $ | 15,017 |
|
| $ | — |
|
| $ | 15,017 |
|
| $ | — |
|
| $ | 8,026 |
|
| $ | — |
|
| $ | 8,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Contingent consideration (2) |
| $ | — |
|
| $ | — |
|
| $ | 820 |
|
| $ | 820 |
| ||||||||||||||||
Total liabilities |
| $ | — |
|
| $ | — |
|
| $ | 820 |
|
| $ | 820 |
|
|
| September 30, 2020 |
|
| 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 |
|
| 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 |
|
| $ | — |
|
| $ | 5,308 |
|
| $ | — |
|
| $ | 5,308 |
|
Available-for-sale securities |
|
| — |
|
|
| 30,313 |
|
|
| — |
|
| $ | 30,313 |
| ||||||||||||||||
Available-for-sale investments (1) |
|
| — |
|
|
| 9,719 |
|
|
| — |
|
|
| 9,719 |
| ||||||||||||||||
Total assets |
| $ | — |
|
| $ | 48,947 |
|
| $ | — |
|
| $ | 48,947 |
|
| $ | — |
|
| $ | 15,027 |
|
| $ | — |
|
| $ | 15,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Contingent consideration (2) |
| $ | — |
|
| $ | — |
|
| $ | 817 |
|
| $ | 817 |
| ||||||||||||||||
Total liabilities |
| $ | — |
|
| $ | — |
|
| $ | 817 |
|
| $ | 817 |
|
(1) | Fair value of cash equivalents (money market funds) and available-for-sale investments (commercial paper and corporate bond securities) is based on quoted vendor prices and broker pricing where all significant inputs are observable. |
(2) | Fair value of contingent consideration liabilities was determined based on discounted cash flow analyses that included probability and timing of development and regulatory milestone achievements and a discount rate, which are considered significant unobservable inputs as of the acquisition date and as of both December 31, 2021 and September 30, 2021. |
Contingent consideration liabilities are remeasured to fair value each reporting period using discount rates, probabilities of payment and projected payment dates. Increases or decreases in the fair value of the contingent consideration liability can result from changes in the timing or likelihood of achieving milestones and changes in discount periods and rates. Projected contingent payment amounts are discounted back to the current period using a discount cash flow model. Interest accretion and fair value adjustments associated with contingent consideration liabilities are reported in contingent consideration expense (gain) on the condensed consolidated statements of operations.
10
There were 0 transfers of assets between amountsChanges in the contingent consideration liabilities measured at fair value using Level 3 fair value measurements duringinputs were as follows:
(In thousands) |
|
|
|
|
Contingent consideration liability at September 30, 2021 |
| $ | 817 |
|
Additions |
|
| — |
|
Fair value adjustments |
|
| — |
|
Settlements |
|
| — |
|
Interest accretion |
|
| 3 |
|
Foreign currency translation |
|
| — |
|
Contingent consideration liability at December 31, 2021 |
| $ | 820 |
|
Contingent consideration liabilities were associated with the nine months ended June 30,fiscal 2021 acquisition of Vetex Medical Limited and 2020.were included in other long-term liabilities on the condensed consolidated balance sheets; see Note 11 Acquisitions for further disclosures.
5. Supplemental Balance Sheet Information
Investments
The amortized cost, unrealized holding gains and losses, and fair value of available-for-sale securities were as follows:
|
| June 30, 2021 |
|
| December 31, 2021 |
| ||||||||||||||||||||||||||||||||||||||||||
|
| Valuation |
|
| Balance Sheet Classification |
|
| Valuation |
|
| Balance Sheet Classification |
| ||||||||||||||||||||||||||||||||||||
(In thousands) |
| Amortized Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
|
| Current Assets |
|
| Noncurrent Assets |
|
| Amortized Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
|
| Current Assets |
|
| Noncurrent Assets |
| ||||||||||||
Commercial paper and corporate bonds |
| $ | 9,794 |
|
| $ | 1 |
|
| $ | (4 | ) |
| $ | 9,791 |
|
| $ | 5,741 |
|
| $ | 4,050 |
|
| $ | 5,697 |
|
| $ | — |
|
| $ | (4 | ) |
| $ | 5,693 |
|
| $ | 5,693 |
|
| $ | — |
|
Total |
| $ | 9,794 |
|
| $ | 1 |
|
| $ | (4 | ) |
| $ | 9,791 |
|
| $ | 5,741 |
|
| $ | 4,050 |
|
| $ | 5,697 |
|
| $ | — |
|
| $ | (4 | ) |
| $ | 5,693 |
|
| $ | 5,693 |
|
| $ | — |
|
|
| September 30, 2020 |
|
| September 30, 2021 |
| ||||||||||||||||||||||||||||||||||||||||||
|
| Valuation |
|
| Balance Sheet Classification |
|
| Valuation |
|
| Balance Sheet Classification |
| ||||||||||||||||||||||||||||||||||||
(In thousands) |
| Amortized Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
|
| Current Assets |
|
| Noncurrent Assets |
|
| Amortized Cost |
|
| Unrealized Gains |
|
| Unrealized Losses |
|
| Fair Value |
|
| Current Assets |
|
| Noncurrent Assets |
| ||||||||||||
Commercial paper and corporate bonds |
| $ | 30,313 |
|
| $ | 19 |
|
| $ | (19 | ) |
| $ | 30,313 |
|
| $ | 30,313 |
|
| $ | — |
|
| $ | 9,718 |
|
| $ | 2 |
|
| $ | (1 | ) |
| $ | 9,719 |
|
| $ | 7,717 |
|
| $ | 2,002 |
|
Total |
| $ | 30,313 |
|
| $ | 19 |
|
| $ | (19 | ) |
| $ | 30,313 |
|
| $ | 30,313 |
|
| $ | — |
|
| $ | 9,718 |
|
| $ | 2 |
|
| $ | (1 | ) |
| $ | 9,719 |
|
| $ | 7,717 |
|
| $ | 2,002 |
|
6. Inventories
Inventories consisted of the following components:
|
| June 30, |
|
| September 30, |
|
| December 31, |
|
| September 30, |
| ||||
(In thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2021 |
| ||||
Raw materials |
| $ | 3,812 |
|
| $ | 3,758 |
|
| $ | 4,896 |
|
| $ | 4,165 |
|
Work-in process |
|
| 1,263 |
|
|
| 817 |
|
|
| 1,650 |
|
|
| 1,295 |
|
Finished products |
|
| 1,241 |
|
|
| 1,391 |
|
|
| 1,744 |
|
|
| 1,300 |
|
Total |
| $ | 6,316 |
|
| $ | 5,966 |
|
| $ | 8,290 |
|
| $ | 6,760 |
|
7. Other Assets
Other assets consisted of the following:
|
| June 30, |
|
| September 30, |
| ||
(In thousands) |
| 2021 |
|
| 2020 |
| ||
Operating lease right-of-use assets |
|
| 2,519 |
|
|
| 2,508 |
|
Other noncurrent assets |
|
| 2,177 |
|
|
| 1,761 |
|
Other assets |
| $ | 4,696 |
|
| $ | 4,269 |
|
Other noncurrent assets include prepaid expenses related to our ongoing clinical trials and a receivable related to refundable Irish research and development tax credits.
11
8.
Prepaids and Other Assets, Current
Prepaids and other current assets consisted of the following:
|
| December 31, |
|
| September 30, |
| ||
(In thousands) |
| 2021 |
|
| 2021 |
| ||
Prepaid expenses |
| $ | 2,972 |
|
| $ | 1,712 |
|
Irish research and development credits receivable |
|
| 1,140 |
|
|
| 1,164 |
|
CARES Act employee retention credit receivable |
|
| 3,577 |
|
|
| 3,577 |
|
Prepaids and other |
| $ | 7,689 |
|
| $ | 6,453 |
|
In the fourth quarter of fiscal 2021, a benefit of $3.6 million was recorded to reduce operating costs and expenses as a result of our eligibility for the employee retention credit under the provisions of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") enacted in March 2020. This $3.6 million benefit and corresponding receivable reflect anticipated reimbursement of personnel expenses we incurred in fiscal 2021 and 2020.
Intangible Assets
Intangible assets consisted of the following:
|
| June 30, 2021 |
|
| December 31, 2021 |
| ||||||||||||||||||||||||||
(In thousands) |
| Weighted Average Original Life (Years) |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net |
|
| Weighted Average Original Life (Years) |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net |
| ||||||||
Definite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists and relationships |
|
| 8.9 |
|
| $ | 13,516 |
|
| $ | (8,724 | ) |
| $ | 4,792 |
|
|
| 8.9 |
|
| $ | 12,959 |
|
| $ | (9,046 | ) |
| $ | 3,913 |
|
Developed technology |
|
| 11.5 |
|
|
| 9,723 |
|
|
| (4,913 | ) |
|
| 4,810 |
|
|
| 11.9 |
|
|
| 35,899 |
|
|
| (6,370 | ) |
|
| 29,529 |
|
Patents and other |
|
| 14.1 |
|
|
| 3,551 |
|
|
| (2,251 | ) |
|
| 1,300 |
|
|
| 14.1 |
|
|
| 3,551 |
|
|
| (2,335 | ) |
|
| 1,216 |
|
Total definite-lived intangible assets |
|
|
|
|
|
| 26,790 |
|
|
| (15,888 | ) |
|
| 10,902 |
|
|
|
|
|
|
| 52,409 |
|
|
| (17,751 | ) |
|
| 34,658 |
|
Unamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names |
|
|
|
|
|
| 580 |
|
|
| — |
|
|
| 580 |
|
|
|
|
|
|
| 580 |
|
|
| — |
|
|
| 580 |
|
Total intangible assets |
|
|
|
|
| $ | 27,370 |
|
| $ | (15,888 | ) |
| $ | 11,482 |
|
|
|
|
|
| $ | 52,989 |
|
| $ | (17,751 | ) |
| $ | 35,238 |
|
|
| September 30, 2020 |
|
| September 30, 2021 |
| ||||||||||||||||||||||||||
(In thousands) |
| Weighted Average Original Life (Years) |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net |
|
| Weighted Average Original Life (Years) |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net |
| ||||||||
Definite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists and relationships |
|
| 8.9 |
|
| $ | 13,356 |
|
| $ | (7,594 | ) |
| $ | 5,762 |
|
|
| 8.9 |
|
| $ | 13,216 |
|
| $ | (8,878 | ) |
| $ | 4,338 |
|
Developed technology |
|
| 11.5 |
|
|
| 9,685 |
|
|
| (4,200 | ) |
|
| 5,485 |
|
|
| 11.9 |
|
|
| 36,531 |
|
|
| (5,652 | ) |
|
| 30,879 |
|
Patents and other |
|
| 14.1 |
|
|
| 3,551 |
|
|
| (2,095 | ) |
|
| 1,456 |
|
|
| 14.1 |
|
|
| 3,551 |
|
|
| (2,294 | ) |
|
| 1,257 |
|
Total definite-lived intangible assets |
|
|
|
|
|
| 26,592 |
|
|
| (13,889 | ) |
|
| 12,703 |
|
|
|
|
|
|
| 53,298 |
|
|
| (16,824 | ) |
|
| 36,474 |
|
Unamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names |
|
|
|
|
|
| 580 |
|
|
| — |
|
|
| 580 |
|
|
|
|
|
|
| 580 |
|
|
| — |
|
|
| 580 |
|
Total intangible assets |
|
|
|
|
| $ | 27,172 |
|
| $ | (13,889 | ) |
| $ | 13,283 |
|
|
|
|
|
| $ | 53,878 |
|
| $ | (16,824 | ) |
| $ | 37,054 |
|
12
Intangible asset amortization expense was $1.2 million and $0.6 million for both the three months ended June 30, 2021 and 2020 and $1.9 million and $1.8 million for the nine months ended June 30,December 31, 2021 and 2020, respectively. Based on the intangible assets in service as of June 30,December 31, 2021, estimated amortization expense for the remainder of fiscal 2021 and each of the next fivefuture fiscal years is as follows:
(In thousands) |
|
|
|
|
|
|
|
|
Remainder of 2021 |
| $ | 620 |
| ||||
2022 |
|
| 2,471 |
| ||||
Remainder of 2022 |
| $ | 3,436 |
| ||||
2023 |
|
| 1,858 |
|
|
| 3,998 |
|
2024 |
|
| 1,764 |
|
|
| 3,908 |
|
2025 |
|
| 1,725 |
|
|
| 3,871 |
|
2026 |
|
| 757 |
|
|
| 2,940 |
|
2027 |
|
| 2,684 |
| ||||
Thereafter |
|
| 13,821 |
| ||||
Definite-lived intangible assets |
| $ | 34,658 |
|
Future amortization amounts presented above are estimates. Actual future amortization expense may be different as a result of future acquisitions, impairments, changes in amortization periods, foreign currency translation rates, or other factors.
