UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
(Mark One)
For the quarterly period ended
or
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(
(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 |
|
|
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.
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).
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 |
☐ |
☒ |
|
|
|
|
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
The number of shares of the registrant’s Common Stock, $0.05 par value per share, as of January 29, 2024 was
TABLE OF CONTENTS
|
||
Item 1. |
3 |
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
19 |
Item 3. |
28 |
|
Item 4. |
29 |
|
|
|
|
Item 1. |
30 |
|
Item 1A. |
30 |
|
Item 2. |
30 |
|
Item 3. |
30 |
|
Item 4. |
30 |
|
Item 5. |
30 |
|
Item 6. |
31 |
|
|
32 |
|
2
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Surmodics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
|
December 31, |
|
|
September 30, |
|
||
|
2023 |
|
|
2023 |
|
||
(In thousands, except per share data) |
(Unaudited) |
|
|||||
ASSETS |
|
|
|
|
|
||
Current Assets: |
|
|
|
|
|
||
Cash and cash equivalents |
$ |
|
|
$ |
|
||
Available-for-sale securities |
|
|
|
|
|
||
Accounts receivable, net of allowances of $ |
|
|
|
|
|
||
Contract assets |
|
|
|
|
|
||
Inventories, net |
|
|
|
|
|
||
Income tax receivable |
|
|
|
|
|
||
Prepaids and other |
|
|
|
|
|
||
Total Current Assets |
|
|
|
|
|
||
Property and equipment, net |
|
|
|
|
|
||
Intangible assets, net |
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
||
Other assets |
|
|
|
|
|
||
Total Assets |
$ |
|
|
$ |
|
||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
||
Current Liabilities: |
|
|
|
|
|
||
Accounts payable |
$ |
|
|
$ |
|
||
Accrued liabilities: |
|
|
|
|
|
||
Compensation |
|
|
|
|
|
||
Accrued other |
|
|
|
|
|
||
Deferred revenue |
|
|
|
|
|
||
Total Current Liabilities |
|
|
|
|
|
||
Long-term debt, net |
|
|
|
|
|
||
Deferred revenue, less current portion |
|
|
|
|
|
||
Deferred income taxes |
|
|
|
|
|
||
Other long-term liabilities |
|
|
|
|
|
||
Total Liabilities |
|
|
|
|
|
||
(Note 11) |
|
|
|
|
|
||
Stockholders’ Equity: |
|
|
|
|
|
||
Series A Preferred stock — $ |
|
|
|
|
|
||
Common stock — $ |
|
|
|
|
|
||
Additional paid-in capital |
|
|
|
|
|
||
Accumulated other comprehensive loss |
|
( |
) |
|
|
( |
) |
Retained earnings |
|
|
|
|
|
||
Total Stockholders’ Equity |
|
|
|
|
|
||
Total Liabilities and Stockholders’ Equity |
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Surmodics, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
|
Three Months Ended December 31, |
|
|||||
|
2023 |
|
|
2022 |
|
||
(In thousands, except per share data) |
(Unaudited) |
|
|||||
Revenue: |
|
|
|
|
|
||
Product sales |
$ |
|
|
$ |
|
||
Royalties and license fees |
|
|
|
|
|
||
Research, development and other |
|
|
|
|
|
||
Total revenue |
|
|
|
|
|
||
Operating costs and expenses: |
|
|
|
|
|
||
|
|
|
|
|
|||
Research and development |
|
|
|
|
|
||
Selling, general and administrative |
|
|
|
|
|
||
Acquired intangible asset amortization |
|
|
|
|
|
||
Contingent consideration expense |
|
— |
|
|
|
|
|
Total operating costs and expenses |
|
|
|
|
|
||
Operating loss |
|
( |
) |
|
|
( |
) |
Other expense: |
|
|
|
|
|
||
Interest expense, net |
|
( |
) |
|
|
( |
) |
Foreign exchange loss |
|
( |
) |
|
|
( |
) |
Investment income, net |
|
|
|
|
|
||
Other expense, net |
|
( |
) |
|
|
( |
) |
Loss before income taxes |
|
( |
) |
|
|
( |
) |
Income tax (expense) benefit |
|
( |
) |
|
|
|
|
Net loss |
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
||
Basic net loss per share |
$ |
( |
) |
|
$ |
( |
) |
Diluted net loss per share |
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
||
Weighted average number of shares outstanding: |
|
|
|
|
|
||
Basic |
|
|
|
|
|
||
Diluted |
|
|
|
|
|
||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Surmodics, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
|
Three Months Ended December 31, |
|
|||||
|
2023 |
|
|
2022 |
|
||
(In thousands) |
(Unaudited) |
|
|||||
Net loss |
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive income: |
|
|
|
|
|
||
Derivative instruments: |
|
|
|
|
|
||
Unrealized net loss |
|
( |
) |
|
|
( |
) |
Net (gain) loss reclassified to earnings |
|
( |
) |
|
|
|
|
Net changes related to available-for-sale securities, net of tax |
|
( |
) |
|
|
— |
|
Foreign currency translation adjustments |
|
|
|
|
|
||
Other comprehensive income |
|
|
|
|
|
||
Comprehensive income (loss) |
$ |
|
|
$ |
( |
) |
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Surmodics, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
|
Three Months Ended December 31, 2023 and 2022 |
|
|||||||||||||||||||||
|
(Unaudited) |
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
Total |
|
||||||
|
Common Stock |
|
|
Paid-In |
|
|
Comprehensive |
|
|
Retained |
|
|
Stockholders’ |
|
|||||||||
(In thousands) |
Shares |
|
|
Amount |
|
|
Capital |
|
|
Loss |
|
|
Earnings |
|
|
Equity |
|
||||||
Balance at September 30, 2023 |
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Other comprehensive income, net of tax |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Issuance of common stock |
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
Common stock options exercised, net |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|||
Purchase of common stock to pay |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Stock-based compensation |
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance at December 31, 2023 |
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Balance at September 30, 2022 |
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Other comprehensive income, net of tax |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Issuance of common stock |
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
Common stock options exercised, net |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||||
