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 |
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Trading Symbol |
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Name of each exchange on which registered |
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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 |
☐ |
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Non-accelerated filer |
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Smaller reporting company |
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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 26, 2024 was
TABLE OF CONTENTS
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Item 1. |
3 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
21 |
Item 3. |
31 |
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Item 4. |
32 |
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Item 1. |
33 |
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Item 1A. |
33 |
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Item 2. |
35 |
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Item 3. |
36 |
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Item 4. |
36 |
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Item 5. |
36 |
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Item 6. |
37 |
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38 |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Surmodics, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
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June 30, |
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September 30, |
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2024 |
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2023 |
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(In thousands, except per share data) |
(Unaudited) |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
$ |
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$ |
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Available-for-sale securities |
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Accounts receivable, net of allowances of $ |
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Contract assets, current |
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Inventories |
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Income tax receivable |
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— |
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Prepaids and other |
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Total Current Assets |
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Property and equipment, net |
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Intangible assets, net |
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Goodwill |
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Other assets |
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Total Assets |
$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities: |
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Accounts payable |
$ |
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$ |
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Accrued liabilities: |
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Compensation |
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Accrued other |
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Deferred revenue |
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Income tax payable |
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— |
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Total Current Liabilities |
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Long-term debt, net |
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Deferred revenue, less current portion |
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— |
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Deferred income taxes |
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Other long-term liabilities |
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Total Liabilities |
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(Note 11) |
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Stockholders’ Equity: |
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Series A Preferred stock — $ |
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Common stock — $ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Retained earnings |
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Total Stockholders’ Equity |
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Total Liabilities and Stockholders’ Equity |
$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Surmodics, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
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Three Months Ended June 30, |
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Nine Months Ended June 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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(In thousands, except per share data) |
(Unaudited) |
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(Unaudited) |
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Revenue: |
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Product sales |
$ |
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$ |
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$ |
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$ |
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Royalties and license fees |
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Research, development and other |
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Total revenue |
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Operating costs and expenses: |
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Research and development |
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Selling, general and administrative |
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Acquired intangible asset amortization |
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Restructuring expense |
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— |
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— |
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— |
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Contingent consideration gain |
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— |
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( |
) |
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— |
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( |
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Total operating costs and expenses |
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Operating (loss) income |
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( |
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( |
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Other expense, net: |
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Interest expense, net |
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( |
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( |
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( |
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( |
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Foreign exchange loss |
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( |
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( |
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( |
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( |
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Investment income, net |
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Other expense, net |
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( |
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( |
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( |
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( |
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(Loss) income before income taxes |
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( |
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( |
) |
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Income tax expense |
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( |
) |
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( |
) |
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( |
) |
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( |
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Net (loss) income |
$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
( |
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Basic net (loss) income per share |
$ |
( |
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$ |
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$ |
( |
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$ |
( |
) |
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Diluted net (loss) income per share |
$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
( |
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Weighted average number of shares outstanding: |
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Basic |
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Diluted |
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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 June 30, |
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Nine Months Ended June 30, |
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2024 |
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2023 |
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2024 |
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2023 |
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(In thousands) |
(Unaudited) |
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(Unaudited) |
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Net (loss) income |
$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
( |
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Other comprehensive (loss) income: |
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Derivative instruments: |
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Unrealized net gain (loss) |
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( |
) |
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( |
) |
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Net gain reclassified to earnings |
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( |
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( |
) |
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( |
) |
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( |
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Net changes related to available-for-sale securities, net of tax |
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— |
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— |
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( |
) |
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— |
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Foreign currency translation adjustments |
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( |
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Other comprehensive (loss) income |
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( |
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Comprehensive (loss) income |
$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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, 2024 and 2023 |
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(Unaudited) |
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Accumulated |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid-In |
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Comprehensive |
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Retained |
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Stockholders’ |
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(In thousands) |
Shares |
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Amount |
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Capital |
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Loss |
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Earnings |
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Equity |
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Balance at March 31, 2024 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Other comprehensive loss, net of tax |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Issuance of common stock |
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— |
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— |
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— |
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— |
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— |
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Common stock options exercised, net |
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— |
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— |
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— |
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Purchase of common stock to pay |
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( |
) |
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— |
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( |
) |
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— |
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— |
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( |
) |
Stock-based compensation |
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— |
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— |
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— |
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— |
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Balance at June 30, 2024 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Balance at March 31, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Other comprehensive income, net of tax |
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— |
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— |
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— |
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— |
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Issuance of common stock |
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— |
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— |
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— |
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— |
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— |
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Common stock options exercised, net |
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— |
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— |
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— |
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— |
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— |
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— |
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Purchase of common stock to pay |
|
( |
) |
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— |
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( |
) |
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— |
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— |
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( |
) |
Stock-based compensation |
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— |
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— |
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— |
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— |
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Balance at June 30, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Nine Months Ended June 30, 2024 and 2023 |
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(Unaudited) |
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Accumulated |
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Additional |
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Other |
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Total |
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Common Stock |
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Paid-In |
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Comprehensive |
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Retained |
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Stockholders’ |
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(In thousands) |
Shares |
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Amount |
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Capital |
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Loss |
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Earnings |
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Equity |
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Balance at September 30, 2023 |
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$ |
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$ |
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$ |
( |
) |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Other comprehensive income, net of tax |
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— |
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— |
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— |
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— |
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Issuance of common stock |
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— |
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— |
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Common stock options exercised, net |
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— |
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— |
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Purchase of common stock to pay |
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( |
) |
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( |
) |
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( |
) |
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— |
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— |
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( |
) |
Stock-based compensation |
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— |
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— |
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— |
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— |
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Balance at June 30, 2024 |
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$ |
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$ |
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$ |
( |
) |
|
$ |
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$ |
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Balance at September 30, 2022 |
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$ |
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$ |
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$ |
( |
) |
|
$ |
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$ |
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Net loss |
— |
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— |
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— |
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— |
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( |
) |
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( |
) |
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Other comprehensive income, net of tax |
— |
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— |
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— |
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— |
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Issuance of common stock |
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— |
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— |
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Common stock options exercised, net |
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— |
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— |
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||||||
Purchase of common stock to pay |
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( |
) |
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( |
) |
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( |
) |
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— |
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— |
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( |
) |
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Stock-based compensation |
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— |
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— |
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||||||
Balance at June 30, 2023 |
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$ |
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$ |
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$ |
( |
) |
|
$ |
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$ |
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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 June 30, |
|
|||||
|
2024 |
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|
2023 |
|
||
(In thousands) |
(Unaudited) |
|
|||||
Operating Activities: |
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|
||
Net loss |
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
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Depreciation and amortization |
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Stock-based compensation |
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Noncash lease expense |
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Amortization of debt issuance costs |
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Provision for credit losses |
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Contingent consideration gain |
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— |
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( |
) |
Deferred taxes |
|
( |
) |
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( |
) |
Other |
|
( |
) |
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Change in operating assets and liabilities: |
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||
Accounts receivable and contract assets |
|
( |
) |
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( |
) |
Inventories |
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( |
) |
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( |
) |
Prepaids and other |
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( |
) |
|
Accounts payable |
|
|
|
|
( |
) |
|
Accrued liabilities |
|
( |
) |
|
|
( |
) |
Income taxes |
|
|
|
|
|
||
Deferred revenue |
|
( |
) |
|
|
( |
) |
Net cash (used in) provided by 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 |
|
( |
) |
|
|
( |
) |
Payments for acquisition of in-process research and development |
|
( |
) |
|
|
( |
) |
Net cash (used in) provided by financing activities |
|
( |
) |
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
|
|
|
||
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 June 30, 2024
(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.