9. Goodwill
Changes in the carrying amount of goodwill by segment were as follows:
(In thousands) |
| In Vitro Diagnostics |
|
| Medical Device |
|
| Total |
|
| In Vitro Diagnostics |
|
| Medical Device |
|
| Total |
| ||||||
Goodwill as of September 30, 2020 |
| $ | 8,010 |
|
| $ | 19,175 |
|
| $ | 27,185 |
| ||||||||||||
Goodwill as of September 30, 2021 |
| $ | 8,010 |
|
| $ | 37,596 |
|
| $ | 45,606 |
| ||||||||||||
Currency translation adjustment |
|
| — |
|
|
| 194 |
|
|
| 194 |
|
|
| — |
|
|
| (706 | ) |
|
| (706 | ) |
Goodwill as of June 30, 2021 |
| $ | 8,010 |
|
| $ | 19,369 |
|
| $ | 27,379 |
| ||||||||||||
Goodwill as of December 31, 2021 |
| $ | 8,010 |
|
| $ | 36,890 |
|
| $ | 44,900 |
|
12
Other noncurrent assets consisted of Contentsthe following:
|
| December 31, |
|
| September 30, |
| ||
(In thousands) |
| 2021 |
|
| 2021 |
| ||
Operating lease right-of-use assets |
| $ | 2,519 |
|
| $ | 2,435 |
|
Other |
|
| 1,602 |
|
|
| 1,283 |
|
Other assets |
| $ | 4,121 |
|
| $ | 3,718 |
|
Other noncurrent assets include prepaid expenses related to our ongoing clinical trials and a receivable related to refundable Irish research and development tax credits.
10. Accrued Other Liabilities
Accrued other liabilities consisted of the following:
|
| December 31, |
|
| September 30, |
| ||
(In thousands) |
| 2021 |
|
| 2021 |
| ||
Accrued professional fees |
| $ | 252 |
|
| $ | 489 |
|
Accrued clinical study expense |
|
| 1,926 |
|
|
| 1,667 |
|
Accrued purchases |
|
| 1,437 |
|
|
| 1,195 |
|
Acquisition of in-process research and development (1) |
|
| 1,454 |
|
|
| 494 |
|
Operating lease liability, current portion |
|
| 672 |
|
|
| 518 |
|
Other |
|
| 335 |
|
|
| 542 |
|
Total accrued other liabilities |
| $ | 6,076 |
|
| $ | 4,905 |
|
| (1) | Acquisition of in-process research and development consists of the present value of guaranteed payments to be made (current portion) in connection with an asset acquisition in fiscal 2018 (Note 10). |
13
Other Long-term Liabilities
Other long-term liabilities consisted of the following:
|
| June 30, |
|
| September 30, |
| ||
(In thousands) |
| 2021 |
|
| 2020 |
| ||
Accrued professional fees |
| $ | 439 |
|
| $ | 239 |
|
Accrued clinical study expense |
|
| 1,393 |
|
|
| 2,206 |
|
Accrued purchases |
|
| 734 |
|
|
| 647 |
|
Acquisition of in-process research and development and intangible assets |
|
| 488 |
|
|
| 1,148 |
|
Due to customers |
|
| 512 |
|
|
| 321 |
|
Construction-in-progress |
|
| — |
|
|
| 272 |
|
Operating lease liability, current portion |
|
| 510 |
|
|
| 436 |
|
Other |
|
| 227 |
|
|
| 278 |
|
Total accrued other liabilities |
| $ | 4,303 |
|
| $ | 5,547 |
|
|
| December 31, |
|
| September 30, |
| ||
(In thousands) |
| 2021 |
|
| 2021 |
| ||
Deferred consideration (1) |
| $ | 4,188 |
|
| $ | 5,106 |
|
Contingent consideration (2) |
|
| 820 |
|
|
| 817 |
|
Unrecognized tax benefits (3) |
|
| 2,446 |
|
|
| 2,538 |
|
Operating lease liabilities (4) |
|
| 3,259 |
|
|
| 3,188 |
|
Other long-term liabilities |
| $ | 10,713 |
|
| $ | 11,649 |
|
(1) | Deferred consideration consists of the present value of guaranteed payments to be made (noncurrent portion) in connection with the fiscal 2021 Vetex acquisition (Note 11) and with an asset acquisition in fiscal 2018 (Note 10). |
(2) | Contingent consideration consists of the fair value of contingent consideration liabilities associated with the fiscal 2021 Vetex acquisition (Note 11). |
(3) | Balance of unrecognized tax benefits (Note 9) includes accrued interest and penalties, if applicable. |
(4) | Operating lease liabilities consist of the non-current portion of the net present value of future minimum lease payments, reduced by the discounted value of leasehold improvement incentives paid or payable to the Company. |
11.6. Debt
On September 14, 2020, the Company entered into a secured revolving credit facility pursuant to a Loan and Security Agreement, (thewhich was amended by a First Amendment on July 2, 2021 (as amended, the "Loan Agreement") with Bridgewater Bank (“Bridgewater”). The Loan Agreement provides for availability under a secured revolving line of credit of up to $25 million (the "Revolving Line of Credit"Credit Facility"). The outstanding balance on the Revolving Line of Credit Facility was 0$10.0 million as of June 30,both December 31, 2021 and September 30, 2020.2021.
Availability under the Revolving Line of Credit Facility is subject to a borrowing base that equals 80% of the margin value of securities collateral that has been pledged to the Bank.Bridgewater. The Revolving Line of Credit will initiallyFacility was scheduled to mature on September 14, 2021, but the Company extended the maturity to September 14, 2022, as permitted under the Loan Agreement. The maturity date may be extended by the Company for up to twoone additional extension periodsperiod of twelve months subject to certain conditions set forth in the Loan Agreement. The Company's obligations under the Loan Agreement are secured by substantially all of the Company’s and its material subsidiaries' assets, other than intellectual property, real estate and foreign assets, including equity in foreign subsidiaries. The Company has also pledged the stock of certain of its subsidiaries to secure such obligations. Interest under the Loan Agreement accrues at a rate per annum equal to the greater of (i) 3.25% per annum and (ii) the 90-day interest rate yield for U.S. Government Treasury Securities plus 2.75% per annum. A facility fee is payable on unused commitments at a rate of 0.075% quarterly. For the ninethree months ended June 30,December 31, 2021 and 2020, unused commitment fees, reported within interest expense on the condensed consolidated statements of operations, totaled 0 and less than $0.1 million.million, respectively.
The Loan Agreement contains affirmative and negative covenants customary for a transaction of this type which, among other things, require the Company to meet certain financial tests, including (i) minimum liquidity, (ii) minimum current ratio, (iii) minimum adjusted EBITDA, and (iv) minimum tangible net worth. The Loan Agreement also contains covenants which, among other things, limit the Company's ability to incur additional debt, make certain investments, create or permit certain liens, create or permit restrictions on the ability of subsidiaries to pay dividends or make other distributions, consolidate or merge, and engage in other activities customarily restricted in such agreements, in each case subject to exceptions permitted by the Loan Agreement. The Loan Agreement also contains customary events of default, the occurrence of which would permit the BankBridgewater to terminate its commitment and accelerate the Revolving Line of Credit.Credit Facility.
1314
12.7. Stock-based Compensation Plans
The Company has stock-based compensation plans approved by its shareholders under which it grants stock options, restricted stock awards, restricted stock units and deferred stock units to officers, directors and key employees. Stock-based compensation expense was reported as follows in the condensed consolidated statements of operations:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
| |||||||||||||||
|
| June 30, |
|
| June 30, |
|
| December 31, |
| |||||||||||||||
(In thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||
Product costs |
| $ | 23 |
|
| $ | 34 |
|
| $ | 92 |
|
| $ | 82 |
|
| $ | 30 |
|
| $ | 37 |
|
Research and development |
|
| 329 |
|
|
| 189 |
|
|
| 918 |
|
|
| 619 |
|
|
| 453 |
|
|
| 284 |
|
Selling, general and administrative |
|
| 1,104 |
|
|
| 1,117 |
|
|
| 3,308 |
|
|
| 3,336 |
|
|
| 1,197 |
|
|
| 1,112 |
|
Total |
| $ | 1,456 |
|
| $ | 1,340 |
|
| $ | 4,318 |
|
| $ | 4,037 |
|
| $ | 1,680 |
|
| $ | 1,433 |
|
As of June 30,December 31, 2021, approximately $9.0$13.9 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 2.32.8 years.
Stock Option Awards
During the nine months ended June 30, 2021 and 2020, theThe Company awarded 244,000 and 291,000awards stock options to officers, directors and key employees with a weighted average grant dateand uses the Black-Scholes option pricing model to determine the fair value perof stock options as of the date of each grant. Stock option of $14.08 and $14.12, respectively.grant activity was as follows:
|
| Three Months Ended |
| |||||
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
Stock option grant activity: |
|
|
|
|
|
|
|
|
Stock options granted |
|
| 245,000 |
|
|
| 217,000 |
|
Weighted average grant date fair value |
| $ | 16.36 |
|
| $ | 13.42 |
|
Weighted average exercise price |
| $ | 43.93 |
|
| $ | 37.44 |
|
Restricted Stock Awards
During the ninethree months ended June 30,December 31, 2021 and 2020, the Company awarded 68,00078,000 and 64,00065,000 restricted stock shares, respectively, to certain key employees and officers with a weighted average grant date fair value per share of $38.06$43.93 and $41.50,$37.44, respectively. Restricted Stock is valued based on the market value of the shares as of the date of grant.
Restricted Stock Unit Awards
During each of the ninethree months ended June 30,December 31, 2021 and 2020, the Company awarded 12,000 and 18,0006,000 restricted stock units respectively,(“RSUs”) to directors and to key employees in foreign jurisdictions with a weighted average grant date fair value per unit of $45.13$43.93 and $40.36,$37.44, respectively. RSUs are valued based on the market value of the shares as of the date of grant.
Employee Stock Purchase Plan
Our U.S. employees are eligible to participate in the amended 1999 Employee Stock Purchase Plan (“ESPP”) approved by our shareholders. SharesDuring the three months ended December 31, 2021 and 2020, 0 shares were issued under the ESPP totaled 8,000 and 7,000 for the nine months ended June 30, 2021 and 2020, respectively.ESPP.
13.8. Net (Loss) IncomeLoss Per Share Data
Basic net (loss) income per common share is calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per common share is computed by dividing net (loss) income by the weighted average number of common and common equivalent shares outstanding during the period. The Company’s potentially dilutive common shares are those that result from dilutive common stock options and non-vested stock relating to restricted stock awards and restricted stock units. However, these items have been excluded from the calculation of diluted net loss per share for the three months ended June 30,December 31, 2021 and 2020 as their effect was anti-dilutive as a result of the net loss incurred for that period.those periods. Therefore, diluted weighted average number of shares outstanding and diluted net loss per share were the same as basic weighted average number of shares outstanding and net loss per share for the three months ended June 30, 2021.December 31, 2021 and 2020.
1415
The following table sets forthpresents the calculationdenominator for the computation of diluted weighted average shares outstanding:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
| |||||||||||||||
|
| June 30, |
|
| June 30, |
|
| December 31, |
| |||||||||||||||
(In thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||
Basic weighted average shares outstanding |
|
| 13,837 |
|
|
| 13,601 |
|
|
| 13,740 |
|
|
| 13,577 |
|
|
| 13,878 |
|
|
| 13,668 |
|
Dilutive effect of outstanding stock options, non-vested restricted stock, and non-vested restricted stock units |
|
| — |
|
|
| 185 |
|
|
| 219 |
|
|
| 198 |
|
|
| — |
|
|
| — |
|
Diluted weighted average shares outstanding |
|
| 13,837 |
|
|
| 13,786 |
|
|
| 13,959 |
|
|
| 13,775 |
|
|
| 13,878 |
|
|
| 13,668 |
|
The calculation of weighted average diluted shares outstanding excludes outstanding stock options associated with the right to purchase less than 0.1 million shares of common stock for the three months ended June 30, 2020 and less than 0.1 million shares of common stock for both the nine months ended June 30, 2021 and 2020 as their inclusion would have had an anti-dilutive effect on diluted net income per share for the period.