Purchase of common stock to pay |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Stock-based compensation |
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Balance at December 31, 2022 |
|
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Surmodics, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
|
Three Months Ended December 31, |
|
|||||
|
2023 |
|
|
2022 |
|
||
(In thousands) |
(Unaudited) |
|
|||||
Operating Activities: |
|
|
|
|
|
||
Net loss |
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
||
Stock-based compensation |
|
|
|
|
|
||
Noncash lease expense |
|
|
|
|
|
||
Amortization of debt issuance costs |
|
|
|
|
|
||
Provision for credit losses |
|
|
|
|
|
||
Deferred taxes |
|
( |
) |
|
|
( |
) |
Other |
|
( |
) |
|
|
|
|
Change in operating assets and liabilities: |
|
|
|
|
|
||
Accounts receivable and contract assets |
|
( |
) |
|
|
|
|
Inventories |
|
|
|
|
( |
) |
|
Prepaids and other |
|
( |
) |
|
|
( |
) |
Accounts payable |
|
( |
) |
|
|
( |
) |
Accrued liabilities |
|
( |
) |
|
|
( |
) |
Income taxes |
|
|
|
|
|
||
Deferred revenue |
|
( |
) |
|
|
( |
) |
Net cash used in operating activities |
|
( |
) |
|
|
( |
) |
Investing Activities: |
|
|
|
|
|
||
Purchases of property and equipment |
|
( |
) |
|
|
( |
) |
Purchases of available-for-sale securities |
|
( |
) |
|
|
— |
|
Maturities of available-for-sale securities |
|
|
|
|
— |
|
|
Net cash used in investing activities |
|
( |
) |
|
|
( |
) |
Financing Activities: |
|
|
|
|
|
||
Payments of short-term borrowings |
|
— |
|
|
|
( |
) |
Proceeds from issuance of long-term debt |
|
— |
|
|
|
|
|
Payments of debt issuance costs |
|
— |
|
|
|
( |
) |
Issuance of common stock |
|
|
|
|
|
||
Payments for taxes related to net share settlement of equity awards |
|
( |
) |
|
|
( |
) |
Net cash (used in) provided by financing activities |
|
( |
) |
|
|
|
|
Effect of exchange rate changes on cash |
|
|
|
|
|
||
Net change in cash and cash equivalents |
|
( |
) |
|
|
|
|
Cash and Cash Equivalents: |
|
|
|
|
|
||
Beginning of period |
|
|
|
|
|
||
End of period |
$ |
|
|
$ |
|
||
Supplemental Information: |
|
|
|
|
|
||
Cash paid for income taxes |
$ |
— |
|
|
$ |
|
|
Cash paid for interest |
|
|
|
|
|
||
Noncash investing and financing activities: |
|
|
|
|
|
||
Acquisition of property and equipment |
|
|
|
|
|
||
Right-of-use assets obtained in exchange for operating lease liabilities |
|
|
|
|
— |
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
Surmodics, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Period Ended December 31, 2023
(Unaudited)
1. Organization
Description of Business
Surmodics, Inc. and subsidiaries (referred to as “Surmodics,” the “Company,” “we,” “us,” “our” and other like terms) is a leading provider of performance coating technologies for intravascular medical devices and chemical and biological components for in vitro diagnostic (“IVD”) immunoassay tests and microarrays. Surmodics develops and commercializes highly differentiated vascular intervention 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 modification and drug-delivery coating technologies, along with its device design, development and manufacturing capabilities. The Company’s mission is to improve the detection and treatment of disease. Surmodics is headquartered in Eden Prairie, Minnesota.
Basis of Presentation and Principles of Consolidation
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, 2023, and notes thereto included in our Annual Report on Form 10-K as filed with the SEC.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from those estimates. The results of operations for the three months ended December 31, 2023 are not necessarily indicative of the results that may be expected for the entire 2024 fiscal year.
New Accounting Pronouncements
Not Yet Adopted
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting: Improvements to Reportable Segment Disclosures. This guidance requires disclosure of incremental segment information on an annual and interim basis. This amendment is effective for our fiscal year ending September 30, 2025 and interim periods within our fiscal year ending September 30, 2026. We are currently assessing the impact of this guidance on our disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes: Improvements to Income Tax Disclosures. This guidance requires consistent categories and greater disaggregation of information in the rate reconciliation and disclosures of income taxes paid by jurisdiction. This amendment is effective for our fiscal year ending September 30, 2026 and interim periods within our fiscal year ending September 30, 2027. We are currently assessing the impact of this guidance on our disclosures.
No other new accounting pronouncement issued or effective during the fiscal year has had, or is expected to have, a material impact on the Company’s condensed consolidated financial statements.
8
2. Revenue
The following table is a disaggregation of revenue within each reportable segment.
|
Three Months Ended December 31, |
|
|||||
(In thousands) |
2023 |
|
|
2022 |
|
||
Medical Device |
|
|
|||||
Product sales |
$ |
|
|
$ |
|
||
Royalties & license fees – performance coatings |
|
|
|
|
|
||
License fees – SurVeil DCB |
|
|
|
|
|
||
Research, development and other |
|
|
|
|
|
||
Medical Device Revenue |
|
|
|
|
|
||
In Vitro Diagnostics |
|
|
|
|
|
||
Product sales |
|
|
|
|
|
||
Research, development and other |
|
|
|
|
|
||
In Vitro Diagnostics Revenue |
|
|
|
|
|
||
Total Revenue |
$ |
|
|
$ |
|
||
Contract assets totaled $
3. Collaborative Arrangement
On February 26, 2018, the Company entered into an agreement with Abbott Vascular, Inc. (“Abbott”) with respect to one of the device products in our Medical Device reportable segment, the SurVeil™ drug-coated balloon (“DCB”) for treatment of the superficial femoral artery (the “Abbott Agreement”). In June 2023, the SurVeil DCB received U.S. Food and Drug Administration (“FDA”) premarket approval (“PMA”) and may now be marketed and sold in the U.S. by Abbott.