On May 28, 2024, Surmodics entered into a Merger Agreement (the “Merger Agreement”) with BCE Parent, LLC, a Delaware limited liability company (“Parent”), and BCE Merger Sub, Inc., a Minnesota corporation and a wholly owned Subsidiary of Parent (“Merger Sub”), pursuant to which Surmodics will, subject to the terms and conditions thereof, be acquired by Parent for $
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 and nine months ended June 30, 2024 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 June 30, |
|
|
Nine Months Ended June 30, |
|
||||||||||
(In thousands) |
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
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 $
Deferred revenue 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 June 30, 2024, deferred revenue on the condensed consolidated balance sheets included $
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 first quarter of fiscal 2024, 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, current and other assets, noncurrent 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:
|
June 30, 2024 |
|
|||||||||||||
(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:
|
|
June 30, 2024 |
|
|||||||||||||
(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:
|
June 30, |
|
|
September 30, |
|
||
(In thousands) |
2024 |
|
|
2023 |
|
||
Raw materials |
$ |
|
|
$ |
|
||
Work-in process |
|
|
|
|
|
||
Finished products |
|
|
|
|
|
||
Inventories |
$ |
|
|
$ |
|
Prepaids and Other Assets, Current
Prepaids and other current assets consisted of the following:
|
June 30, |
|
|
September 30, |
|
||
(In thousands) |
2024 |
|
|
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:
|
June 30, 2024 |
|
|||||||||||||
(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 June 30, 2024 |
$ |
|
|
$ |
|
|
$ |
|
12
Other Assets, Noncurrent
Other noncurrent assets consisted of the following:
|
June 30, |
|
|
September 30, |
|
||
(In thousands) |
2024 |
|
|
2023 |
|
||
Operating lease right-of-use assets |
$ |
|
|
$ |
|
||
Contract asset (1) |
|
|
|
|
— |
|
|
Other |
|
|
|
|
|
||
Other assets |
$ |
|
|
$ |
|
Accrued Other Liabilities
Accrued other liabilities consisted of the following:
|
June 30, |
|
|
September 30, |
|
||
(In thousands) |
2024 |
|
|
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:
|
June 30, |
|
|
September 30, |
|
||
(In thousands) |
2024 |
|
|
2023 |
|
||
Deferred consideration (1) |
$ |
|
|
$ |
|
||
Unrecognized tax benefits (2) |
|
|
|
|
|
||
|
|
|
|
|
|||
Other |
|
|
|
|
|
||
Other long-term liabilities |
$ |
|
|
$ |
|
13
6. Debt
Debt consisted of the following:
|
June 30, |
|
|
September 30, |
|
||
(In thousands) |
2024 |
|
|
2023 |
|
||
Revolving Credit Facility, |
$ |
|
|
$ |
|
||
Tranche 1 Term Loans, |
|
|
|
|
|
||
Long-term debt, gross |
|
|
|
|
|
||
Less: Unamortized debt issuance costs |
|
( |
) |
|
|
( |
) |
Long-term debt, net |
$ |
|
|
$ |
|
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 $
14
Borrowings under the MidCap Credit Agreement bear interest at
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 June 30, 2024 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 |
|||||
June 30, 2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
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 June 30, |
|
|
Nine Months Ended June 30, |
|
||||||||||
(In thousands) |
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Beginning unrealized net (loss) gain in AOCL |
$ |
( |
) |
|
$ |
— |
|
|
$ |
|
|
$ |
— |
|
|
Net gain (loss) recognized in other comprehensive (loss) income |
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
||
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Ending unrealized (loss) gain in AOCL |
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
15
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 June 30, |
|
|
Nine Months Ended June 30, |
|
||||||||||
(In thousands) |
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Product costs |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Research and development |
|
|
|
|
|
|
|
|
|
|
|
||||
Selling, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
As of June 30, 2024, 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.