14.9. Income Taxes
For interim income tax reporting, the Company estimates its annual effective tax rate and applies it to fiscal year-to-date pretax (loss) income, excluding unusual or infrequently occurring discrete items. Tax jurisdictions with losses for which tax benefits cannot be realized are excluded. The Company reported income tax expensebenefit of $(0.8)$0.7 million and income tax benefitexpense of $1.2$(0.2) million for the three months ended June 30,December 31, 2021 and 2020, respectively, and income tax expense of $(2.4) million and income tax benefit of $3.4 million for the nine months ended June 30, 2021 and 2020, respectively. For the nine months ended June 30, 2020, the income tax benefit includes a discrete tax benefit of $1.8 million as a result of our ability under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), enacted in March 2020, to carry back net operating losses (“NOLs”) incurred to periods when the statutory rate was 35% versus the current tax rate of 21%.
The effective income tax rate for the three and nine months ended June 30,December 31, 2021 and 2020 differs from the U.S. federal statutory tax rate of 21% primarily due to the discrete tax benefits recognized under the CARES Act in the second quarter of fiscal 2020, favorable impacts of the U.S. federal research and development tax credits, in both the three-and nine-month periods, stock award activity, in the three-month period, and operating results of our Irish subsidiary, where tax benefit is offset by a valuation allowance. The Company recognized discrete tax benefits related to stock-based compensation awards vested, expired, cancelled and exercised of $0.1 million and less than $0.1 million in both the three months ended June 30, 2021 and 2020 and $0.7 million and $0.3 million in the nine months ended June 30,December 31, 2021 and 2020, respectively.
The total amount of unrecognized tax benefits, excluding interest and penalties that, if recognized, would affect the effective tax rate was $3.1$3.0 million and $2.7 million as of June 30,December 31, 2021 and September 30, 2020,2021, respectively. Interest and penalties related to unrecognized tax benefits are recorded in the income tax benefit.benefit (provision).
The Company files income tax returns, including returns for its subsidiaries, in the U.S. federal jurisdiction and in various state jurisdictions, as well as several non-U.S. jurisdictions. Uncertain tax positions are related to tax years that remain subject to examination. U.S. federal income tax returns for years prior to fiscal 20172018 are no longer subject to examination by federal tax authorities. For tax returns for U.S. state and local jurisdictions, the Company is no longer subject to examination for tax years generally before fiscal 2009.2011. For tax returns for non-U.S. jurisdictions, the Company is no longer subject to income tax examination for years prior to fiscal 2016.2017. Additionally, the Company has been indemnified of liability for any taxes relating to Creagh Medical, NorMedix and NorMedixVetex for periods prior to theirthe respective acquisition dates, pursuant to the terms of the related share purchase agreements. There were 0 undistributed earnings in foreign subsidiaries as of June 30,December 31, 2021 and September 30, 2020.2021.
15
15. Segment Information
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, who is the Company’s Chief Executive Officer, in deciding how to allocate resources and in assessing performance. We operate 2 reportable segments:
|
|
|
|
Segment revenue, operating (loss) income, and depreciation and amortization were as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| June 30, |
|
| June 30, |
| ||||||||||
(In thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Device |
| $ | 16,755 |
|
| $ | 20,514 |
|
| $ | 60,858 |
|
| $ | 54,222 |
|
In Vitro Diagnostics |
|
| 7,118 |
|
|
| 6,369 |
|
|
| 20,307 |
|
|
| 18,099 |
|
Total revenue |
| $ | 23,873 |
|
| $ | 26,883 |
|
| $ | 81,165 |
|
| $ | 72,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Device |
| $ | (2,491 | ) |
| $ | 532 |
|
| $ | 5,480 |
|
| $ | (1,344 | ) |
In Vitro Diagnostics |
|
| 3,378 |
|
|
| 3,254 |
|
|
| 10,407 |
|
|
| 9,315 |
|
Total segment operating income |
|
| 887 |
|
|
| 3,786 |
|
|
| 15,887 |
|
|
| 7,971 |
|
Corporate |
|
| (3,271 | ) |
|
| (2,622 | ) |
|
| (8,695 | ) |
|
| (7,229 | ) |
Total operating (loss) income |
| $ | (2,384 | ) |
| $ | 1,164 |
|
| $ | 7,192 |
|
| $ | 742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Device |
| $ | 1,631 |
|
| $ | 1,424 |
|
| $ | 5,004 |
|
| $ | 4,318 |
|
In Vitro Diagnostics |
|
| 121 |
|
|
| 112 |
|
|
| 314 |
|
|
| 331 |
|
Corporate |
|
| 92 |
|
|
| 254 |
|
|
| 292 |
|
|
| 741 |
|
Total depreciation and amortization |
| $ | 1,844 |
|
| $ | 1,790 |
|
| $ | 5,610 |
|
| $ | 5,390 |
|
The Corporate category includes expenses that are not fully allocated to Medical Device and In Vitro Diagnostics segments. These Corporate costs are related to administrative corporate functions, such as executive management, corporate accounting, legal, human resources and Board of Directors. Corporate may also include expenses, such as litigation, which are not specific to a segment and thus not allocated to the operating segments.
Asset information by segment is not presented because the Company does not provide its chief operating decision maker assets by segment, as the data is not readily available.
16
16. Leases
Operating lease right-of-use assets and lease liabilities were as follows:
|
| June 30, |
|
| September 30, |
| ||
|
| 2021 |
|
| 2020 |
| ||
Right-of-use assets: |
|
|
|
|
|
|
|
|
Other assets |
| $ | 2,519 |
|
| $ | 2,508 |
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities: |
|
|
|
|
|
|
|
|
Other accrued liabilities |
| $ | 510 |
|
| $ | 436 |
|
Other long-term liabilities |
|
| 3,321 |
|
|
| 3,340 |
|
Total operating lease liabilities |
| $ | 3,831 |
|
| $ | 3,776 |
|
As of June 30, 2021, operating lease maturities for the remainder of fiscal 2021 and each of the next five fiscal years were as follows:
(In thousands) |
|
|
|
|
Remainder of 2021 |
| $ | 162 |
|
2022 |
|
| 657 |
|
2023 |
|
| 671 |
|
2024 |
|
| 685 |
|
2025 |
|
| 699 |
|
2026 |
|
| 604 |
|
Thereafter |
|
| 894 |
|
Total expected operating lease payments |
|
| 4,372 |
|
Less: Imputed interest |
|
| (541 | ) |
Total operating lease liabilities |
| $ | 3,831 |
|
Operating lease cost was $0.2 million for both the three months ended June 30, 2021 and 2020 and $0.6 million and $0.5 million for the nine months ended June 30, 2021 and 2020, respectively. Cash paid for operating lease liabilities approximated operating lease cost for the three and nine month periods ended June 30, 2021 and 2020.
17.10. Commitments and Contingencies
InnoCore Technologies BV. In 2006, the Company entered into a license agreement whereby the Company obtained an exclusive license to a drug-delivery coating for licensed products within the vascular field, which included peripheral, coronary and neurovascular biodurable stent products. The license requires an annual, minimum payment of approximately $0.2 million (at the Euro to US dollar exchange rate as of June 30, 2021) until the last patent expires, which is currently estimated to be May 2027. The total minimum future payments associated with this license are approximately $1.4 million as of June 30, 2021. The license is currently utilized by one of the Company’s drug delivery customers.
Clinical Trials. The Company has engaged clinical trial clinical research organization (“CRO”) consultants to assist with the administration of its ongoing clinical trials. The Company has executed separate contracts with two CROs for services rendered in connection with the TRANSCEND pivotal clinical trial for the SurVeil DCB, including pass-through expenses paid by the CROs, of up to approximately $29 million in the aggregate. As of June 30,December 31, 2021, an estimated $8$7 million remains to be paid on these contracts, which may vary depending on actual pass-through expenses incurred to execute the trial. The Company estimates that the total cost of the TRANSCEND clinical trial will be in the range of $35$37 million to $40 million from inception to completion. In the event the Company were to terminate any trial, it may incur certain financial penalties which would become payable to the CRO for costs to wind down the terminated trial.
Asset Acquisitions. In the fiscal 2019, the Company acquired certain intellectual property assets supporting ongoing development of the Company’s medical device pipeline and paid the sellers $0.8 million in fiscal 2019 and $0.2 million in the first quarter of fiscal 2021. An additional $1.1 million in payments is contingent upon achievement of certain strategic milestones within a contingency period ending in fiscal 2022.
17
In fiscal 2018, the Company acquired certain intellectual property assets of Embolitech, LLC (the “Embolitech Transaction”). As part of the Embolitech Transaction, the Company paid the sellers $5.0 million in fiscal 2018, $1.0 million in the second quarter of fiscal 2020, and $1.0 million in the first quarter of fiscal 2021. The Company is obligated to pay additional installments totaling $2.5$2.5 million in fiscal 2022 through fiscal 2024. These payments may be accelerated upon the occurrence of certain sales and regulatory milestones. An additional $1.0$1.0 million payment is contingent upon the achievement of certain regulatory milestones within a contingency period ending in 2033.
16
Business Combinations. See Note 11 Acquisitions for disclosure of the fiscal 2021 acquisition of Vetex Medical Limited and associated deferred and contingent consideration liabilities.
As of June 30, 2021, $0.5 million and $1.8 million related to these asset acquisitions was recorded in other accrued liabilities and other long-term liabilities, respectively, on the condensed consolidated balance sheets.As of September 30, 2020, $1.1 million and $2.2 million related to these asset acquisitions was reported in other accrued liabilities and other long-term liabilities, respectively, on the condensed consolidated balance sheets.11. Acquisitions
18. Subsequent Events
Acquisition of Vetex Medical Limited
On July 2, 2021, Surmodics completedacquired all of the acquisition of all outstanding shares of Vetex Medical Limited (“Vetex”). Vetex, which was formerly privately held and is based in Galway, Ireland, develops and manufactures medical devices focused on venous clot removal solutions. The transaction expandsexpanded Surmodics’ thrombectomy portfolio with a second Food and Drug Administration (“FDA”)FDA 510(k)-cleared device, a mechanical venous thrombectomy device. The acquisition was accounted for as a business combination. The acquired assets, liabilities and operating results of Vetex have been included on our condensed consolidated financial statements within the Medical Device segment from the date of acquisition.
Surmodics acquired Vetex with an upfront cash payment of $39.9 million funded using cash on hand and $10.0 million from the Revolving Credit Facility. The Company is obligated to pay additional installments totaling $3.5 million in fiscal 2024 through fiscal 2027. These payments may be accelerated upon the occurrence of certain product development and regulatory milestones. An additional $3.5 million in payments is contingent upon the achievement of certain product development and regulatory milestones within a contingency period ending in fiscal 2027. The Company recognized $0.5 million in acquisition transaction, integration and other costs related to the Vetex acquisition in the three and nine months ended June 30, 2021 in the condensed consolidated statements of operations.
The estimatedacquisition date fair value of purchase consideration and was as follows:
(In thousands) |
|
|
|
|
Consideration paid at closing |
| $ | 39,985 |
|
Deferred consideration |
|
| 3,257 |
|
Contingent consideration |
|
| 814 |
|
Total purchase consideration |
|
| 44,056 |
|
Less: Cash acquired |
|
| (432 | ) |
Total purchase consideration, net of cash acquired |
| $ | 43,624 |
|
The fair value of contingent consideration was derived using a discounted cash flow approach based on Level 3 inputs. See Note 4 Fair Value Measurements for additional disclosures regarding contingent consideration.