SurVeil DCB License Fees
Under the Abbott Agreement, Surmodics is responsible for conducting all necessary clinical trials, including completion of the ongoing, five-year TRANSCEND pivotal clinical trial of the SurVeil DCB. The Company has received payments totaling $
License fee revenue on milestone payments received under the Abbott Agreement is recognized using the cost-to-cost method based on total costs incurred to date relative to total expected costs for the TRANSCEND pivotal clinical trial, which is expected to be competed in fiscal 2025. See Note 2 Revenue for SurVeil DCB license fee revenue recognized in our Medical Device reportable segment.
As of December 31, 2023 and September 30, 2023, deferred revenue on the condensed consolidated balance sheets totaled $
The amount of revenue recognized that was included in the respective beginning of fiscal year balances of deferred revenue on the condensed consolidated balance sheets totaled $
9
SurVeil DCB Product Sales
Under the Abbott Agreement, we supply commercial units of the SurVeil DCB to Abbott, and Abbott has exclusive worldwide distribution rights. During the three months ended December 31, 2023, we commenced shipment of commercial units of the SurVeil DCB to Abbott. We recognize revenue from the sale of commercial units of the SurVeil DCB to Abbott at the time of shipment in product sales on the condensed consolidated statements of operations. The amount of SurVeil DCB product sales revenue recognized includes (i) the contractual transfer price per unit and (ii) an estimate of Surmodics’ share of net profits resulting from product sales by Abbott to third parties pursuant to the Abbott Agreement (“estimated SurVeil DCB profit-sharing”). On a quarterly basis, Abbott (i) reports to us its third-party sales of the SurVeil DCB the quarter after those sales occur, which may occur within two years following shipment based on the product’s current shelf life; and (ii) reports to us and pays the actual amount of profit-sharing. Estimated SurVeil DCB profit-sharing represents variable consideration and is recorded in contract assets on the condensed consolidated balance sheets. We estimate variable consideration as the most-likely amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue will not occur when the uncertainty associated with the variable consideration is resolved. Significant judgment is required in estimating the amount of variable consideration to recognize when assessing factors outside of Surmodics’ influence, such as limited availability of third-party information, expected duration of time until resolution, and limited relevant past experience.
4. Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis by level of the fair value hierarchy were as follows:
|
December 31, 2023 |
|
|||||||||||||
(In thousands) |
Quoted Prices in Active Markets for Identical Instruments |
|
|
Significant Other |
|
|
Significant |
|
|
Total Fair Value |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
||||
Cash equivalents (1) |
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
Available-for-sale securities (1) |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Total assets |
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
||||
Interest rate swap (2) |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Total liabilities |
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
|
September 30, 2023 |
|
|||||||||||||
(In thousands) |
Quoted Prices in |
|
|
Significant Other |
|
|
Significant |
|
|
Total Fair Value |
|
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
||||
Cash equivalents (1) |
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
Available-for-sale securities (1) |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Interest rate swap (2) |
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Total assets |
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
||
10
5. Supplemental Balance Sheet Information
Investments — Available-for-sale Securities
The amortized cost, unrealized holding gains and losses, and fair value of available-for-sale securities were as follows:
|
|
December 31, 2023 |
|
|||||||||||||
(In thousands) |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
||||
Commercial paper and corporate bonds |
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
|
||
Available-for-sale securities |
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
|
||
|
|
September 30, 2023 |
|
|||||||||||||
(In thousands) |
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
||||
Commercial paper and corporate bonds |
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
|
||
Available-for-sale securities |
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
|
||
Inventories
Inventories consisted of the following components:
|
December 31, |
|
|
September 30, |
|
||
(In thousands) |
2023 |
|
|
2023 |
|
||
Raw materials |
$ |
|
|
$ |
|
||
Work-in process |
|
|
|
|
|
||
Finished products |
|
|
|
|
|
||
Total |
$ |
|
|
$ |
|
||
Prepaids and Other Assets, Current
Prepaids and other current assets consisted of the following:
|
December 31, |
|
|
September 30, |
|
||
(In thousands) |
2023 |
|
|
2023 |
|
||
Prepaid expenses |
$ |
|
|
$ |
|
||
Irish research and development credits receivable |
|
|
|
|
|
||
CARES Act employee retention credit receivable (1) |
|
|
|
|
|
||
Prepaids and other |
$ |
|
|
$ |
|
||
11
Intangible Assets
Intangible assets consisted of the following:
|
December 31, 2023 |
|
|||||||||||||
(Dollars in thousands) |
Weighted Average Original Life (Years) |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net |
|
||||
Definite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
||||
Customer lists and relationships |
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Developed technology |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Patents and other |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total definite-lived intangible assets |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Unamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
||||
Trademarks and trade names |
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Total intangible assets |
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
|
September 30, 2023 |
|
|||||||||||||
(Dollars in thousands) |
Weighted Average Original Life (Years) |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net |
|
||||
Definite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
||||
Customer lists and relationships |
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Developed technology |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Patents and other |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total definite-lived intangible assets |
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Unamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
||||
Trademarks and trade names |
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Total intangible assets |
|
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Intangible asset amortization expense was $
(In thousands) |
|
|
|
Remainder of 2024 |
$ |
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
2028 |
|
|
|
2029 |
|
|
|
Thereafter |
|
|
|
Definite-lived intangible assets |
$ |
|
|
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.