|
Nine Months Ended June 30, |
|
|||||
|
2024 |
|
|
2023 |
|
||
Stock option grant activity: |
|
|
|
|
|
||
Stock options granted |
|
|
|
|
|
||
Weighted average grant date fair value |
$ |
|
|
$ |
|
||
Weighted average exercise price |
$ |
|
|
$ |
|
Restricted Stock Awards
During the nine months ended June 30, 2024 and 2023, the Company awarded
Restricted Stock Unit Awards
During each of the nine months ended June 30, 2024 and 2023, the Company awarded
Employee Stock Purchase Plan
9. Net (Loss) Income 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.
16
The calculation of diluted loss per share excluded
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
||||||||||
(In thousands) |
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
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 |
|
|
|
|
|
|
|
|
|
|
|
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 $
17
11. Commitments and Contingencies
Asset Acquisition. 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 $
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) income, and depreciation and amortization were as follows:
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
||||||||||
(In thousands) |
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
||||
Medical Device |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
In Vitro Diagnostics |
|
|
|
|
|
|
|
|
|
|
|
||||
Total revenue |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
||||
Medical Device |
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
In Vitro Diagnostics |
|
|
|
|
|
|
|
|
|
|
|
||||
Total segment operating income |
|
|
|
|
|
|
|
|
|
|
|
||||
Corporate |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Total operating (loss) income |
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
|
|
|
|
|
|
|
|
|
|
|
|
||||
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 litigation and merger-and-acquisition-related costs, 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
13. Merger Agreement
On May 28, 2024, Surmodics entered into the Merger Agreement with Parent and Merger Sub (Note 1). Pursuant to the Merger Agreement, and subject to the terms and conditions thereof, Merger Sub will merge (the “Merger”) with and into the Company, with the Company as the surviving corporation and a wholly owned subsidiary of Parent. At the effective time of the Merger (the “Effective Time”), each share of common stock of the Company then outstanding (other than (1) those shares owned by Merger Sub, Parent, the Company, or any direct or indirect wholly owned subsidiary of Parent or the Company (which will be cancelled without any consideration), (2) any shares outstanding immediately prior to the Effective Time and held of record or beneficially by a Person who has not voted in favor of approval of this Agreement and who is entitled to demand and properly demands and perfects such holder’s dissenter’s rights with respect to such shares, and (3) any shares that have been issued as a restricted stock award pursuant to any of the Stock Incentive Plans (as defined in the Merger Agreement) and that remains unvested and subject to forfeiture thereunder (“Restricted Shares”) (which will be treated as described below)) will be converted into the right to receive $
During the three months ended June 30, 2024, we incurred a total of $
See Part II, Item 1A. Risk Factors for a discussion of certain risks related to the Merger.
Merger Consideration
The Merger Agreement provides that, at the Effective Time, each of the Company’s then outstanding equity awards will be treated as follows: (1) each restricted stock unit or deferred stock unit that has been issued pursuant to any of the Stock Incentive Plans will be cancelled in exchange for an amount in cash equal to the Merger Consideration net of any taxes withheld pursuant to the Merger Agreement; (2) each Restricted Share will be cancelled in exchange for an amount in cash equal to the Merger Consideration, net of any taxes withheld pursuant to the Merger Agreement; and (3) each unexercised option to acquire Company common stock will be (i) if the Merger Consideration for such option is equal to or greater than the exercise price per share of Company common stock subject to such option, cancelled in exchange for an amount in cash equal to the excess, if any, of the Merger Consideration over the exercise price per share of Company common stock subject to such option multiplied by the number of shares of Company common stock subject to such option, and (ii) if the Merger Consideration for such option is less than the exercise price per share of Company common stock subject to such option, cancelled for no consideration.
Conditions
The obligations of the parties to consummate the Merger are subject to the satisfaction or waiver of closing conditions set forth in the Merger Agreement, including (1) the approval of the Company’s shareholders, (2) the expiration or termination of any waiting period applicable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), (3) the absence of a “Company Material Adverse Effect” (as defined in the Merger Agreement) with respect to the Company and (4) other customary closing conditions.
Termination Rights & Fees
The Merger Agreement may be terminated with the mutual written consent of Parent and the Company and also contains termination rights for each of Parent and the Company, including, among others, (1) if the Merger has not been consummated by February 28, 2025 (which date may be extended one or more times, for up to nine additional months in total, under specified circumstances), (2) if a final and non-appealable judgment or law makes consummation of the Merger illegal or prevents the consummation of the Merger, (3) if the required approval of the Company’s shareholders is not obtained, or (4) in the case of a material uncured breach by the other party, in each case as further described in, and subject to the terms and conditions of, the Merger Agreement. Parent may terminate the Merger Agreement in certain circumstances generally related to an adverse change in the Company’s board of directors’ recommendation in favor of the Merger and, as further described below, the Company may terminate the Merger Agreement to accept a Superior Proposal, as further described in, and subject to the terms and conditions of, the Merger Agreement.
19
Upon termination of the Merger Agreement under specified circumstances, generally relating to alternative acquisition proposals or an adverse change in the Company’s board of directors’ recommendation in favor of the Merger, the Company would be required to pay Parent a termination fee of $
The foregoing description of the Merger and the Merger Agreement does not purport to be and is not complete and is subject to and qualified in its entirety by reference to the full text of the Merger Agreement, a copy of which is included as Exhibit 2.4 to this Quarterly Report on Form 10-Q.
20
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.
Merger Agreement
As described more fully under Part I, Item 1, Note 13 Merger Agreement, on May 28, 2024, we entered into a Merger Agreement with BCE Parent, LLC, a Delaware limited liability company (“Parent”), and BCE Merger Sub, Inc., a Minnesota corporation and a wholly owned Subsidiary of Parent (“Merger Sub”), pursuant to which we will, subject to the terms and conditions of the Merger Agreement, be acquired by Parent for $43.00 per share in cash through the merger of Merger Sub with and into us (the “Merger”), with Surmodics as the surviving corporation and a wholly owned subsidiary of Parent. The Merger remains subject to customary closing conditions, including approval by Surmodics shareholders and required regulatory approval. If the Merger is consummated, shares of our common stock will be delisted from The Nasdaq Stock Market and deregistered under the Exchange Act.
During the three and nine months ended June 30, 2024, we incurred a total of $2.9 million in merger-related charges, which we reported within selling, general and administrative expense on the condensed consolidated statements of operations.