As of December 31, 2021, the preliminary allocation is preliminaryof purchase consideration was as the acquisition was recently completed. follows:
(In thousands) |
|
|
|
|
Asset (Liability) |
|
|
|
|
Current assets |
| $ | 66 |
|
Property and equipment |
|
| 37 |
|
Intangible assets |
|
| 27,600 |
|
Other non-current assets |
|
| 133 |
|
Accrued compensation |
|
| (236 | ) |
Other accrued liabilities |
|
| (111 | ) |
Deferred income taxes |
|
| (2,954 | ) |
Net assets acquired |
|
| 24,535 |
|
Goodwill |
|
| 19,089 |
|
Total purchase consideration, net of cash acquired |
| $ | 43,624 |
|
The preliminary estimated totalallocation of purchase consideration is approximately $45 million, which consistedconsidered preliminary as of $40 millionDecember 31, 2021, with provisional amounts related to current assets, other non-current assets and deferred income taxes. We expect to finalize the allocation of cash paid at closing, lesspurchase consideration no later than $1 million operating liabilities assumed, $3 million deferred consideration, and $1 million contingent consideration. Deferred consideration and contingent consideration are stated at their respectiveone year from the acquisition date estimated fair values. The Company expects to recognize approximately $28 million indate.
Acquired intangible assets approximately $3 million in deferredconsist of developed technology. We used the income approach, specifically the discounted cash flow method and the incremental cash flow approach using Level 3 inputs, to derive the fair value of the developed technology. The developed technology is amortized on a straight-line basis over its estimated useful life of 12 years. The amortization of the acquired intangible assets is tax liabilities, and approximately $19 million in goodwill within the Medical Device operating segment. deductible.
17
The goodwill to be recorded from the Vetex acquisition is a result of expected synergies from integrating the Vetex business into the Company’s Medical Device segment and from acquiring and retaining the existing Vetex workforce. The goodwill is not deductible for tax purposes.
Amendment12. Segment Information
Segment revenue, operating (loss) income, and depreciation and amortization were as follows:
|
| Three Months Ended |
| |||||
|
| December 31, |
| |||||
(In thousands) |
| 2021 |
|
| 2020 |
| ||
Revenue: |
|
|
|
|
|
|
|
|
Medical Device |
| $ | 16,908 |
|
| $ | 16,196 |
|
In Vitro Diagnostics |
|
| 6,095 |
|
|
| 6,101 |
|
Total revenue |
| $ | 23,003 |
|
| $ | 22,297 |
|
|
|
|
|
|
|
|
|
|
Operating (loss) income: |
|
|
|
|
|
|
|
|
Medical Device |
| $ | (3,792 | ) |
| $ | (593 | ) |
In Vitro Diagnostics |
|
| 3,155 |
|
|
| 3,220 |
|
Total segment operating (loss) income |
|
| (637 | ) |
|
| 2,627 |
|
Corporate |
|
| (2,804 | ) |
|
| (2,534 | ) |
Total operating (loss) income |
| $ | (3,441 | ) |
| $ | 93 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
Medical Device |
| $ | 2,194 |
|
| $ | 1,652 |
|
In Vitro Diagnostics |
|
| 86 |
|
|
| 105 |
|
Corporate |
|
| 96 |
|
|
| 103 |
|
Total depreciation and amortization |
| $ | 2,376 |
|
| $ | 1,860 |
|
The Corporate category includes expenses that are not fully allocated to Loan Agreementthe Medical Device and In Vitro Diagnostics segments. These Corporate costs are related to administrative corporate functions, such as executive management, corporate accounting, information technology, legal, human resources and Board of Directors. Corporate may also include expenses, such as acquisition-related costs and litigation, which are not specific to a segment and thus not allocated to the reportable segments.
On July 2, 2021,Asset information by segment is not presented because the Company entered into a First Amendment to Loan and Security Agreement (the “Amendment”) with Bridgewater amendingdoes not provide its chief operating decision maker assets by segment, as the Loan Agreement. Among other things, the Amendment modifies certain affirmative and negative covenants, specifically the amount the Company may pay for permitted acquisitions and the terms of the required minimum current ratio. See Note 11 Debt for additional information regarding the Loan Agreement.data is not readily available.
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information management believes is useful in understanding the operating results, cash flows and financial condition of Surmodics. The discussion should be read in conjunction with both the unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations, each included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.2021. This discussion contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statement entitled “Forward-Looking Statements” located at the end of this Item 2.
Overview
Surmodics, Inc. and subsidiaries (referred to as “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.
Acquisition of Vetex Medical Limited
On July 2,In the fourth quarter of fiscal 2021, Surmodics completed the acquisition of all outstanding shares of Vetex Medical Limited (“Vetex”). Vetex, which was formerly privately held and is based in Galway, Ireland, develops and manufactures medical devices focused on venous clot removal solutions. Surmodics acquired Vetex with an upfront cash payment of $39.9 million funded using cash on hand and $10 million from the Company’s $25 million revolving credit facility. Additional payments of up to $7 million, $3.5 million of which are guaranteed, may be made upon achievement of certain product development and regulatory milestones.
The transaction expands Surmodics’ thrombectomy portfolio with a second Food and Drug Administration (“FDA”) 510(k)-cleared device, a mechanical thrombectomy catheterwhich is marketed as our PounceTM Venous Thrombectomy Catheter, for use in venous vascular beds that is specifically designed to remove large, mixed-morphology blood clots commonly found with venous thromboembolism (“VTE”). The Vetex venous thrombectomy catheterPounce Venous Thrombectomy Catheter has also received Conformité Européenne Mark (“CE Mark”) approval, which is a prerequisite for commercialization in the E.UEuropean Union (“E.U.”). The device’s dual action technology efficiently removes mixed-morphology clot in a single session, minimizing the need for thrombolytics and without capital equipment. Refer to the Product Development discussion below for next steps in preparation for commercialization of the venous thrombectomy catheter.
Product DevelopmentVascular Intervention Device Platforms
Our business model for our whole-product solutions strategy withinWithin our Medical Device segment, is to design,we develop and manufacture highly differentiatedour own proprietary vascular intervention medical device products, that incorporatewhich leverage our proprietary catheter, balloon, thrombectomy and/orexpertise in surface modification coating technologies, to improve patient outcomesproduct design and reduce procedure costs, while maintaining patient safety.engineering capabilities. We are focused onbelieve our strategy of developing devices that meet the needs of a spectrum of care settings ranging from hospitals, to ambulatory surgery centers, to office-based interventional labs in order to provide improved care and address unmet needs in the treatment of peripheral artery disease (“PAD”) and other vascular diseases.
Below is a brief summary of our pipeline ofown medical device products underhas increased, and will continue to increase, our relevance in the medical device industry. This strategy is key to our future growth and profitability, providing us with the opportunity to capture more revenue and operating margin with vascular intervention products than we would by licensing our device-enabling technologies.
Highlighted below are select medical device products within our development pipeline that are a focus for fiscal 2022 development and recently commercialized, grouped bycommercialization efforts. For both our thrombectomy and radial access platforms, we are pursuing commercialization in fiscal 2022 via a direct sales strategy leveraging a small team of experienced sales professionals and clinical specialists. Beginning in the third quarter of our fiscal 2022, we expect to see modest, but meaningful and growing revenue associated with the adoption, utilization, and sales of our SublimeTM and Pounce platform products.
19
Pounce Thrombectomy Platform
We have successfully developed, internally and through acquisitions, two FDA 510(k) approved mechanical thrombectomy devices for the non-surgical removal of thrombi and emboli (clots) from the peripheral vasculature (legs). In addition to FDA clearance, our Pounce Venous Thrombectomy Catheter has received the CE Mark approval prerequisite for commercialization in the E.U. We believe that the ease of use, intuitive design and efficient performance of our thrombectomy products make these devices a viable first-line treatment option for interventionalists. These devices include:
• | Pounce Arterial Thrombo-embolectomy System for removal of clots from arteries in the legs associated with peripheral arterial disease (“PAD”). Clinical product evaluations began in the second half of fiscal 2021 and are continuing into fiscal 2022. Commercial sales began in the first quarter of fiscal 2022. |
• | Pounce Venous Thrombectomy Catheter for removal of clots from veins in the legs generally associated with VTE. Process and manufacturing validations for our Pounce Venous Thrombectomy Catheter are underway and are expected to continue through the second quarter of fiscal 2022. We expect to initiate clinical product evaluation activities for our venous thrombectomy catheter in the second half of fiscal 2022, an important precursor to commercialization. |
Sublime Radial Access Platform
We have successfully developed and secured FDA 510(k) regulatory approval for a suite of devices that enable vascular intervention via radial (wrist) access. These devices include:
• | Sublime guide sheath to provide the conduit for peripheral intervention with an access point at the wrist that enables treatment all the way to the pedal loop of the foot; |
• | Sublime .014 RX PTA Dilatation Catheter for treatment of lesions in arteries below the knee all the way to the patient’s foot and around the pedal loop; and |
• | Sublime .018 RX PTA Dilatation Catheter for treatment of lesions in arteries above and below the knee. |
Commercial sales began in the fourth quarter of fiscal 2021 for our Sublime guide sheath and Sublime .014 RX PTA dilatation catheter. For our Sublime .018 RX PTA dilatation catheter product, platform.commercial sales began in the first quarter of fiscal 2022.
Drug-coated BalloonsBalloon Platform
Surmodics’ drug-coated balloons (“DCBs”) are designed for vascular interventions to treat peripheral arterial disease (“PAD”)PAD, a condition that causes a narrowing of the blood vessels supplying the extremities.
• | SurVeil™ DCB – paclitaxel-coated DCB to treat PAD in the upper leg (superficial femoral artery). In fiscal 2018, we entered into an agreement (the “Abbott Agreement”) with Abbott Vascular, Inc. (“Abbott”) that provides Abbott with exclusive worldwide commercialization rights to the SurVeil DCB product. Our SurVeil DCB utilizes a proprietary paclitaxel drug-excipient formulation for a durable balloon coating and is manufactured using an innovative process to improve coating uniformity. |
We announcedThe SurVeil DCB has the necessary regulatory approval for commercialization in Januarythe E.U., and timing of commercialization in the E.U. is at the discretion of our exclusive distribution partner, Abbott. In fiscal 2021, that ourthe TRANSCEND pivotal clinical trial the pivotal trial for theof our SurVeilDCB met both the primary safety and primary efficacy endpoints and the SurVeil DCB was found to be non-inferior to the control device in those endpoints to the Medtronic IN.PACT® Admiral® DCB, while delivering a substantially lower drug dose.
19
In the second quarter of fiscal 2021, we delivered to Abbott the written clinical report and related materials that demonstrated the primary safety endpoint and primary efficacy endpoint for the TRANSCEND clinical study were met. As a result, we received a $15 million milestone payment from Abbott in the second quarter of fiscal 2021, of which $10.8 million was recognized as license fee revenue in the second quarter of fiscal 2021.endpoints.
In June 2021, we submitted the fourth and final module of our PMA submissionapplication to the FDA for premarket approval (“PMA”) of our SurveilDCB, including certain long-term vital status data required by the FDA. We are targeting the second quarter of fiscal 2022 for receiptThe Agency has requested certain additional data, and we continue to work closely with the Agency to fulfill requirements regarding our PMA application. Receipt of PMA from the FDA, which isif granted, would be expected to fulfill the requirements for a $30 million (if received by December 31, 2022) or $27 million (if received after December 31, 2022) milestone payment pursuant to the Abbott Agreement.
• | Sundance™ DCB – sirolimus-coated DCB |
20
• |
|
Thrombectomy
Surmodics’ thrombectomy products are mechanical devices designed for the removal of clots from venous and arterial vascular beds without the need for capital equipment, while minimizing the need for thrombolytics.
|
|
|
|
Radial Access
Surmodics’ SublimeTM radial access and therapeutic devices are designed to provide wrist access to the peripheral vasculature.
|
|
|
|
|
|
Clinical product evaluations of both our Sublime guide sheath and .014 RX PTA dilatation catheter products began in the second quarter of fiscal 2021 and are expected to continue through the second half of fiscal 2021. We are targeting the first half of fiscal 2022 to initiate clinical product evaluation activities for our Sublime .018 RX PTA dilatation catheter product.
20
Specialty Catheters
|
|
|
|
For more information regarding our product development and commercialization strategy,vascular intervention medical devices, see Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.2021.
Coating Technology Patents
We generate royalties revenue from licensing our proprietary surface coating technology to customers. Medical Device royalties revenue was 30%, 35% and 38% of our total revenue for fiscal 2020, 2019 and 2018, respectively. The most significant source of royalties revenue was derived from our hydrophilic coating technology. The latest generation of our hydrophilic coating technology, our Serene™ hydrophilic coating, is protected by a family of patents that begin to expire in 2033. Royalties revenue associated with our Serene hydrophilic coating technology increased approximately 27% in fiscal 2020, compared to the prior year, driven by customer product launches and resulting market share increases associated with customer device applications that incorporate this next-generation coating technology.