Goodwill
Changes in the carrying amount of goodwill by segment were as follows:
(In thousands) |
In Vitro |
|
|
Medical |
|
|
Total |
|
|||
Goodwill as of September 30, 2023 |
$ |
|
|
$ |
|
|
$ |
|
|||
Currency translation adjustment |
|
— |
|
|
|
|
|
|
|
||
Goodwill as of December 31, 2023 |
$ |
|
|
$ |
|
|
$ |
|
|||
12
Other Assets, Noncurrent
Other noncurrent assets consisted of the following:
|
December 31, |
|
|
September 30, |
|
||
(In thousands) |
2023 |
|
|
2023 |
|
||
Operating lease right-of-use assets |
$ |
|
|
$ |
|
||
Other |
|
|
|
|
|
||
Other assets |
$ |
|
|
$ |
|
||
Accrued Other Liabilities
Accrued other liabilities consisted of the following:
|
December 31, |
|
|
September 30, |
|
||
(In thousands) |
2023 |
|
|
2023 |
|
||
Accrued professional fees |
$ |
|
|
$ |
|
||
Accrued clinical study expense |
|
|
|
|
|
||
Accrued purchases |
|
|
|
|
|
||
Deferred consideration (1) |
|
|
|
|
|
||
Operating lease liabilities, current portion |
|
|
|
|
|
||
Other |
|
|
|
|
|
||
Total accrued other liabilities |
$ |
|
|
$ |
|
||
Other Long-term Liabilities
Other long-term liabilities consisted of the following:
|
December 31, |
|
|
September 30, |
|
||
(In thousands) |
2023 |
|
|
2023 |
|
||
Deferred consideration (1) |
$ |
|
|
$ |
|
||
Unrecognized tax benefits (2) |
|
|
|
|
|
||
|
|
|
|
|
|||
Other |
|
|
|
|
|
||
Other long-term liabilities |
$ |
|
|
$ |
|
||
6. Debt
Debt consisted of the following:
|
December 31, |
|
|
September 30, |
|
||
(In thousands) |
2023 |
|
|
2023 |
|
||
Revolving Credit Facility, |
$ |
|
|
$ |
|
||
Tranche 1 Term Loans, |
|
|
|
|
|
||
Long-term debt, gross |
|
|
|
|
|
||
Less: Unamortized debt issuance costs |
|
( |
) |
|
|
( |
) |
Long-term debt, net |
$ |
|
|
$ |
|
||
13
On October 14, 2022, the Company entered into a secured revolving credit facility and secured term loan facilities pursuant to a Credit, Security and Guaranty Agreement (the “MidCap Credit Agreement”) with Mid Cap Funding IV Trust, as agent, and MidCap Financial Trust, as term loan servicer and the lenders from time to time party thereto. The MidCap Credit Agreement provides for availability under a secured revolving line of credit of up to $
The MidCap Credit Agreement also provides for up to $
Pursuant to the MidCap Credit Agreement, the Company provided a first priority security interest in all existing and future acquired assets, including intellectual property and real estate, owned by the Company. The MidCap Credit Agreement contains certain covenants that limit the Company’s ability to engage in certain transactions. Subject to certain limited exceptions, these covenants limit the Company’s ability to, among other things:
The MidCap Credit Agreement also contains customary indemnification obligations and customary events of default, including, among other things, (i) non-payment, (ii) breach of warranty, (iii) non-performance of covenants and obligations, (iv) default on other indebtedness, (v) judgments, (vi) change of control, (vii) bankruptcy and insolvency, (viii) impairment of security, (ix) termination of a pension plan, (x) regulatory matters, and (xi) material adverse effect.
In addition, the Company must maintain minimum core net revenue levels tested quarterly to the extent that Term Loans advanced under the MidCap Credit Agreement exceed $
Borrowings under the MidCap Credit Agreement bear interest at the forward-looking,
14
Subject to certain limitations, the Term Loans have a prepayment fee for payments made prior to the maturity date equal to
7. Derivative Financial Instruments
As of December 31, 2023 and September 30, 2023, derivative financial instruments on the condensed consolidated balance sheets consisted of a fixed-to-variable interest rate swap to mitigate exposure to interest rate increases related to our Term Loans (“interest rate swap”). The interest rate swap has been designated as a cash flow hedge. See Note 6 Debt for further information on our financing arrangements.
|
Asset (Liability) |
||||||||||||||||||||
(In thousands) |
Gross Recognized Amount |
|
|
Gross Offset Amount |
|
|
Net Amount Presented |
|
|
Cash Collateral Receivable |
|
|
Net Amount Reported |
|
|
Balance Sheet Location |
|||||
December 31, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest rate swap |
$ |
( |
) |
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
|||
September 30, 2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interest rate swap |
$ |
|
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
$ |
|
|
||||
The pretax amounts recognized in accumulated other comprehensive loss (“AOCL”) for designated hedge derivative instruments were as follows:
|
Three Months Ended December 31, |
|
|||||
(In thousands) |
2023 |
|
|
2022 |
|
||
Beginning unrealized net gain in AOCL |
$ |
|
|
$ |
— |
|
|
Net loss recognized in other comprehensive income (loss) |
|
( |
) |
|
|
( |
) |
|
( |
) |
|
|
|
||
Ending unrealized loss in AOCL |
$ |
( |
) |
|
$ |
( |
) |
8. 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.
|
Three Months Ended December 31, |
|
|||||
(In thousands) |
2023 |
|
|
2022 |
|
||
Product costs |
$ |
|
|
$ |
|
||
Research and development |
|
|
|
|
|
||
Selling, general and administrative |
|
|
|
|
|
||
Total |
$ |
|
|
$ |
|
||
15
As of December 31, 2023, unrecognized compensation costs related to non-vested awards totaled approximately $
Stock Option Awards
The Company awards stock options to officers, directors and key employees and uses the Black-Scholes option pricing model to determine the fair value of stock options as of the date of each grant.