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 commercialization and development efforts. For our drug-coated balloon (“DCB") platform, we commercialized 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.
21
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. In the second and third quarters of fiscal 2024, we continued to manufacture and ship commercial units to Abbott in support of Abbott’s commercialization of the product.
Thrombectomy Systems
We have successfully developed, internally and through acquisitions, multiple FDA 510(k)-cleared mechanical thrombectomy devices, which require no capital equipment, for the non-surgical removal of thrombi and emboli (clots) from the peripheral arterial and venous vasculatures, while minimizing the need for thrombolytics. We believe that the ease of use, intuitive design, and performance of our thrombectomy systems make these products attractive first-line treatment options for interventionalists.
The original Pounce (mid profile) Thrombectomy System is indicated for use in peripheral arterial vessels 3.5 mm to 6 mm in diameter, such as those found above the knee. Commercial sales of the Pounce Thrombectomy System began in fiscal 2022.
The Pounce LP (Low Profile) Thrombectomy System is indicated for use in peripheral arterial vessels 2 mm to 4 mm in diameter, such as those found below the knee. The Pounce LP Thrombectomy System received FDA 510(k) regulatory clearance in the third quarter of fiscal 2023, and we began limited market evaluations of the product in the first quarter of fiscal 2024. In the third quarter of fiscal 2024, we completed limited market evaluations for the Pounce LP Thrombectomy System, and the product was commercially launched.
Sublime Radial Access Platform
We have successfully developed and received FDA 510(k) regulatory clearance for a suite of devices designed to access and treat stenosed (narrowed) arteries from the thigh to the foot via radial (wrist) access. Our Sublime radial access platform provides a unique combination of length, profile and deliverability, allowing physicians to access and treat lesions previously inaccessible via radial access. Commercial sales of the Sublime guide sheath and RX PTA dilatation catheter devices began in fiscal 2022.
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.
22
Results of Operations
Three and Nine Months Ended June 30, 2024 and 2023
Revenue. Revenue in the third quarter of fiscal 2024 was $30.3 million, a $22.1 million or 42% decrease compared to the prior-year quarter. Revenue in the first nine months of fiscal 2024 was $92.9 million, an $11.8 million or 11% decrease compared to the same prior-year period. The year-over-year decline in revenue was primarily driven by the $27.0 million PMA milestone payment from Abbott received in the third quarter of fiscal 2023, $24.6 million of which was recognized as SurVeil DCB license fee revenue in the third quarter and first nine months of fiscal 2023, partly offset by growth in product sales and performance coating royalties and license fee revenue. The following is a summary of revenue streams within each reportable segment.
|
Three Months Ended June 30, |
|
Nine Months Ended June 30, |
||||||||||||||||||||||||||||
(Dollars in thousands) |
2024 |
|
|
2023 |
|
|
Increase/(Decrease) |
|
2024 |
|
|
2023 |
|
|
Increase/(Decrease) |
||||||||||||||||
Medical Device |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Product sales |
$ |
10,726 |
|
|
$ |
9,299 |
|
|
$ |
1,427 |
|
|
15 |
|
% |
|
$ |
33,776 |
|
|
$ |
25,593 |
|
|
$ |
8,183 |
|
|
32 |
|
% |
Royalties & license fees – performance coatings |
|
9,324 |
|
|
|
8,286 |
|
|
|
1,038 |
|
|
13 |
|
% |
|
|
27,855 |
|
|
|
23,853 |
|
|
|
4,002 |
|
|
17 |
|
% |
License fees – SurVeil DCB |
|
1,134 |
|
|
|
25,867 |
|
|
|
(24,733 |
) |
|
(96 |
) |
% |
|
|
3,193 |
|
|
|
28,494 |
|
|
|
(25,301 |
) |
|
(89 |
) |
% |
R&D and other |
|
2,199 |
|
|
|
2,562 |
|
|
|
(363 |
) |
|
(14 |
) |
% |
|
|
6,930 |
|
|
|
6,799 |
|
|
|
131 |
|
|
2 |
|
% |
Medical Device Revenue |
|
23,383 |
|
|
|
46,014 |
|
|
|
(22,631 |
) |
|
(49 |
) |
% |
|
|
71,754 |
|
|
|
84,739 |
|
|
|
(12,985 |
) |
|
(15 |
) |
% |
In Vitro Diagnostics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Product sales |
|
6,836 |
|
|
|
6,368 |
|
|
|
468 |
|
|
7 |
|
% |
|
|
20,712 |
|
|
|
19,658 |
|
|
|
1,054 |
|
|
5 |
|
% |
R&D and other |
|
122 |
|
|
|
101 |
|
|
|
21 |
|
|
21 |
|
% |
|
|
385 |
|
|
|
217 |
|
|
|
168 |
|
|
77 |
|
% |
In Vitro Diagnostics Revenue |
|
6,958 |
|
|
|
6,469 |
|
|
|
489 |
|
|
8 |
|
% |
|
|
21,097 |
|
|
|
19,875 |
|
|
|
1,222 |
|
|
6 |
|
% |
Total Revenue |
$ |
30,341 |
|
|
$ |
52,483 |
|
|
$ |
(22,142 |
) |
|
(42 |
) |
% |
|
$ |
92,851 |
|
|
$ |
104,614 |
|
|
$ |
(11,763 |
) |
|
(11 |
) |
% |
Medical Device. Revenue in our Medical Device segment was $23.4 million in the third quarter of fiscal 2024, a 49% decrease from $46.0 million in the prior-year quarter. For the first nine months of fiscal 2024, revenue in our Medical Device segment was $71.8 million, a 15% decrease from $84.7 million in the same prior-year period.
23
In Vitro Diagnostics. Revenue in our In Vitro Diagnostics (“IVD”) segment was $7.0 million in the third quarter of fiscal 2024, an 8% increase from $6.5 million in the prior-year quarter. For the first nine months of fiscal 2024, revenue in our IVD segment was $21.1 million, a 6% increase from $19.9 million in the same prior-year period.