The family of patents that protected our fourth-generation PhotoLink™ hydrophilic coating technology expired in the first quarter of fiscal 2020 in all countries where patent coverage existed for the technology, except in Japan, where the relevant patent expired in the first quarter of fiscal 2021. Medical Device royalties revenue associated with our fourth-generation hydrophilic coating technology was approximately 14%, 21% and 21% of our total revenue for fiscal 2020, 2019 and 2018, respectively. Of the license agreements using our fourth-generation and early-generation Photolink technologies, most continue to generate royalties revenue for know-how and other proprietary rights, at a reduced royalty rate, beyond patent expiration. The amount of the decline in royalties and license fee revenue in fiscal 2020, compared to the prior year, related specifically to the expiration of fourth-generation hydrophilic coating patents was approximately $5.5 million. In fiscal 2021, we expect a decline of approximately $1.0 million to $1.5 million in royalties and license fee revenue, compared to the prior year, specific to the tail-end impact of these fourth-generation patent expirations, which reflects the mitigating impact of growth among our fourth-generation coating customers. In addition, we expect the decline in fourth-generation coating royalties to be more than offset by continued growth in our next-generation Serene hydrophilic coating royalties portfolio.
COVID-19COVID Pandemic Update
Our business, operations and financial condition and results have been and may continue to be impacted by the COVID-19COVID pandemic. In fiscal 2020, we experienced significant and unpredictable reductions in both royalties and license fee revenue and product sales, primarily in our Medical Device business, as our customers were negatively impacted by the decline in the volume of elective procedures that resulted from the global healthcare system’s response to COVID-19.COVID. As fiscal 2021 has progressed, we are seeingobserved a diminishing degree of COVID-related impacts to our reported revenue. However, thein fiscal 2022, we are continuing to see COVID-related impacts to our reported revenue. The extent to which the COVID-19COVID pandemic continues to impact the Company’s results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and longevity of COVID-19COVID and its variants, the resurgence of COVID-19COVID in regions that have begun to recover from the initial impact of the pandemic, the impact of COVID-19COVID on economic activity, the emergence of new variants of COVID, and the actions to contain its impact on public health and the global economy. 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.
21
Table of Contents2021.
Results of Operations
Three and Nine Months Ended June 30,December 31, 2021 and 2020
Revenue. Revenue for the thirdfirst quarter of fiscal 20212022 was $23.9 million, a decrease of 11.2%, compared to the third quarter of fiscal 2020. Revenue for the first nine months of fiscal 2021 was $81.2$23.0 million, an increase of 12.2%,3.2% compared to the same prior-year period. The following is a summary of revenue by operating segment:streams within each reportable segment.
|
| Three Months Ended June 30, |
|
| Nine Months Ended June 30, |
|
| Three Months Ended December 31, |
| |||||||||||||||||||||||||||||||
(In thousands) |
| 2021 |
|
| 2020 |
|
| % Change |
|
| 2021 |
|
| 2020 |
|
| % Change |
|
| 2021 |
|
| 2020 |
|
| $ Change |
|
| % Change |
| ||||||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Medical Device |
| $ | 16,755 |
|
| $ | 20,514 |
|
|
| (18.3 | )% |
| $ | 60,858 |
|
| $ | 54,222 |
|
|
| 12.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
| $ | 6,788 |
|
| $ | 4,561 |
|
| $ | 2,227 |
|
|
| 49 | % | ||||||||||||||||||||||||
Royalties |
|
| 6,886 |
|
|
| 7,909 |
|
|
| (1,023 | ) |
|
| (13 | )% | ||||||||||||||||||||||||
License fees |
|
| 1,213 |
|
|
| 1,425 |
|
|
| (212 | ) |
|
| (15 | )% | ||||||||||||||||||||||||
Research, development and other |
|
| 2,021 |
|
|
| 2,301 |
|
|
| (280 | ) |
|
| (12 | )% | ||||||||||||||||||||||||
Medical Device Revenue |
|
| 16,908 |
|
|
| 16,196 |
|
|
| 712 |
|
|
| 4 | % | ||||||||||||||||||||||||
In Vitro Diagnostics |
|
| 7,118 |
|
|
| 6,369 |
|
|
| 11.8 | % |
|
| 20,307 |
|
|
| 18,099 |
|
|
| 12.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales |
|
| 5,556 |
|
|
| 5,541 |
|
|
| 15 |
|
|
| — | % | ||||||||||||||||||||||||
Research, development and other |
|
| 539 |
|
|
| 560 |
|
|
| (21 | ) |
|
| (4 | )% | ||||||||||||||||||||||||
In Vitro Diagnostics Revenue |
|
| 6,095 |
|
|
| 6,101 |
|
|
| (6 | ) |
|
| — | % | ||||||||||||||||||||||||
Total Revenue |
| $ | 23,873 |
|
| $ | 26,883 |
|
|
| (11.2 | )% |
| $ | 81,165 |
|
| $ | 72,321 |
|
|
| 12.2 | % |
| $ | 23,003 |
|
| $ | 22,297 |
|
| $ | 706 |
|
|
| 3 | % |
Medical Device. Medical Device revenue was $16.8$16.9 million in the thirdfirst quarter of fiscal 2021, a decrease of 18.3%, compared to $20.5 million for the third quarter of fiscal 2020. Medical Device revenue for the first nine months of fiscal 2021 was $60.9 million,2022, an increase of 12.2%,4.4% compared to $16.2 million for the same prior-year period.
• | Medical Device product sales increased 48.8% to $6.8 million for the first quarter of fiscal 2022, compared to $4.6 million in the first quarter of fiscal 2021. The increase in product sales was driven by sustained growth in demand for our coating reagent products, as well as by higher sales of both distributed specialty catheters and legacy, contract-manufactured balloon catheters. |
Medical Device royalties and license fee revenue was $8.8 million for the third quarter21
Table of fiscal 2021, a decline of 29.1% or $3.6Contents
• | Medical Device coatings royalties revenue decreased 12.9% to $6.9 million for the first quarter of fiscal 2022, compared to $7.9 million |
• | License fee revenue from the Abbott Agreement for our SurVeil DCB was $1.2 million and $1.3 million for the first quarter of fiscal 2022 and 2021, respectively. |
Abbott Agreement license fee revenue were primarily dueis recognized as costs are incurred on a proportional basis to total expected costs for the TRANSCEND pivotal clinical trial. The percentage of costs incurred relative to total estimated costs for the TRANSCEND pivotal clinical trial of our SurVeil DCB was approximately 80% and 76% as of December 31, 2021 and September 30, 2021, respectively. We estimate this percentage will be approximately 83% by the end of fiscal 2022, with the remaining 17% of costs incurred and revenue recognized over the subsequent final three years of the TRANSCEND trial follow-up and clinical reporting period.
Future license fee revenue related to the Abbott Agreement will depend extensively on whether and when we receive the milestone payment of up to $30 million associated with receipt of milestone payments. In the second quarterPMA of fiscal 2021, a $15.0the SurVeil DCB. Approximately $25 million of the $30 million milestone payment was received on which $11.0 million in Abbott Agreementwould be recognized as license fee revenue was recognized in the first nine months of fiscal 2021. Inperiod in which it is received. If PMA is received after December 31, 2022, the third quarter of fiscal 2020, a $10.8 million milestone payment was received on which $6.7is reduced to $27 million in Abbott Agreement license fee revenue was recognized inpursuant to the third quarter and first nine months of fiscal 2020. Royalties revenue increased 63.1% to $7.8 million for the third quarter of fiscal 2021, compared to $4.8 million in the prior-year quarter, and increased 13.6% to $23.1 million for the first nine months of fiscal 2021, compared to $20.4 million in the same prior-year period. With respect to COVID-19, the third quarter of fiscal 2020 provides a favorable comparison as it was the most significantly impacted period since the onsetterms of the pandemic. Fiscal 2021 royalties revenue benefited from broad-based, year-over-year growth, most notably from our Serene coating customers. For the first nine months of fiscal 2021, the year-over-year impact of the expiration our fourth-generation hydrophilic coatings was approximately $1.2 million, largely in the first quarter.Abbott Agreement.
Medical Device product sales declined 4.7% to $5.5 million for the third quarter of fiscal 2021, compared to the prior-year quarter. For the first nine months of fiscal 2021, Medical Device product sales declined 4.8% to $15.5 million, compared to the same prior-year period. For both the third quarter and first nine months of fiscal 2021, product sales were unfavorably impacted by softness in legacy balloon catheter sales volume due in part to a product replacement matter for one of our contract manufactured products. For the third quarter of fiscal 2021, this was offset, in part, by growth in product sales of chemical reagents, compared the prior year.
• | Medical Device research, development and other revenue decreased by $(0.3) million in the first quarter of fiscal 2021, compared to the same prior-year period, driven by lower coating services volume from supply chain challenges related to customer supplied components and from lifecycle attrition for certain customer products. |
In Vitro Diagnostics. In Vitro Diagnostics revenue increased 11.8% to $7.1 million for the third quarter of fiscal 2021 and increased 12.2% to $20.3totaled $6.1 million for the first nine monthsquarter of fiscal 2021,2022 and was flat compared to the same respective prior-year periods. For the third quarter of fiscal 2021, IVD product sales benefited from favorable order timing for our distributed antigen products. For the first nine months of fiscal 2021, the growth in IVD revenue was driven by broad-based demand across all IVD product offerings, notably for our microarray slide/surface products and development projects.period.