|
Three Months Ended December 31, |
|
|||||
|
2023 |
|
|
2022 |
|
||
Stock option grant activity: |
|
|
|
|
|
||
Stock options granted |
|
|
|
|
|
||
Weighted average grant date fair value |
$ |
|
|
$ |
|
||
Weighted average exercise price |
$ |
|
|
$ |
|
||
Restricted Stock Awards
During the three months ended December 31, 2023 and 2022, the Company awarded
Restricted Stock Unit Awards
During each of the three months ended December 31, 2023 and 2022, the Company awarded
Employee Stock Purchase Plan
9. Net Loss Per Share Data
Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) 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.
|
Three Months Ended December 31, |
|
|||||
(In thousands) |
2023 |
|
|
2022 |
|
||
Basic weighted average shares outstanding |
|
|
|
|
|
||
Dilutive effect of outstanding stock options, non-vested restricted stock, and non-vested restricted stock units |
|
— |
|
|
|
— |
|
Diluted weighted average shares outstanding |
|
|
|
|
|
||
16
10. Income Taxes
A valuation allowance is required to be recognized against deferred tax assets if, based on the available evidence, it is more likely than not (defined as a likelihood of more than
Discrete tax benefits related to stock-based compensation awards vested, expired, canceled and exercised was $
11. Commitments and Contingencies
Asset Acquisitions. 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 $
17
Vetex Acquisition. In fiscal 2021, Surmodics acquired all of the outstanding shares of Vetex with an upfront cash payment of $
12. Segment Information
Segment revenue, operating loss, and depreciation and amortization were as follows:
|
Three Months Ended December 31, |
|
|||||
(In thousands) |
2023 |
|
|
2022 |
|
||
Revenue: |
|
|
|
|
|
||
Medical Device |
$ |
|
|
$ |
|
||
In Vitro Diagnostics |
|
|
|
|
|
||
Total revenue |
$ |
|
|
$ |
|
||
|
|
|
|
|
|
||
Operating loss: |
|
|
|
|
|
||
Medical Device |
$ |
( |
) |
|
$ |
( |
) |
In Vitro Diagnostics |
|
|
|
|
|
||
Total segment operating income (loss) |
|
|
|
|
( |
) |
|
Corporate |
|
( |
) |
|
|
( |
) |
Total operating loss |
$ |
( |
) |
|
$ |
( |
) |
|
|
|
|
|
|
||
Depreciation and amortization: |
|
|
|
|
|
||
Medical Device |
$ |
|
|
$ |
|
||
In Vitro Diagnostics |
|
|
|
|
|
||
Corporate |
|
|
|
|
|
||
Total depreciation and amortization |
$ |
|
|
$ |
|
||
The Corporate category includes expenses that are not fully allocated to the 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.
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.
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, 2023. 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. (referred to as “Surmodics,” the “Company,” “we,” “us,” “our” and other like terms) is a leading provider of performance coating technologies for intravascular medical devices and chemical and biological components for in vitro diagnostic (“IVD”) immunoassay tests and microarrays. Surmodics develops and commercializes highly differentiated vascular intervention 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 modification and drug-delivery coating technologies, along with its device design, development and manufacturing capabilities. The Company’s mission is to improve the detection and treatment of disease. Surmodics is headquartered in Eden Prairie, Minnesota.
Vascular Intervention Medical Device Platforms
Within our Medical Device segment, we develop and manufacture our own proprietary vascular intervention medical device products, which leverage our expertise in performance coating technologies, product design and engineering capabilities. We believe our strategy of developing our own medical device products has 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 device products than we would by licensing our device-enabling technologies.
Highlighted below are select medical device products within our development pipeline that are our focus for development and commercialization efforts. For our drug-coated balloon (“DCB") platform, we are commercializing our SurVeil™ DCB through a distribution arrangement with Abbott Vascular, Inc. (“Abbott”). For both our thrombectomy and radial access platforms, we are pursuing commercialization via a direct sales strategy leveraging a small team of experienced sales professionals and clinical specialists. Beginning in fiscal 2022, we began to see modest, but meaningful and growing revenue associated with the adoption, utilization and sales of our Pounce™ and Sublime™ platform products.
Drug-coated Balloon Platform
Surmodics’ DCBs are designed for vascular interventions to treat peripheral arterial disease (“PAD”), a condition that causes a narrowing of the blood vessels supplying the extremities.
In the first quarter of fiscal 2024, we completed shipment of Abbott’s initial stocking order of commercial units of the SurVeil DCB, resulting in recognition of product sales, which included both (i) the contractual transfer price, and (ii) an estimate of Surmodics’ share of net profits resulting from product sales by Abbott to third parties. As of January 2024, the SurVeil DCB is now a commercial product available in the U.S. through Abbott.
19
Pounce Thrombectomy Platform
We have successfully developed, internally and through acquisitions, multiple FDA 510(k)-cleared mechanical thrombectomy devices for the non-surgical removal of thrombi and emboli (clots) from the peripheral vasculature. In addition to FDA clearance, our Pounce Venous Thrombectomy System has the necessary regulatory approval 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 viable first-line treatment options for interventionalists. These devices include:
In the third quarter of fiscal 2023, the low-profile (LP) model of the Pounce Arterial Thrombectomy System received FDA 510(k) regulatory clearance, which will allow for clot removal in below-the-knee peripheral arteries (2 mm to 4 mm in diameter), expanding the addressable market for the Pounce platform. Limited market evaluations for the Pounce LP device began in the first quarter of fiscal 2024, and transition to commercial launch is targeted for fiscal 2024.