Operating Costs and Expenses. Product sales, product costs, product gross profit, product gross margin, and operating costs were as follows:
|
Three Months Ended June 30, |
|
Nine Months Ended June 30, |
||||||||||||||||||||||||||||||||
(Dollars in thousands) |
2024 |
|
2023 |
|
Increase/(Decrease) |
|
2024 |
|
2023 |
|
Increase/(Decrease) |
||||||||||||||||||||||||
Product sales |
$ |
17,562 |
|
|
|
$ |
15,667 |
|
|
|
$ |
1,895 |
|
|
12 |
|
% |
|
$ |
54,488 |
|
|
|
$ |
45,251 |
|
|
|
$ |
9,237 |
|
|
20 |
|
% |
Product costs |
|
8,448 |
|
|
|
|
6,921 |
|
|
|
|
1,527 |
|
|
22 |
|
% |
|
|
24,352 |
|
|
|
|
17,926 |
|
|
|
|
6,426 |
|
|
36 |
|
% |
Product gross profit (1) |
|
9,114 |
|
|
|
|
8,746 |
|
|
|
|
368 |
|
|
4 |
|
% |
|
|
30,136 |
|
|
|
|
27,325 |
|
|
|
|
2,811 |
|
|
10 |
|
% |
% Product gross margin (2) |
|
51.9 |
|
% |
|
|
55.8 |
|
% |
|
|
(3.9 |
) |
ppt |
|
|
55.3 |
|
% |
|
|
60.4 |
|
% |
|
|
(5.1 |
) |
ppt |
||||||
R&D expense |
|
9,765 |
|
|
|
|
11,232 |
|
|
|
|
(1,467 |
) |
|
(13 |
) |
% |
|
|
28,658 |
|
|
|
|
36,899 |
|
|
|
|
(8,241 |
) |
|
(22 |
) |
% |
% Total revenue |
|
32 |
|
% |
|
|
21 |
|
% |
|
|
|
|
|
|
|
|
31 |
|
% |
|
|
35 |
|
% |
|
|
|
|
|
|
||||
SG&A expense |
|
16,627 |
|
|
|
|
12,874 |
|
|
|
|
3,753 |
|
|
29 |
|
% |
|
|
42,257 |
|
|
|
|
39,077 |
|
|
|
|
3,180 |
|
|
8 |
|
% |
% Total revenue |
|
55 |
|
% |
|
|
25 |
|
% |
|
|
|
|
|
|
|
|
46 |
|
% |
|
|
37 |
|
% |
|
|
|
|
|
|
||||
Acquired intangible asset amortization |
|
870 |
|
|
|
|
879 |
|
|
|
|
(9 |
) |
|
(1 |
) |
% |
|
|
2,616 |
|
|
|
|
2,659 |
|
|
|
|
(43 |
) |
|
(2 |
) |
% |
Restructuring expense |
|
— |
|
|
|
|
— |
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
1,282 |
|
|
|
|
(1,282 |
) |
|
|
|
||
Contingent consideration gain |
|
— |
|
|
|
|
(835 |
) |
|
|
|
835 |
|
|
|
|
|
|
— |
|
|
|
|
(829 |
) |
|
|
|
829 |
|
|
|
|
Product Gross Profit and Product Gross Margins. Product gross profit increased $0.4 million, or 4%, in the third quarter of fiscal 2024, compared to the prior-year quarter, and increased $2.8 million, or 10%, in the first nine months of fiscal 2024, compared to the same prior-year period. Product gross margins were 51.9% and 55.8% in the third quarter of fiscal 2024 and 2023, respectively, and 55.3% and 60.4% in the first nine months of fiscal 2024 and 2023, respectively. The year-over-year decrease in product gross margins was primarily driven by increased sales of vascular intervention medical devices – our SurVeil DCB, Pounce thrombectomy, and Sublime radial access products – as a proportion of total product sales, as these devices were not at scale, and product gross margins reflected the associated under-absorption and production inefficiencies, including expiration of inventory. In the remainder of 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.
24
R&D Expense. R&D expense declined 13%, or $1.5 million, in the third quarter of fiscal 2024, compared to the prior-year quarter. For the first nine months of fiscal 2024, R&D expense declined 22%, or $8.2 million, compared to the same prior-year period. R&D expense as a percentage of revenue was 32% and 21% in the third quarter of fiscal 2024 and 2023, respectively, and 31% and 35% in the first nine months of fiscal 2024 and 2023, respectively. For the third quarter and first nine months of fiscal 2024, the year-over-year decrease in R&D expense was primarily driven by lower SurVeil DCB R&D expenses due to the transition to commercialization and lower thrombectomy platform R&D expenses due to the timing of development and commercialization of device products. For the first nine months of fiscal 2024, the spending reduction plan and workforce reduction implemented in the second quarter of fiscal 2023 also contributed to the year-over-year decrease in R&D expense. For the third quarter and first nine months of fiscal 2023, R&D expense as a percentage of revenue reflects the impact of higher revenue, principally from the $24.6 million in license fee revenue recognized in the period upon receipt of the $27.0 million SurVeil DCB PMA milestone payment under the Abbott Agreement. For full-year fiscal 2024, we expect R&D expense to decrease, compared to fiscal 2023, primarily related to lower SurVeil DCB expenses with the transition to commercialization and the workforce reduction implemented in the third 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 increased 29%, or $3.8 million, in the third quarter of fiscal 2024, compared to the prior-year quarter. For the first nine months of fiscal 2024, SG&A expense increased 8%, or $3.2 million, compared to the same prior-year period. SG&A expense as a percentage of revenue was 55% and 25% in the third quarter of fiscal 2024 and 2023, respectively, and 46% and 37% in the first nine months of fiscal 2024 and 2023, respectively. The year-over-year increase in SG&A expense in the third quarter and first nine months of fiscal 2024 was primarily driven by $2.9 million in merger-related charges. For the third quarter and first nine months of fiscal 2023, SG&A expense as a percentage of revenue reflects the impact of higher revenue, principally from the $24.6 million in license fee revenue recognized in the period upon receipt of the $27.0 million SurVeil DCB PMA milestone payment under the Abbott Agreement. For full-year fiscal 2024, we expect SG&A expense to increase, compared to fiscal 2023, primarily due to merger-related charges and 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.