22
• IVD product revenue was $5.6 million for the first quarter of fiscal 2022 and was consistent with the same prior-year period. Sales of our protein stabilization and colorimetric substrate products delivered double-digit growth year-over-year in the first quarter of fiscal 2022. This was offset by a year-over-year decline in sales of our microarray slide/surface products in the first quarter of fiscal 2022. • IVD research, development and other revenue was $0.5 million for the first quarter of fiscal 2022 and was consistent with the same prior-year period. Operating costs and expenses. Major costs and expenses as a percentage of total revenue were as follows: Three Months Ended June 30, Nine Months Ended June 30, Three Months Ended December 31, 2021 2020 2021 2020 2021 2020 (In thousands) Amount % Total Revenue Amount % Total Revenue Amount % Total Revenue Amount % Total Revenue Amount % Total Revenue Amount % Total Revenue Product costs $ 5,105 21 % $ 4,443 17 % $ 13,018 16 % $ 11,415 16 % $ 4,497 20 % $ 3,743 17 % Research and development 12,246 51 % 13,324 50 % 36,003 44 % 37,401 52 % 11,663 51 % 10,882 49 % Selling, general and administrative 7,885 33 % 7,416 28 % 22,815 28 % 21,092 29 % 9,192 40 % 7,023 32 % Acquired intangible asset amortization 560 2 % 536 2 % 1,676 2 % 1,671 2 % 1,089 5 % 556 3 % Acquisition transaction, integration and other costs 461 2 % — — 461 1 % — — Contingent consideration expense 3 — % — — % Product costs. Product gross margins (defined as product sales less related product costs, as a percentage of product sales) were Research and development (“R&D”) expense. For the 22 Table of Selling, general and administrative (“SG&A”) expense. For the Acquired intangible asset amortization. We have previously acquired certain intangible assets through business Contingent consideration expense. We have contingent consideration obligations related to Other Income tax benefit (provision) The Company’s effective tax rate reflects the impact of state income taxes, permanent tax items and discrete tax benefits, as well as operating results in Ireland, where tax expense or benefit is offset by a valuation allowance. The tax benefit (expense)Table of Contents58%63.6% and 63%62.9% for the thirdfirst quarter of fiscal 2022 and 2021, and 2020, respectively, and 62% and 66% for the first nine months of fiscal 2021 and 2020, respectively. For both the three- and nine-month periods in fiscal 2021,The benefit to product gross margins were unfavorably impacted by $0.7 million in charges relatedmargin from leverage on higher sales volume, compared to a product replacement matter for one of the contract manufactured products in our Medical Device business, partlyprior year period, was offset by thea net favorableunfavorable impact from mix with as a result of growth in IVD product sales and a decline in legacy balloon catheter product sales.mix.thirdfirst quarter of fiscal 2021,2022, R&D expense declined 8%increased 7.2%, or $(1.1)$0.8 million, compared to the prior-year quarter. For the first nine months of fiscal 2021, R&D expense declined 4%, or $(1.4) million, compared the same prior-year period. R&D expense as a percentage of revenue was 51%50.7% and 50%48.8% for the thirdfirst quarter of fiscal 2022 and 2021, and 2020, respectively, and 44% and 52%respectively. The fiscal 2021 Vetex acquisition added $0.5 million in R&D expense for the first nine monthsquarter of fiscal 2021 and 2020, respectively. Clinical trial spending and other costs related to our SurVeil DCB declined for both the third quarter and first nine months of fiscal 2021,2022, compared to the same respective prior-year periods, with the progression of the TRANSCEND clinical trial from patient follow upprior year. We anticipate R&D expenses will continue to be significant in fiscal 20202022, primarily related to preparationmedical device product development, including support for commercialization of the clinical reportour Pounce and submissionSublime platforms.the final PMA modules in fiscal 2021.Contentsthirdfirst quarter of fiscal 2021,2022, SG&A expense increased 6%30.9%, or $0.5$2.2 million, compared the prior-year quarter. Forquarter, related to sales and marketing activities, including new hires, to support the first nine monthscommercialization of fiscal 2021, SG&A expense increased 8%, or $1.7 million, compared the same prior-year period.our Sublime and Pounce products. SG&A expense as a percentage of revenue was 33%40.0% and 28%31.5% for the thirdfirst quarter of fiscal 2022 and 2021, and 2020, respectively, and 28% and 29% for the first nine months ofrespectively. For full-year fiscal 2021 and 2020, respectively. Personnel and other investments to support product development and strategic initiatives drove the2022, we anticipate an increase in SG&A expense in the third quarterexpenditures of between $11 million and first nine months of fiscal 2021,$15 million, compared to the prior year.year, as we invest in sales and marketing personnel and infrastructure to support commercialization of our Sublime and Pounce platforms.combinations. Amortization expense on acquired intangible assets was consistent for bothcombinations, which are amortized over periods ranging from six to 14 years. For the third quarter and first nine months of fiscal 2021, compared the same respective prior-year periods.Acquisition transaction, integration and other costs. In the third quarter of fiscal 2022, acquired intangible asset amortization increased $0.6 million, compared to the prior-year quarter, as a result of the developed technology associated with the fiscal 2021 we incurred $0.5 million in legal, accounting and other due diligence costs specificallyVetex acquisition.the acquisition of Vetex. We expectbusiness combinations. Expense (gain) recognized is related to report a similar amount of acquisition costschanges in the fourth quarterprobability and timing of achieving certain contractual milestones, as well as accretion expense for the passage of time. In fiscal 2021.2022, contingent consideration expense consists of accretion for liabilities associated with the fiscal 2021 Vetex acquisition.(expense) income.expense. Other expense was $(0.1) million and $(0.2) million for the thirdfirst quarter of fiscal 2022 and 2021, respectively. Interest expense increased in the first quarter of fiscal 2022, compared to other incomethe same prior-year quarter, due to utilization of our revolving credit facility. Foreign currency gains totaled less than $0.1 million forin the thirdfirst quarter of fiscal 2020.Other expense was $(0.3)2022, compared to foreign currency losses of $(0.2) million and $(0.1) million for the first nine months of fiscal 2021 and 2020, respectively. The first nine months of fiscal 2020 included a $0.5 million impairment loss on a strategic investment to reduce the carrying value to zero. Investment income declined in the third quarter and first nine months of fiscal 2021 relative to the prior year commensurate with a decline in interest rates. Foreign currency losses totaled $(0.1) million in both the third quarter of fiscal 2021 and 2020 and $(0.2) million and $(0.1) million for the first nine months of fiscal 2021 and 2020. respectively.2021. Foreign currency gains (losses) gains result primarily from the impact of U.S. to Euro exchange rate fluctuations on certain intercompany obligations. Foreign currency gains (losses) gains reflect weakening (strengthening) weakening of the Euro relative to the U.S. dollar in each respective period.23 benefit. For the thirdfirst quarter of fiscal 2021,2022, income tax expensebenefit was $(0.8)$0.7 million, compared to income tax benefitexpense of $1.2$(0.2) million in the prior-year quarter. For the first nine months of fiscal 2021, income tax expense was $(2.4) million, compared to income tax benefit of $3.4 million in the same prior-year period. Reported income tax (expense) benefit reflects the impact to pretax income of the receipt of Abbott milestone payments in the second quarter of fiscal 2021 and the third quarter of fiscal 2020. In the third quarter of fiscal 2020, we recorded a discrete tax benefit of $1.8 million as result of our ability under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), enacted in March 2020, to carry back net operating losses incurred to periods when the statutory tax rate was 35% versus our current tax rate of 21%. benefit recognized in the thirdfirst quarter and first nine months of fiscal 2022 and 2021 and 2020 reflectreflected expected full-year pre-tax operating results, impacted by our estimated U.S. federal R&D tax credit, and by excess tax benefits related to stock-based compensation due to equity award exercise activity.
Segment Operating Results
Operating results for each of our reportable segments were as follows:
|
| Three Months Ended | Nine Months Ended |
| ||||||||||||||||||||||||
|
| June 30, | June 30, |
|
| Three Months Ended December 31, |
| |||||||||||||||||||||
(In thousands) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
|
| $ Change |
| |||||||
Operating (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Device |
| $ | (2,491 | ) |
| $ | 532 |
|
| $ | 5,480 |
|
| $ | (1,344 | ) |
| $ | (3,792 | ) |
| $ | (593 | ) |
| $ | (3,199 | ) |
In Vitro Diagnostics |
|
| 3,378 |
|
|
| 3,254 |
|
|
| 10,407 |
|
|
| 9,315 |
|
|
| 3,155 |
|
|
| 3,220 |
|
|
| (65 | ) |
Total segment operating income |
|
| 887 |
|
|
| 3,786 |
|
|
| 15,887 |
|
|
| 7,971 |
| ||||||||||||
Total segment operating (loss) income |
|
| (637 | ) |
|
| 2,627 |
|
|
| (3,264 | ) | ||||||||||||||||
Corporate |
|
| (3,271 | ) |
|
| (2,622 | ) |
|
| (8,695 | ) |
|
| (7,229 | ) |
|
| (2,804 | ) |
|
| (2,534 | ) |
|
| (270 | ) |
Total operating (loss) income |
| $ | (2,384 | ) |
| $ | 1,164 |
|
| $ | 7,192 |
|
| $ | 742 |
|
| $ | (3,441 | ) |
| $ | 93 |
|
| $ | (3,534 | ) |
Medical Device. Our Medical Device business reported an operating loss of $(2.5)$(3.8) million and operating income of $0.5 million for the third quarter of fiscal 2021 and 2020, respectively, representing (14.9)% and 2.6% of revenue, respectively. For the first nine months of fiscal 2021 and 2020, our Medical Device business reported operating income of $5.5 million and an operating loss of $(1.3) million, respectively, representing 9.0% and (2.5)% of revenue, respectively. The year-over-year contribution to operating (loss) income from royalties and license fee revenue declined $(3.6) million for the third quarter of fiscal 2021 and increased $7.4$(0.6) million for the first nine months of fiscal 2021. Royalties revenue increased $3.0 million and $2.8 million for the third quarter and first nine months of fiscal 2021, respectively, primarily due to significant prior-year COVID-19 impacts and underlying growth. License fee revenue reflects the timing of Abbott milestone payments received and declined $(6.6) million for the third quarter of fiscal 2022 and 2021, respectively, representing (22.4)% and increased $4.6 million for the first nine months(3.7)% of fiscal 2021, compared to the prior year, as a resultrevenue, respectively.
• | Medical Device operating expenses, excluding product costs, increased $3.1 million for the first quarter of fiscal 2022, compared to the prior year, primarily driven by investments in sales and marketing personnel and infrastructure to execute our long-term growth strategy. The fiscal 2021 Vetex acquisition added $1.1 million in expenses for the first quarter of fiscal 2022 for R&D personnel and acquired intangible asset amortization. |
• | The year-over-year contribution to operating (loss) income from royalties and license fee revenue declined $(1.2) million for the first quarter of fiscal 2022 related to unfavorable impacts from estimated vs. customer-reported royalties. |
• | Medical Device product gross profit increased $1.4 million year-over-year for the first quarter of fiscal 2022 on revenue growth. Product gross margins were 57.2% and 53.8% for the first quarter of fiscal 2022 and 2021, respectively. Growth in sales of coating reagents in the first quarter of fiscal 2022, compared to the prior year, was favorable to product gross margin. |
23
Medical Device product gross margins were 51.0% and 54.2% for the third quarter of fiscal 2021 and 2020, respectively, and 54.5% and 62.1% for the first nine months of fiscal 2021 and 2020, respectively. For the third quarter of fiscal 2021, compared the prior year, product gross margins were unfavorably impacted by $0.7 million in charges related to a product replacement matter for one of our contract manufactured products, partly offset by the favorable impact of product mix with strong sales of coating reagents and a decline in legacy balloon catheter sales. For the first nine months of fiscal 2021, compared to the prior year, product gross margins were unfavorably impacted by both a product replacement matter for one of our contract manufactured products and by leverage on lower sales volume of coating reagents early in fiscal 2021.
In Vitro Diagnostics. Our In Vitro Diagnostics business reported operating income of $3.4 million and $3.3$3.2 million for both the thirdfirst quarter of fiscal 2022 and 2021, representing 51.8% and 2020, respectively, representing 47.5% and 51.1%52.8% of revenue, respectively. For the first nine months of fiscal 2021 and 2020, our In Vitro Diagnostics business reported operating income of $10.4 million and $9.3 million, respectively, representing 51.2% and 51.5% of revenue, respectively. Product gross margins were 63.4% and 71.0% in the third quarter fiscal 2021 and 2020, respectively, and 67.6% and 69.9% for the first nine months of fiscal 2021 and 2020, respectively. For the both the third quarter and first nine months of fiscal 2021, product margins were unfavorably impacted by product mix from a relative increase in sales of our distributed antigen products.
24
• | IVD product gross profit was $4.0 million for the first quarter of fiscal 2022 and was consistent with the prior year. IVD product gross margins were 71.4% and 70.5% in the first quarter fiscal 2022 and 2021, respectively. Product gross margin for the first quarter of fiscal 2022 was favorably impacted by a shift product mix relative to the same prior-year period. |
Corporate. The Corporate category includes expenses for administrative corporate functions, such as executive management, corporate accounting, information technology, legal, human resources and Board of Directors related fees and expenses, which havewe do not been fully allocatedallocate to the Medical Device and IVD segments. Corporate also includes expenses, such as acquisition-related costs and litigation, which are not specific to a segment and thus not allocated to our reportable segments. The unallocated Corporate expense operating expenses increased by $0.6loss was $(2.8) million and $1.5$(2.5) million for the first quarter of fiscal 2022 and 2021, respectively.