Sublime Radial Access Platform
We have successfully developed and received FDA 510(k) regulatory clearance for a suite of devices that enable vascular intervention via radial (wrist) access for which commercial sales began in the first quarter of fiscal 2022. These devices include:
For more information regarding our vascular intervention medical devices, see Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
20
Results of Operations
Three Months Ended December 31, 2023 and 2022
Revenue. Revenue in the first quarter of fiscal 2024 was $30.6 million, a $5.6 million or 23% increase compared to the prior-year quarter. The following is a summary of revenue streams within each reportable segment.
|
Three Months Ended December 31, |
||||||||||||||
(Dollars in thousands) |
2023 |
|
|
2022 |
|
|
Increase/(Decrease) |
||||||||
Medical Device |
|
|
|
|
|
|
|
|
|
|
|
||||
Product sales |
$ |
11,950 |
|
|
$ |
8,380 |
|
|
$ |
3,570 |
|
|
43 |
|
% |
Royalties & license fees – performance coatings |
|
8,208 |
|
|
|
7,469 |
|
|
|
739 |
|
|
10 |
|
% |
License fees – SurVeil DCB |
|
971 |
|
|
|
1,296 |
|
|
|
(325 |
) |
|
(25 |
) |
% |
R&D and other |
|
2,416 |
|
|
|
1,873 |
|
|
|
543 |
|
|
29 |
|
% |
Medical Device Revenue |
|
23,545 |
|
|
|
19,018 |
|
|
|
4,527 |
|
|
24 |
|
% |
In Vitro Diagnostics |
|
|
|
|
|
|
|
|
|
|
|
||||
Product sales |
|
6,877 |
|
|
|
5,854 |
|
|
|
1,023 |
|
|
17 |
|
% |
R&D and other |
|
130 |
|
|
|
61 |
|
|
|
69 |
|
|
113 |
|
% |
In Vitro Diagnostics Revenue |
|
7,007 |
|
|
|
5,915 |
|
|
|
1,092 |
|
|
18 |
|
% |
Total Revenue |
$ |
30,552 |
|
|
$ |
24,933 |
|
|
$ |
5,619 |
|
|
23 |
|
% |
Medical Device. Revenue in our Medical Device segment was $23.5 million in the first quarter of fiscal 2024, a 24% increase from $19.0 million in the prior-year quarter.
In Vitro Diagnostics. Revenue in our In Vitro Diagnostics (“IVD”) segment was $7.0 million in the first quarter of fiscal 2024, an 18% increase from $5.9 million in the prior-year quarter.
21
Operating Costs and Expenses. Product sales, product costs, product gross profit, product gross margin, and operating costs were as follows:
|
Three Months Ended December 31, |
||||||||||||||||
(Dollars in thousands) |
2023 |
|
2022 |
|
Increase/(Decrease) |
||||||||||||
Product sales |
$ |
18,827 |
|
|
|
$ |
14,234 |
|
|
|
$ |
4,593 |
|
|
32 |
|
% |
Product costs |
|
8,803 |
|
|
|
|
5,267 |
|
|
|
|
3,536 |
|
|
67 |
|
% |
Product gross profit (1) |
|
10,024 |
|
|
|
|
8,967 |
|
|
|
|
1,057 |
|
|
12 |
|
% |
% Product gross margin (2) |
|
53.2 |
|
% |
|
|
63.0 |
|
% |
|
|
(9.8 |
) |
ppt |
|||
R&D expense |
|
8,664 |
|
|
|
|
12,743 |
|
|
|
|
(4,079 |
) |
|
(32 |
) |
% |
% Total revenue |
|
28 |
|
% |
|
|
51 |
|
% |
|
|
|
|
|
|
||
SG&A expense |
|
12,537 |
|
|
|
|
13,236 |
|
|
|
|
(699 |
) |
|
(5 |
) |
% |
% Total revenue |
|
41 |
|
% |
|
|
53 |
|
% |
|
|
|
|
|
|
||
Acquired intangible asset amortization |
|
870 |
|
|
|
|
913 |
|
|
|
|
(43 |
) |
|
(5 |
) |
% |
Contingent consideration expense |
|
— |
|
|
|
|
3 |
|
|
|
|
(3 |
) |
|
|
|
|
Product gross profit and product gross margins. Product gross profit increased $1.1 million, or 12%, in the first quarter of fiscal 2024, compared to the prior-year period. Product gross margins were 53.2% and 63.0% in the first quarter of fiscal 2024 and 2023, respectively. The decrease in product gross margin in the first quarter of fiscal 2024 was primarily driven by several factors.
In fiscal 2024, product gross margins may continue to be adversely impacted by the shift in revenue mix towards sales of vascular intervention medical devices at relatively lower margins.
R&D expense. R&D expense declined 32%, or $4.1 million, in the first quarter of fiscal 2024, compared to the prior-year quarter. R&D expense as a percentage of revenue was 28% and 51% in the first quarter of fiscal 2024 and 2023, respectively. The decrease in R&D expense was primarily driven by lower SurVeil DCB R&D expenses due to the transition to commercialization, the timing of certain investments in product development, and the spending reduction plan and workforce reduction implemented in the second quarter of fiscal 2023,. For full-year fiscal 2024, we expect R&D expense to decrease between $5.5 million and $6.5 million, compared to fiscal 2023, primarily related to lower SurVeil DCB expenses as the result of transition to commercialization and the workforce reduction implemented in the second quarter of fiscal 2023, partly offset by our continued investment in our Pounce thrombectomy and Sublime radial access product platforms.
Selling, general and administrative (“SG&A”) expense. SG&A expense decreased 5%, or $0.7 million in the first quarter of fiscal 2024, compared to the prior-year quarter. SG&A expense as a percentage of revenue was 41% and 53% in the first quarter of fiscal 2024 and 2023, respectively. The decrease in SG&A expense was primarily related to lower headcount, largely as the result of the spending reduction plan and workforce reduction implemented in the second quarter of fiscal 2023. For full-year fiscal 2024, we expect SG&A expense to increase between $2.0 million and $3.0 million, compared to fiscal 2023, as we continue to advance the commercialization of our Pounce thrombectomy and Sublime radial access product platforms.