Restructuring Expense. In the second quarter of fiscal 2023, we initiated a spending reduction plan intended to preserve capital and more closely align our capital allocation priorities with our strategic objectives, which included a workforce restructuring in our Medical Device segment. As a result, for the nine months ended June 30, 2023, we recorded $1.3 million in severance and related charges in restructuring expense.
Contingent consideration gain. In the third quarter and first nine months of fiscal 2023, we reported a $0.8 gain from the fair value adjustment of acquisition-related contingent consideration liabilities related to changes in the probability and timing of achieving certain contractual milestones.
Other Expense. Major classifications of other expense were as follows:
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
||||||||||
(In thousands) |
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
||||
Interest expense, net |
$ |
(879 |
) |
|
$ |
(884 |
) |
|
$ |
(2,656 |
) |
|
$ |
(2,594 |
) |
Foreign exchange loss |
|
(51 |
) |
|
|
(61 |
) |
|
|
(168 |
) |
|
|
(261 |
) |
Investment income, net |
|
488 |
|
|
|
182 |
|
|
|
1,487 |
|
|
|
531 |
|
Other expense, net |
$ |
(442 |
) |
|
$ |
(763 |
) |
|
$ |
(1,337 |
) |
|
$ |
(2,324 |
) |
Interest expense, net in the third quarter and first nine months of fiscal 2024 was relatively consistent with the same prior-year periods. Refer to “Liquidity and Capital Resources” for further discussion of financing arrangements and expectations for fiscal 2024 interest expense. Foreign currency exchange losses 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 third quarter and first nine months of fiscal 2024, compared to the same prior-year periods, due to increased investments in available-for-sale securities, as well as higher interest rates.
25
Income Taxes. (Loss) income before income taxes, income tax expense and our effective tax rate were as follows:
|
Three Months Ended June 30, |
|
Nine Months Ended June 30, |
||||||||||||||||
(Dollars in thousands) |
2024 |
|
2023 |
|
2024 |
|
2023 |
||||||||||||
(Loss) income before income taxes |
$ |
(5,811 |
) |
|
|
$ |
20,649 |
|
|
|
$ |
(6,369 |
) |
|
|
$ |
5,276 |
|
|
Income tax expense |
|
(1,743 |
) |
|
|
|
(13,303 |
) |
|
|
|
(1,724 |
) |
|
|
|
(13,506 |
) |
|
Effective tax rate |
|
(30 |
) |
% |
|
|
64 |
|
% |
|
|
(27 |
) |
% |
|
|
256 |
|
% |
Several factors impacted income taxes and our effective tax rate:
Segment Operating Results
Operating results for each of our reportable segments were as follows:
|
Three Months Ended June 30, |
|
|
Nine Months Ended June 30, |
|
||||||||||||||||||
(In thousands) |
2024 |
|
|
2023 |
|
|
$ Change |
|
|
2024 |
|
|
2023 |
|
|
$ Change |
|
||||||
Operating (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Medical Device |
$ |
(2,288 |
) |
|
$ |
21,777 |
|
|
$ |
(24,065 |
) |
|
$ |
(2,210 |
) |
|
$ |
7,483 |
|
|
$ |
(9,693 |
) |
In Vitro Diagnostics |
|
3,153 |
|
|
|
2,866 |
|
|
|
287 |
|
|
|
9,633 |
|
|
|
9,450 |
|
|
|
183 |
|
Total segment operating income |
|
865 |
|
|
|
24,643 |
|
|
|
(23,778 |
) |
|
|
7,423 |
|
|
|
16,933 |
|
|
|
(9,510 |
) |
Corporate |
|
(6,234 |
) |
|
|
(3,231 |
) |
|
|
(3,003 |
) |
|
|
(12,455 |
) |
|
|
(9,333 |
) |
|
|
(3,122 |
) |
Total operating (loss) income |
$ |
(5,369 |
) |
|
$ |
21,412 |
|
|
$ |
(26,781 |
) |
|
$ |
(5,032 |
) |
|
$ |
7,600 |
|
|
$ |
(12,632 |
) |
Medical Device. Our Medical Device business reported an operating loss of $(2.3) million in the third quarter of fiscal 2024, compared to operating income of $21.8 million in the prior-year quarter, representing (10)% and 47% of revenue, respectively. For the first nine months of fiscal 2024, our Medical Device business reported an operating loss of $(2.2) million, compared to operating income of $7.5 million in the same prior-year period, representing (3)% and 9% of revenue, respectively.
R&D expenditures in our Medical Device segment declined year-over-year in the third quarter and first nine months of fiscal 2024 primarily driven by lower R&D expenses associated with the SurVeil DCB due to the transition to commercialization and lower thrombectomy platform R&D expenses due to the timing of development and commercialization of device products. For the first nine months of fiscal 2024, the spending reduction plan and workforce reduction implemented in the second quarter of fiscal 2023 also contributed to the year-over-year decrease in R&D expense.
26
SG&A expense in our Medical Device business increased modestly in the third quarter of fiscal 2024, compared to the prior-year quarter, primarily driven by higher compensation expenses. For the first nine months of fiscal 2024, SG&A expense in our Medical Device business was relatively flat compared to the same prior-year period.