Cash Flow Operating Results
The following is a summary of cash flow results:
|
| Three Months Ended |
| |||||
|
| December 31, |
| |||||
(In thousands) |
| 2021 |
|
| 2020 |
| ||
Cash (used in) provided by: |
|
|
|
|
|
|
|
|
Operating activities |
| $ | (7,026 | ) |
| $ | (4,270 | ) |
Investing activities |
|
| 3,218 |
|
|
| 9,874 |
|
Financing activities |
|
| (623 | ) |
|
| (790 | ) |
Effect of exchange rates on changes in cash and cash equivalents |
|
| (72 | ) |
|
| 155 |
|
Net change in cash and cash equivalents |
| $ | (4,503 | ) |
| $ | 4,969 |
|
Operating Activities. Cash used in operating activities totaled $(7.0) million for the first quarter of fiscal 2022, compared to cash used of $(4.3) million in the thirdsame prior-year period. Net loss was $(2.8) million and $(0.3) million for the first quarter of fiscal 2022 and 2021, respectively. Net changes in operating assets and liabilities reduced cash flows from operating activities by $(7.8) million and $(7.5) million during the first nine monthsquarter of fiscal 2022 and 2021, respectively. Significant changes in operating assets and liabilities affecting cash flows during these periods included:
• | Cash used in accrued liabilities was $(5.2) million and $(4.2) million for the first quarter of fiscal 2022 and 2021, respectively, primarily related to annual bonus payments. |
• | Cash used in inventories was $(1.6) million for the first quarter of fiscal 2022, compared to cash used of $(0.2) million in the same prior-year period. The current year cash used by inventories was primarily driven by the commercialization of Pounce and Sublime platforms in our Medical Device business. |
• | Cash used in prepaids and other was $(1.4) million for the first quarter of fiscal 2022, compared to cash used of $(0.4) million in the same prior-year period. In the prior-year period, the use of cash associated with the renewal of annual insurance premiums in our first quarter was offset, in part, by receipt of the final $0.8 million Irish Development Authority grant payment. |
• | Cash provided by (used in) accounts receivable and contract assets was $1.6 million cash provided in the first quarter of fiscal 2022, compared to $(0.8) million cash used in the same prior-year period. Royalty payments receivable from customers (contract assets) decreased in the current period, reflecting the reemergence of COVID-related impacts, whereas the contract assets balance increased in the same prior-year period, reflecting diminishing COVID-related impacts. In addition, timing fluctuations in accounts receivable balances were favorable to cash flow in the fiscal 2022 period and slightly unfavorable to cash flow in the same prior-year period. |
Investing Activities. Cash provided by investing activities totaled $3.2 million and $9.9 million for the first quarter of fiscal 2022 and 2021, respectively. Net purchases and maturities of available-for-sale investments were a source of cash of $4.0 million and $12.2 million in the first quarter of fiscal 2022 and 2021, respectively. In the first quarter of fiscal 2021, respectively, comparedthe Company paid $1.0 million for acquisition of intangible assets (patents) to the same prior-year periods, primarily due to $0.5 million in Vetex acquisition-related costs,sellers of Embolitech, LLC as well increases in compensation-related expenses.
Liquidity and Capital Resources
Asa result of June 30, 2021, working capital totaled $76.5 million, an increasethe achievement of $8.7 million from September 30, 2020. Working capital is defined by us as current assets minus current liabilities. Cash and cash equivalents and available-for-sale investments totaled $72.0 million as of June 30, 2021, an increase of $10.9 million from $61.1 million as of September 30, 2020. This change was primarily driven by the $15 million clinical reporta contingent milestone payment received under the Abbott Agreement in fiscal 2020. Capital expenditures for property, plant and equipment totaled $0.8 million and $1.3 million for the first quarter of fiscal 2022 and 2021, partly offset by $2.9respectively.
24
Financing Activities. Cash used in financing activities totaled $(0.6) million in capital expenditures, $2.3and $(0.8) million for the first quarter of fiscal 2022 and 2021, respectively, primarily related to the purchase of common stock to pay employee taxes resulting from the exercise of stock options and vesting of other stock awards,awards.
Liquidity and the $1.0Capital Resources
As of December 31, 2021, working capital totaled $39.3 million, a decrease of $1.2 million from September 30, 2021. We define working capital as current assets minus current liabilities. Cash and cash equivalents and available-for-sale investments totaled $32.3 million as of December 31, 2021, a decrease of $8.6 million from $40.9 million as of September 30, 2021. This change was primarily driven by payment of annual bonuses and planned personnel, inventory and other operational expenditures related to Embolitech, LLC as a resultcommercialization of the achievementPounce and Sublime platforms in our Medical Device business.
Subject to the terms of the Abbott Agreement, the Company is to receive a contingent$30 million PMA milestone in fiscal 2020.payment under the Abbott Agreement if the SurVeil DCB receives PMA on or before December 31, 2022. The PMA milestone payment is reduced to $27 million under the Abbott Agreement if PMA is received after December 31, 2022. The Company cannot be sure whether the PMA milestone payment will be received on or before December 31, 2022, if at all.
Surmodics maintainsThe Company proactively manages its access to capital to support liquidity and continued growth. In fiscal 2020, the Company entered intoSurmodics has access to a secured revolving credit facility, pursuant to a Loan and Security Agreement (the ‘‘Loan Agreement’’). The Loan Agreementwhich provides for availability of up to $25 million under a secured revolving line of credit.subject to borrowing base constraints. The outstanding balance on the revolving credit facility was zero$10 million as of June 30,December 31, 2021. In fiscal 2020,The current scheduled maturity date of the revolving credit facility is September 14, 2022, and the Company filed a universalhas one additional extension period remaining. If we elect to extend the maturity date at least 60 days prior to the scheduled maturity date, and if the extension conditions are met, which include no material adverse effect, default, or event of default under the revolving credit facility, the revolving credit facility will mature, and any outstanding balance will become payable, on September 14, 2023.
As of December 31, 2021, the Company’s shelf registration statement with the SEC as a matter of standard corporate governance to provide the flexibility to access public capital markets in order to respond to future business needsSecurities and opportunities. The shelf registration statement became effective on May 29, 2020 andExchange Commission allows the Company to offer potentially up to $200 million in debt securities, common stock, preferred stock, warrants, and other securities or any such combination of such securities in amounts, at prices, and on terms announced if and when the securities are ever offered.
The Company’s investment policy excludes ownership of collateralized mortgage obligations, mortgage-backed derivatives and other derivative securities without prior written approval of the Board of Directors. Our investments primarily consist of money market,commercial paper and corporate bond and commercial paper securities and are reported at fair value as available-for-sale investments totaling $9.8and totaled $5.7 million as of June 30,December 31, 2021. Our investment policy requires that no more than 5% of investments be held in any one credit or issue, excluding U.S. government and government agency obligations. The primary investment objective of the portfolio is to provide for the safety of principal and appropriate liquidity, while generating an above-benchmark (Barclays Short Treasury 1-3 Month Index) total rate of return on a pre-tax basis.
For full-year fiscal 2022, we anticipate an increase in SG&A expenditures of between $11 million and $15 million, as well as an increase in capital expenditures of up to $3 million, related to sales and marketing activities, including new hires, to support the commercialization of our Sublime and Pounce products. We expect that increasing SG&A expenditures in fiscal 2022 will exceed any associated increases in revenues, and therefore will reduce our cash flow from operations. We also anticipate R&D expenses will continue to be significant in full-year fiscal 2022, primarily related to medical device product development, including readiness for commercialization of our Pounce and Sublime platforms. We believe that our existing cash and cash equivalents and available-for-sale investments, which totaled $72.0$32.3 million as of June 30,December 31, 2021, together with cash flow from operations and our revolving line of credit facility, will provide liquidity sufficient to meet our cash needs and fund our operations the Vetex acquisition, and planned capital expenditures for the next twelve months.through fiscal 2022. There can be no assurance, however, that our business will continue to generate cash flows at historic levels.
Cash Flow Operating ResultsBeyond fiscal 2022, our cash requirements will depend extensively on the timing of market introduction and extent of market acceptance of products in our medical device product portfolio, including our . Cash flow results were as follows:SurVeil DCB. Our long-term cash requirements also will be significantly impacted by the level of our investment in commercialization of our vascular intervention products and whether we make future corporate transactions. We cannot accurately predict our long-term cash requirements at this time. We may seek additional sources of liquidity and capital resources, including through borrowing, debt or equity financing or corporate transactions to generate cashflow. There can be no assurance that such transactions will be available to us on favorable terms, if at all.
|
| Nine Months Ended |
| |||||
|
| June 30, |
| |||||
(In thousands) |
| 2021 |
|
| 2020 |
| ||
Cash provided by (used in): |
|
|
|
|
|
|
|
|
Operating activities |
| $ | 14,500 |
|
| $ | 12,696 |
|
Investing activities |
|
| 16,644 |
|
|
| (1,871 | ) |
Financing activities |
|
| 198 |
|
|
| (4,808 | ) |
Effect of exchange rates on changes in cash and cash equivalents |
|
| 50 |
|
|
| 8 |
|
Net change in cash and cash equivalents |
| $ | 31,392 |
|
| $ | 6,025 |
|
25
Operating Activities. Cash provided by operating activities totaled $14.5 million for the first nine months of fiscal 2021, compared to cash provided of $12.7 million in the same prior-year period. Net income was $4.5 million and $4.1 million for the first nine months of fiscal 2021 and 2020, respectively. Net changes in operating assets and liabilities reduced cash flows from operating activities by $1.2 million and $1.5 million during the first nine months of fiscal 2021 and 2020, respectively. Significant changes in operating assets and liabilities affecting cash flows during these periods included:
|
|
|
|
In the prior-year period, income taxes also impacted cash provided by operating activities. As a result of the NOL carryback provisions of the CARES Act, enacted in March 2020, income tax receivable increased to $4.9 million as of June 30, 2020, compared to $0.6 million as of September 30, 2019, and deferred income taxes decreased to $5.6 million as of June 30, 2020, compared to $6.2 million as of September 30, 2019. In the current-year fiscal 2021 period, income tax receivable decreased to $1.1 million as of June 30, 2021, compared to $2.4 million as of September 30, 2020, and deferred income taxes decreased to $6.4 million as of June 30, 2021, compared to $7.3 million as of September 30, 2020.
Additionally, the portion of acquisition-related contingent consideration and other payments classified as reduction of cash flows from operations was $0.6 million in the first nine months of fiscal 2020, as it related to accretion expense, which increased these obligations from the acquisition date through settlement.
Investing Activities. Cash provided by investing activities totaled $16.6 million for the first nine months of fiscal 2021, compared to cash used of $(1.9) million in the same prior-year period. Net purchases and maturities of available-for-sale investments were a source of cash of $20.5 million in the first nine months of fiscal 2021 as the Company managed liquidity in preparation for the Vetex acquisition, compared to a source of cash of $0.8 million in the first nine months of fiscal 2020. In the first quarter of fiscal 2021, the Company paid $1.0 million for acquisition of intangible assets (patents) to the sellers of Embolitech, LLC as a result of the achievement of a contingent milestone in fiscal 2020. Capital expenditures for property, plant and equipment totaled $2.9 million and $2.6 million for the first nine months of fiscal 2021 and 2020, respectively.
Financing Activities. Cash provided by financing activities totaled $0.2 million for the first nine months of fiscal 2021, compared to cash used of $(4.8) million in the same prior-year period. Issuance of common stock upon the exercise of stock options and vesting of other stock awards was a source of cash of $2.6 million and $1.2 million for the first nine months of fiscal 2021 and 2020, respectively. In the first nine months of fiscal 2021 and 2020, we paid $2.3 million and $2.4 million, respectively, to purchase common stock to pay employee taxes resulting from the exercise of stock options and vesting of other stock awards. In the first nine months of fiscal 2020, contingent consideration payments totaled $3.2 million related to the acquisition of NorMedix, Inc., with $0.6 million and $2.6 million classified as cash used in operating and financing activities, respectively.
Customer Concentrations
We have agreements with a diverse base of customers and certain customers have multiple products using our technology. Abbott and Medtronic are our largest customers, comprising 19%21% and 13%, respectively, of our consolidated revenue for fiscal 2021. These same customers each comprised 10% and 14%, respectively, of our consolidated revenue for fiscal 2020. These same customers each comprised 24% and 13%, respectively, of our consolidated revenue for the ninethree months ended June 30,December 31, 2021. Revenue generated under our SurVeil DCB license agreement with Abbott represented 18%5% of total revenue for the ninethree months ended June 30,December 31, 2021. Apart from the SurVeil DCB license, Abbott has several separately licensed products which generate royalties revenue for Surmodics, none of which represented more than 3% of total revenue for the ninethree months ended June 30,December 31, 2021. Medtronic has several separately licensed products that generate royalties revenue for Surmodics, none of which represented more than 5%4% of our total revenue for the ninethree months ended June 30,December 31, 2021. No other individual customer constitutes more than 10% of Surmodics’ total fiscal 2021 to date or fiscal 2020 revenue.
26
Share Purchase Activity
Our Board of Directors has authorized the repurchase of up to an additional $25.3 million of the Company’s outstanding common stock in open-market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, tender offers or by any combination of such methods. The authorization has no fixed expiration date. No shares were repurchased in the nine months ended June 30, 2021.
Off-Balance Sheet Arrangements
As of June 30, 2021 and September 30, 2020, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Significant Estimates
Critical accounting policies are those policies that require the application of management’s most challenging subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies involve judgments and uncertainties that are sufficiently likely to result in materially different results under different assumptions and conditions. For the ninethree months ended June 30,December 31, 2021, there were no significant changes in our critical accounting policies. For a detailed description of our other critical accounting policies and significant estimates, see Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.2021.