Acquired intangible asset amortization. We have previously acquired certain intangible assets through business combinations, which are amortized over periods ranging from seven to 14 years.
22
Other expense. Major classifications of other expense were as follows:
|
Three Months Ended December 31, |
|
|||||
(In thousands) |
2023 |
|
|
2022 |
|
||
Interest expense, net |
$ |
(896 |
) |
|
$ |
(826 |
) |
Foreign exchange loss |
|
(45 |
) |
|
|
(125 |
) |
Investment income, net |
|
539 |
|
|
|
172 |
|
Other expense, net |
$ |
(402 |
) |
|
$ |
(779 |
) |
Interest expense, net increased in the first quarter of fiscal 2024, compared to the prior-year quarter, due to higher interest rates. Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements and expectations for fiscal 2024 interest expense. Foreign currency exchange (losses) gains result primarily from the impact of U.S. dollar to Euro exchange rate fluctuations on certain intercompany transactions and balances. Investment income, net increased in the first quarter of fiscal 2024, compared to the prior-year quarter, due to increased investments in available-for-sale securities, as well as higher interest rates.
Income taxes. We reported income tax expense of $(0.1) million and income tax benefit of $0.2 million in the first quarter of fiscal 2024 and 2023, respectively. Our effective tax rate was (9)% and 2% for the first quarter of fiscal 2024 and 2023, respectively.
Segment Operating Results
Operating results for each of our reportable segments were as follows:
|
Three Months Ended December 31, |
|
|||||||||
(In thousands) |
2023 |
|
|
2022 |
|
|
$ Change |
|
|||
Operating loss: |
|
|
|
|
|
|
|
|
|||
Medical Device |
$ |
(224 |
) |
|
$ |
(7,235 |
) |
|
$ |
7,011 |
|
In Vitro Diagnostics |
|
3,124 |
|
|
|
2,948 |
|
|
|
176 |
|
Total segment operating income (loss) |
|
2,900 |
|
|
|
(4,287 |
) |
|
|
7,187 |
|
Corporate |
|
(3,222 |
) |
|
|
(2,942 |
) |
|
|
(280 |
) |
Total operating loss |
$ |
(322 |
) |
|
$ |
(7,229 |
) |
|
$ |
6,907 |
|
Medical Device. Our Medical Device business reported an operating loss of $(0.2) million in the first quarter of fiscal 2024, compared to $(7.2) million in the prior-year quarter, representing (1)% and (38)% of revenue, respectively.
23
In Vitro Diagnostics. Our In Vitro Diagnostics business reported operating income of $3.1 million and $2.9 million in the first quarter of fiscal 2024 and 2023, respectively, representing 45% and 50% of revenue, respectively.
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 we do not fully allocate 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 loss was $(3.2) million and $(2.9) million in the first quarter of fiscal 2024 and 2023, respectively.
Cash Flow Operating Results
The following is a summary of cash flow results:
|
Three Months Ended December 31, |
|
|||||
(In thousands) |
2023 |
|
|
2022 |
|
||
Cash (used in) provided by: |
|
|
|
|
|
||
Operating activities |
$ |
(8,792 |
) |
|
$ |
(10,802 |
) |
Investing activities |
|
(8,470 |
) |
|
|
(977 |
) |
Financing activities |
|
(1,049 |
) |
|
|
18,800 |
|
Effect of exchange rates on changes in cash and cash equivalents |
|
247 |
|
|
|
411 |
|
Net change in cash and cash equivalents |
$ |
(18,064 |
) |
|
$ |
7,432 |
|
Operating Activities. Cash used in operating activities was $(8.8) million in the first three months of fiscal 2024, compared to cash used of $(10.8) million in the same prior-year period. Net loss was $(0.8) million in the first three months of fiscal 2024, compared to $(7.8) million in the same prior-year period. Net changes in operating assets and liabilities reduced cash flows from operating activities by $(12.4) million in the first three months of fiscal 2024 and reduced cash flows from operating activities by $(7.3) million in the same prior-year period. Significant changes in operating assets and liabilities affecting cash flows during these periods included:
24
Investing Activities. Cash used in investing activities totaled $(8.4) million in the first three months of fiscal 2024, compared to cash used of $(1.0) million in the same prior-year period.
Financing Activities. Cash (used in) provided by financing activities totaled $(1.0) million and $18.8 million in the first three months of fiscal 2024 and 2023, respectively.
Liquidity and Capital Resources
As of December 31, 2023, working capital totaled $63.3 million, an increase of $0.6 million from September 30, 2023. We define working capital as current assets minus current liabilities. Cash and cash equivalents and available-for-sale investments totaled $35.2 million as of December 31, 2023, a decrease of $10.2 million from $45.4 million as of September 30, 2023.
The Company proactively manages its access to capital to support liquidity and continued growth. On October 14, 2022, Surmodics entered into a new, five-year secured credit agreement with MidCap, consisting of up to $100 million in term loans ($25 million of which is at the sole discretion of MidCap) and a $25 million revolving credit facility. At close, the Company drew $25 million on the term loan and $5 million on the revolving credit facility. These proceeds were partially used to retire the Company’s then existing $25 million revolving credit facility with Bridgewater Bank, of which $10 million was outstanding. Upon closing in October 2022, the Company’s cash balance increased by $19.3 million. In fiscal 2024, the Company expects total interest expense under the credit agreement with MidCap to be approximately $3.5 million.
25
As of December 31, 2023, the Company’s shelf registration statement with the SEC 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. This shelf registration statement expires in May 2026.