In Vitro Diagnostics. Our In Vitro Diagnostics business reported operating income of $3.2 million and $2.9 million in the third quarter of fiscal 2024 and 2023, respectively, representing 45% and 44% of revenue, respectively. For the first nine months of fiscal 2024 and 2023, our In Vitro Diagnostics business reported operating income of $9.6 million and $9.5 million, respectively, representing 46% and 48% 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 litigation and merger-and-acquisition-related costs, which are not specific to a segment and thus not allocated to our reportable segments. The unallocated corporate expense operating loss was $(6.2) million and $(3.2) million in the third quarter of fiscal 2024 and 2023, respectively, and $(12.5) million and $(9.3) million in the first nine months of fiscal 2024 and 2023, respectively. The year-over-year increase in corporate expense operating loss in the third quarter and first nine months of fiscal 2024 was primarily driven by $2.9 million in merger-related charges reported in SG&A expense.
Cash Flow Operating Results
The following is a summary of cash flow results:
|
Nine Months Ended June 30, |
|
|||||
(In thousands) |
2024 |
|
|
2023 |
|
||
Cash (used in) provided by: |
|
|
|
|
|
||
Operating activities |
$ |
(3,410 |
) |
|
$ |
9,264 |
|
Investing activities |
|
(12,395 |
) |
|
|
(2,170 |
) |
Financing activities |
|
(1,388 |
) |
|
|
17,987 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
75 |
|
|
|
500 |
|
Net change in cash and cash equivalents |
$ |
(17,118 |
) |
|
$ |
25,581 |
|
27
Operating Activities. Cash used in operating activities was $(3.4) million in the first nine months of fiscal 2024, compared to cash provided of $9.3 million in the same prior-year period. Net loss was $(8.1) million in the first nine months of fiscal 2024, compared to $(8.2) million in the same prior-year period. Net changes in operating assets and liabilities reduced cash flows from operating activities by $(8.1) million in the first nine months of fiscal 2024 and increased cash flows from operating activities by $5.4 million in the same prior-year period. Significant changes in operating assets and liabilities affecting cash flows during these periods included:
Investing Activities. Cash used in investing activities totaled $(12.4) million in the first nine months of fiscal 2024, compared to cash used of $(2.2) million in the same prior-year period.
Financing Activities. Cash (used in) provided by financing activities totaled $(1.4) million and $18.0 million in the first nine months of fiscal 2024 and 2023, respectively.
28
Liquidity and Capital Resources
As of June 30, 2024, working capital totaled $60.2 million, a decrease of $2.6 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 $38.2 million as of June 30, 2024, a decrease of $7.2 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.
As of June 30, 2024, 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, as compared to the prior year, primarily due to merger-related charges and as we continue to advance the commercialization of our Pounce thrombectomy and Sublime radial access product platforms. We also anticipate R&D expenses will continue to be significant in the remainder of 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 $38.2 million as of June 30, 2024, 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 sources 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 approximately 16% and 12%, respectively, of our consolidated revenue for the nine months ended June 30, 2024.
29
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 nine months ended June 30, 2024, 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.
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 (1) risks related to the consummation of the Merger, including the risks that (a) the Merger may not be consummated within the anticipated time period, or at all, (b) the parties may fail to obtain shareholder approval of the Merger Agreement, (c) the parties may fail to secure the termination or expiration of any waiting period applicable under Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), (d) other conditions to the consummation of the Merger under the Merger Agreement may not be satisfied, (e) all or part of Parent’s financing may not become available, and (f) the significant limitations on remedies contained in the Merger Agreement may limit or entirely prevent the Company from specifically enforcing Parent’s obligations under the Merger Agreement or recovering damages for any breach by Parent; (2) the effects that any termination of the Merger Agreement may have on the Company or its business, including the risks that (a) the Company’s stock price may decline significantly if the Merger is not completed, (b) the Merger Agreement may be terminated in circumstances requiring the Company to pay Parent a termination fee of $20,380,000, or (c) the circumstances of the termination, including the possible imposition of a 12-month tail period during which the termination fee could be payable upon certain subsequent transactions, may have a chilling effect on alternatives to the Merger; (3) the effects that the announcement or pendency of the Merger may have on the Company and its business, including the risks that as a result (a) the Company’s business, operating results or stock price may suffer, (b) the Company’s current plans and operations may be disrupted, (c) the Company’s ability to retain or recruit key employees may be adversely affected, (d) the Company’s business relationships (including, customers, franchisees and suppliers) may be adversely affected, or (e) the Company’s management’s or employees’ attention may be diverted from other important matters; (4) the effect of limitations that the Merger Agreement places on the Company’s ability to operate its business, return capital to shareholders or engage in alternative transactions; (5) the nature, cost and outcome of pending and future litigation and other legal proceedings, including any such proceedings related to the Merger and instituted against the Company and others; (6) the risk that the Merger and related transactions may involve unexpected costs, liabilities or delays; and (7) other risks, including our ability to sign new license agreements, conduct clinical evaluations, and bring new products to market; the expected duration of limited market evaluations; 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; expectations relating to, and future forecasts of, our SG&A expenses; 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, including future forecasts of such 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 MidCap Credit Agreement; 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
30
forth under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and 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:
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 June 30, 2024, we held $13.9 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.
31
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.
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, 2024. 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, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
32
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 information presented below updates, and should be read in conjunction with, the risk factors 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.” Such risks 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. Except as presented below, there were no other significant changes in our risk factors during the quarter ended June 30, 2024.
RISKS RELATING TO THE MERGER
The completion of the Merger is subject to a number of conditions, many of which are largely outside of the parties’ control, and, if these conditions are not satisfied or waived on a timely basis, the Merger Agreement may be terminated and the Merger may not be completed.
The Merger is subject to various closing conditions, including:
The failure to satisfy all of the required conditions could delay the completion of the Merger by a significant period of time or prevent it from closing. Any delay in completing the Merger could cause the parties to not realize some or all of the benefits that are expected to be achieved if the Merger is successfully completed within the expected timeframe. There can be no assurance that the conditions to closing of the Merger will be satisfied or waived or that the Merger will be completed within the expected timeframe, or at all.
The Merger Agreement and the pendency or failure of the Merger could have a material adverse effect on our business, results of operations, financial condition and stock price.