Forward-looking Statements
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, expectations concerning: the impacts, duration and severity of the global COVID-19 pandemic;pandemic and the effects of responses to it on healthcare systems, the general economy, our business partners, and our operations; the potential results of clinical studies and the potential future clinical studies; our strategies for growth; the expected timing of their results,clinical evaluations; the expected duration of process and manufacturing validations; the potential timingresults of future clinical studies; our business and growth strategy, including our ability to conduct market evaluations and bring new products to market; the development of future products and their anticipated attributes; anticipatedstrategies; regulatory submissions and approvals, includingapprovals; our intent to pursue certain regulatory actions; the expected timing thereof;potential impact of U.S. Food and Drug Administration (“FDA”) communications; expectation regarding the initiation or continuationreceipt of results of clinical studies; expectation regarding delivery of clinical reports; our initiations for product evaluation activities; the initiation or continuation of manufacturing process validation activities;potential for a future milestone payment related to our SurVeil™ drug-coated balloon (“DCB”) and the revenue that would be recognized on that milestone payment; revenue potential related to the potential commercial launch of the SurVeil™ drug-coated balloon (“DCB”) following its regulatory approval; estimatedSurVeil DCB; the expected timing of completion and delivery of the SWING first-in-human clinical trial results; anticipated future revenue expected to be recognized in future periods;from particular products; future revenue growth, our longer-term valuation-creation strategy, and our future success; future gross margins and operating expenses;potential; estimated future amortization expense; futureexpectations regarding operating lease maturities;expenses; recognition of unrecognized compensation costs; anticipated patent expirations and their potential impacts on our royalties revenue; expectation regarding specific product royalties portfolios; potential future customer actions; the potential for a future milestone payment under our agreement with Abbott; research and development plans and expenses, including the estimated cost associated with the TRANSCEND clinical trial;trial and the timing of those costs; anticipated cash requirements; the anticipated maturity date of our revolving credit facility; future cash flow and sources of funding, including our revolving credit facility, and their ability together with existing cash, cash equivalents, and investments to provide liquidity sufficient to meet our cash needs and fund our operations acquisition-related spending, and planned capital expenditures forthrough fiscal 2022; future cash requirements; plans regarding our securities investments and the next twelve months; extension of our revolving credit facility; thepotential impact of interest rate fluctuations on our resultsfluctuations; expectations regarding the maturity of operationsdebt; the impact of potential lawsuits or cash flows;claims; the impact of potential change in raw material prices;prices, sources of raw materials and our ability to manufacture raw materials ourselves; the impact of Abbott, Medtronic, as well as other significant customers; our ability to recognize the expected benefits of our acquisitions; our estimatedstrategic transformation to become a provider of vascular intervention medical device products; expected future income tax rate for fiscal 2021; the future impact of off-balance sheet arrangements and contractual obligations, including future payments(expense) benefit; whether changes in our internal control over financial reporting are reasonably likely to clinical research organizations; future payments related to completed acquisitions; the accounting treatment for the Vetex acquisition; future expenses related to acquisitions; estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied for executed contracts;materially affect our internal control over financial reporting; and the impact of the adoption of new accounting pronouncements. Without limiting the foregoing, words or phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,” “project,” “will” and similar terminology, generally identify forward-looking statements. Forward-looking statements may also represent challenging goals for us. These statements, which represent our expectations or beliefs concerning various future events, are based on current expectations that involve a number of risks and uncertainties that could cause actual results to differ materially from those of such forward-looking statements. We caution that undue reliance should not be placed on such forward-looking statements, which speak only as of the date made. Some of the factors which could cause results to differ from those expressed in any forward-looking statement are set forth under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.2021. We disclaim any intent or obligation to update publicly these forward-looking statements, whether because of new information, future events or otherwise.
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Although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from our forward-looking statements, such factors include, among others:
• | the impacts, duration and severity of the global COVID-19 pandemic, which has impacted, and may continue to impact, our revenue, operations, the conduct of clinical studies, and our ability to access healthcare professionals and facilities; |
• | our reliance on a small number of significant customers, including our largest customers, Abbott and Medtronic, which causes our financial results and stock price to be subject to factors affecting those significant customers and their products, the timing of market introduction of their or competing products, product safety or efficacy concerns and intellectual property litigation impacting such customers, which could adversely affect our growth strategy and the royalties revenue we derive; |
• | clinical and regulatory developments relating to the evaluation of risks associated with paclitaxel-coated products, which developments may adversely impact our ability to complete our TRANSCEND clinical trial on any particular time frame, obtain marketing approval (or the timing of any such approval) for our SurVeilDCB and other paclitaxel-coated products, to treat peripheral artery disease in the femoral and/or popliteal arteries; |
• | our ability to successfully develop, obtain regulatory approval for, and commercialize our SurVeilDCB product, including our reliance on clinical research organizations to manage the TRANSCEND clinical trial and uncertainty related to the impacts of any clinical research relative to drug-coated balloons, including our Avess™ DCB, other DCB products and other catheter and balloon-based products, which will impact our ability to receive additional milestone payments under our agreement with Abbott; |
• | general economic conditions that are beyond our control, such as the impact of |
• | a decrease in our available cash or failure to generate cash flows from operations, which could impact short-term liquidity requirements and expected capital and other expenditures; |
• | our ability to comply with the covenants in our credit facility; |
• | the difficulties and uncertainties associated with the lengthy and costly new product development and foreign and domestic regulatory approval processes, such as delays, difficulties or failures in achieving acceptable clinical results or obtaining foreign or |
• | whether operating expenses that we incur related to the development and commercialization of new technologies and products are effective; |
• | our ability to successfully perform product development activities, the related R&D expense impact and governmental and regulatory compliance activities, which we have not previously undertaken in any significant manner; |
• | our ability to identify and execute new acquisition opportunities and successfully managing the risks associated with acquisitions, which include the potential inability to integrate acquired operations, personnel, technology, information systems, and internal control systems and products; a lack of understanding of tax, legal and cultural differences for non-U.S. acquisitions; diversion of management’s attention; difficulties and uncertainties in transitioning the customers or other business relationships from the acquired entity to us; the loss of key employees of acquired companies; and potential impacts on cash flows; and |
• | other factors described under “Risk Factors” in Part |
Many of these factors are outside our control and knowledge and could result in increased volatility in period-to-period results. Investors are advised not to place undue reliance upon our forward-looking statements and to consult any further disclosures by us on this subject in our filings with the SEC.Securities and Exchange Commission.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our investment policy requires investments with high credit quality issuers and limits the amount of credit exposure to any one issuer. Our investments consist principally of interest-bearing corporate debt securities with varying maturity dates, which generally are less than one year. Because of the credit criteria of our investment policies, the primary market risk associated with these investments is interest rate risk. We do not use derivative financial instruments to manage interest rate risk or to speculate on future changes in interest rates. As of June 30,December 31, 2021, we held $9.8$5.7 million in available-for-sale debt securities of which $5.7 million hadwith maturity dates of less than one year. Therefore, interest rate fluctuations would have an insignificant impact on our results of operations or cash flows. Our policy also allows the Company to hold a substantial portion of funds in cash and cash equivalents, which are defined as financial instruments with original maturities of three months or less and may include money market instruments, certificates of deposit, repurchase agreements and commercial paper instruments.
Management believes that a reasonable change in raw material prices would not have a material impact on future earnings or cash flows because the Company’s inventory exposure is not material.
We are exposed to increasing Euro currency risk with respect to our manufacturing operations in Ireland. In a period where the U.S. dollar is strengthening or weakening relative to the Euro, our revenue and expenses denominated in Euro currency are translated into U.S. dollars at a lower or higher value respectively, than they would be in an otherwise constant currency exchange rate environment. All sales transactions are denominated in U.S. dollars or Euros. We generate royalties revenue from the sale of customer products in foreign jurisdictions. Royalties generated in foreign jurisdictions by customers are converted and paid in U.S. dollars per contractual terms. Substantially all of our purchasing transactions are denominated in U.S. Dollarsdollars or Euros. To date, we have not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, referred to collectively herein as the Certifying Officers, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30,December 31, 2021. Based on that evaluation, the Company’s Certifying Officers concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were effective to ensure that information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Certifying Officers, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the three months ended June 30,December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company has been involved in various legal actions involving its operations, products and technologies, including intellectual property and employment disputes.
Item 1A. Risk Factors
The risks described below and those identified in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020,2021, filed with the SECSecurities and Exchange Commission on December 2, 2020,November 24, 2021, under Part 1, Item 1A, “Risk Factors” could affect our financial performance and could cause our actual results for future periods to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statements made in this Quarterly Report on Form 10-Q.
Failure to successfully integrate the acquisition of Vetex Medical Limited or commercialize its product may limit our growth and adversely impact operating results, cash flows and liquidity.
On July 2, 2021, we completed the acquisition of all outstanding shares of Vetex Medical Limited (“Vetex”). Vetex holds a Food and Drug Administration 510(k) clearance, European Union CE Mark, and portfolio of patents related to its venous mechanical thrombectomy catheter product (the “Vetex Product”). However, Vetex had not initiated commercial production or established commercialization of the Vetex Product prior to the acquisition. We acquired Vetex with an upfront cash payment of $39.9 million and are obligated to pay additional installments totaling $3.5 million in fiscal 2024 through fiscal 2027. These payments may be accelerated upon the occurrence of certain product development and regulatory milestones. An additional $3.5 million in payments are contingent upon the achievement of certain product development and regulatory milestones within a contingency period ending in fiscal 2027. We expect to recognize approximately $28 million in intangible assets, approximately $3 million in deferred tax liabilities, and approximately $19 million in goodwill related to the acquisition.
For us to realize the anticipated benefits of the Vetex acquisition, we must successfully integrate the Vetex operations, establish commercial manufacturing for the Vetex Product, and successfully develop and execute a commercialization strategy for the Vetex Product. If we are unsuccessful, or encounter delays or cost overruns, in integrating the Vetex operations or establishing commercial manufacturing for the Vetex Product, or if potential customers do not adopt the Vetex Product at sufficient levels to make it a commercial success, our operating results, cash flows and liquidity may be adversely impacted. Further, the goodwill and intangible assets that we will recognize related to the acquisition may become impaired if the financial performance of the Vetex Product does not meet our expectations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer PurchasesThe following table presents the information with respect to purchases made by or on behalf of EquitySurmodics, Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities
The Company did not purchase any Exchange Act of its1934), of our common stock during the three months ended June 30,December 31, 2021.
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| Total Number of Shares Purchased (1) |
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| Average Price Paid Per Share |
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| Total Number of Shares Purchased as Part of Publicly Announced Programs |
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| Maximum Dollar Value of Shares that May Yet Be Purchased Under the Programs |
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Period: |
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October 1 – 31, 2021 |
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| 232 |
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| $ | 56.58 |
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| — |
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| $ | 25,300,000 |
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November 1 – 30, 2021 |
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| 18,425 |
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| 45.65 |
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| — |
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| 25,300,000 |
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December 1 – 31, 2021 |
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| — |
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| — |
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| — |
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| 25,300,000 |
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Total |
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| 18,657 |
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| $ | 45.78 |
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| — |
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(1) | All shares reported were delivered by employees in connection with the satisfaction of tax withholding obligations related to the vesting of shares of restricted stock. |
As of June 30,December 31, 2021, the Company had an aggregate of $25.3 million available for future common stock repurchases under an authorization approved by the Board of Directors for up to $20.0 million on November 6, 2015, all of which is remaining, and an authorization approved by the Board of Directors on November 5, 2014 of which $5.3 million is remaining. These authorizations for share repurchases do not have a fixed expiration date.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
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Item 6. Exhibits | EXHIBIT INDEX | |
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101.INS* |
| Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the inline XBRL document. |
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101.SCH* |
| Inline XBRL Taxonomy Extension Schema. |
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101.CAL* |
| Inline XBRL Taxonomy Extension Calculation Linkbase. |
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101.DEF* |
| Inline XBRL Taxonomy Extension Definition Linkbase. |
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101.LAB* |
| Inline XBRL Taxonomy Extension Label Linkbase. |
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101.PRE* |
| Inline XBRL Taxonomy Extension Presentation Linkbase. |
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104* |
| Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
* | Filed herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Surmodics, Inc. | ||
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| By: | /s/ Timothy J. Arens | |
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| Timothy J. Arens | |
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| Senior Vice President of Finance and Chief Financial Officer | |
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| (duly authorized signatory and principal financial officer) |
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