In fiscal 2024, we anticipate an increase in SG&A expenditures of between $2.0 million and $3.0 million, as well as an increase in capital expenditures. We also anticipate R&D expenses will continue to be significant in fiscal 2024, primarily related to medical device product development, including continued investment in our Pounce and Sublime product platforms. We believe that our existing cash and cash equivalents and available-for-sale investments, which totaled $35.2 million as of December 31, 2023, together with cash flow from operations and our revolving credit facility and term loans, will provide liquidity sufficient to meet our cash needs and fund our operations and planned capital expenditures for fiscal 2024. There can be no assurance, however, that our business will continue to generate cash flows at historic levels.
Beyond fiscal 2024, 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 the SurVeil DCB distributed by Abbott, our exclusive distribution partner for the product. Our long-term cash requirements also will be significantly impacted by the level of our investment in commercialization of our vascular intervention device 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.
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 27% and 10%, respectively, of our consolidated revenue for fiscal 2023. Abbott and Medtronic each comprised 19% and 10%, respectively, of our consolidated revenue for the three months ended December 31, 2023.
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 three months ended December 31, 2023, 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, 2023.
26
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, our strategies for growth, including our ability to sign new license agreements, conduct clinical evaluations, and bring new products to market; the expected duration of limited market evaluations and timing of commercial launches of our products; the development of future products and their anticipated attributes; the period over which deferred revenue related to the Abbott Agreement is expected to be recognized; our plans to evaluate our strategy for further clinical investment in the Sundance DCB; future revenue growth, our longer-term valuation-creation strategy, and our future potential; information about our product pipeline; future gross margins, operating expenses, and capital expenditures; the potential impact of a shift in revenue mix towards sales of medical devices; estimated future amortization expense; expectations regarding operating expenses and their impact on our cash flows; the period over which unrecognized compensation costs is expected to be recognized; research and development plans and expenses; the expected completion timeframe for the TRANSCEND clinical trial; anticipated cash requirements; the intended use of remaining proceeds of our borrowing under the MidCap Credit Agreement; future cash flows and sources of funding, and their ability together with existing cash, and cash equivalents, to provide liquidity sufficient to meet our cash needs and fund our operations and planned capital expenditures for fiscal 2024; statements regarding cash requirements beyond fiscal 2024; expectations regarding capital available under our secured revolving credit facility and secured term loan facilities; expectations regarding the maturity of debt; future impacts of our interest rate swap transactions; our expected interest expense in fiscal 2024 under the credit agreement with MidCap; the impact of potential lawsuits or claims; the potential impact of interest rate fluctuations on our results of operations and cash flows; the impact of potential change in raw material prices, sources of raw materials and our ability to manufacture raw materials ourselves; the potential impact on the Company of currency fluctuations; future income tax (expense) benefit; expected income tax expense and cash taxes to be paid; the likelihood that we will realize the benefits of our deferred tax assets; 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, 2023. We disclaim any intent or obligation to update publicly these forward-looking statements, whether because of new information, future events or otherwise.
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:
27
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 Securities and Exchange Commission.
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. As of December 31, 2023, we held $11.8 million in available-for-sale debt securities. Therefore, interest rate fluctuations relating to investments 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.
Loans under the Midcap credit agreement bear interest at floating rates tied to Term SOFR. As a result, changes in Term SOFR can affect our results of operations and cash flows to the extent we do not have effective interest rate swap arrangements in place. On October 14, 2022, we entered into a five-year interest rate swap transaction with Wells Fargo Bank, N.A. with respect to $25.0 million of notional value of the term loans funded under the MidCap credit agreement. The interest rate swap transaction fixes at 4.455% the one-month Term SOFR portion of interest rate under the $25.0 million initial Term Loan funded such that the interest rate on $25.0 million of the Term Loan will be 10.205% through its maturity. We have no other swap arrangements in place for any other loans under the Midcap credit agreement.
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 addition, the contractual transfer price paid by Abbott for commercial units of our SurVeil DCB product is denominated in Euros. 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 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. dollars 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.
28
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 December 31, 2023. 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 December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
29
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 identified in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, filed with the Securities and Exchange Commission on November 22, 2023, under Part I, 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents the information with respect to purchases made by or on behalf of Surmodics, Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the three months ended December 31, 2023.
|
|
Total Number of |
|
|
Average Price Paid |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Programs |
|
|
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Programs |
|
||||
Period: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
October 1 – 31, 2023 |
|
|
111 |
|
|
$ |
28.72 |
|
|
|
— |
|
|
$ |
25,300,000 |
|
November 1 – 30, 2023 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
25,300,000 |
|
December 1 – 31, 2023 |
|
|
28,717 |
|
|
|
32.82 |
|
|
|
— |
|
|
|
25,300,000 |
|
Total |
|
|
28,828 |
|
|
|
32.80 |
|
|
|
— |
|
|
|
|
|
The Company has an aggregate of $25.3 million available for future common stock purchases under the current authorizations. The MidCap credit agreement restricts our ability to repurchase our common stock.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
30
Item 6. Exhibits |
EXHIBIT INDEX |
|
Exhibit |
|
Description |
|
|
|
|
||
|
|
|
|
||
|
|
|
|
||
|
|
|
|
||
|
|
|
|
||
|
|
|
|
||
|
|
|
|
||
|
|
|
|
||
|
|
|
|
||
|
|
|
|
||
|
|
|
|
||
|
|
|
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. |
|
|
|
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents. |
|
|
|
104* |
|
Cover page formatted as Inline XBRL and contained in Exhibit 101. |
* Filed herewith
31
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.
February 1, 2024 |
Surmodics, Inc. |
|
|
|
|
|
By: |
/s/ Timothy J. Arens |
|
|
Timothy J. Arens |
|
|
Senior Vice President of Finance and Chief Financial Officer |
|
|
|
|
|
(duly authorized signatory and principal financial officer) |
32