There can be no assurance that the conditions to the closing of the Merger will be satisfied or waived or that the Merger will be completed in timely manner, or at all. If the Merger is not completed within the expected timeframe or at all, our ongoing business, relationships and financial condition could be materially adversely affected and we will be subject to a variety of additional risks and possible consequences associated with the failure to complete the Merger, including the following:
33
If the Merger is not completed, these risks could materially affect our business and financial results, the trading price of our common stock, including to the extent that the market price of our common stock is positively affected by a market assumption that the Merger will be completed, and investor confidence in our business.
While the Merger is pending, we will be subject to several business uncertainties and contractual restrictions that could adversely affect our business and operations.
In connection with the pending Merger, some customers, vendors, distributors, suppliers, landlords, service providers or other third parties with which we have important business relationships may react unfavorably, including by delaying or deferring decisions concerning their business relationships or transactions with us, which could adversely affect our revenues, earnings, funds from operations, cash flows, expenses and prospects, regardless of whether the Merger is completed. In addition, due to restrictions in the Merger Agreement on the conduct of our business prior to completing the Merger, we are unable, without Parent’s prior written consent, during the pendency of the Merger, to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial, and may cause us to forego certain opportunities we might otherwise wish to pursue. Parent may withhold its consent of these items for any reason. In addition, the pendency of the Merger may make it more difficult for us to effectively retain and incentivize key personnel and may cause distractions from our strategy and day-to-day operations and result in a decline in productivity for our current employees and management.
We will incur substantial transaction fees and costs in connection with the Merger that could adversely affect our business and operations if the Merger is not completed.
We have incurred and expect to continue to incur significant non-recurring transaction fees, which include legal and advisory fees and substantial costs associated with completing the Merger, including costs related to any divestitures required to obtain regulatory approvals, and which could adversely affect our business operations and cash position if the Merger is not completed.
The termination fee and restrictions on solicitation contained in the Merger Agreement may discourage other companies from trying to acquire us while the Merger is pending.
The Merger Agreement prohibits us from soliciting, initiating, knowingly encouraging or knowingly facilitating any competing acquisition proposals, subject to certain limited exceptions. The Merger Agreement also contains certain termination rights, including, but not limited to, our right to terminate the Merger Agreement to accept a superior proposal (as defined in the Merger Agreement), subject to and in accordance with the terms and conditions of the Merger Agreement. The Merger Agreement further provides that, upon our termination of the Merger Agreement to enter into an alternative acquisition agreement that is the subject of a superior proposal, we will be required to pay Parent a termination fee of $20,380,000 in cash. The termination fees and restrictions in the Merger Agreement relating to acquisition proposals by third parties, including with respect to the process such third parties would need to follow, could discourage other companies from trying to acquire us, even though those other companies might be willing to offer greater value to our shareholders than they will receive in the Merger.
Litigation against us, Parent, or the members of their respective boards could prevent or delay the completion of the Merger or result in the payment of damages following completion of the Merger or otherwise negatively affect our business and operations.
It is possible that lawsuits, including shareholder class action complaints, demands for books and records and other complaints, may be filed by certain of our shareholders challenging the Merger. The outcome of such lawsuits cannot be assured, including the amount of costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation of these claims. If a plaintiff in any such lawsuits is successful in obtaining an injunction prohibiting the parties from completing the Merger, such injunction may delay the consummation of the Merger in the expected timeframe, or may prevent the Merger from being consummated at all. Whether or not any such plaintiff’s claim is successful, this type of litigation can result in significant costs, including costs associated with the indemnification of obligations to our directors, and divert management’s attention and resources from the closing of the Merger and ongoing business activities, which could adversely affect our business, results of operations and financial condition.
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Uncertainty about the Merger may adversely affect the relationships between us and our customers, suppliers, distributors, business partners, vendors, landlords, service providers and employees, whether or not the Merger is completed.
In response to the announcement of the Merger, existing or prospective customers, suppliers, distributors, business partners, vendors, landlords, service providers and other of our third party relationships may delay, defer or cease providing goods or services or continuing work on strategic programs, delay or defer other decisions concerning our business, refuse to extend credit to us or extend the terms of material contracts, or otherwise seek to change the terms on which they do business with us. Any such delays or changes to terms could materially adversely harm our business.
In addition, as a result of the Merger, current and prospective employees could experience uncertainty about their future with us. These uncertainties may impair our ability to retain, recruit or motivate key management and technical, manufacturing, and other personnel.
If the Merger is not consummated by February 28, 2025 (which date may be extended one or more times, for up to nine additional months in total, under specified circumstances), either we or Parent may terminate the Merger Agreement, subject to certain exceptions. In the event the Merger Agreement is terminated by either party, we will have incurred significant costs and will have diverted significant management focus and resources from other strategic opportunities and ongoing business activities without realizing the anticipated benefits of the Merger, which could be materially adverse to us.
Actions of activist shareholders or other parties may impair our ability to consummate the Merger or otherwise negatively impact our business.
Actions taken by activist shareholders could impair our ability to satisfy conditions to the consummation of the Merger, including receiving shareholder approval, or otherwise preclude us from consummating the Merger. Activist shareholders could also take actions that disrupt our business, divert the time and attention of management and our employees away from our business operations, cause us to incur substantial additional expense, create perceived uncertainties among current and potential customers, clients, suppliers, employees and other constituencies as to our future direction as a consequence thereof, which may result in lost sales, impaired supplier relationships or other business arrangements and the loss of potential business opportunities, and make it more difficult to attract and retain qualified personnel and business partners.
The occurrence of any of these merger-related events individually or in combination could materially and adversely affect our business, results of operations, financial condition and the market price of our common stock.
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 June 30, 2024.
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Total Number of |
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Average Price Paid |
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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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April 1 – 30, 2024 |
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— |
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$ |
— |
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— |
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|
$ |
25,300,000 |
|
May 1 – 31, 2024 |
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|
728 |
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|
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32.16 |
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|
|
— |
|
|
|
25,300,000 |
|
June 1 – 30, 2024 |
|
|
87 |
|
|
|
41.95 |
|
|
|
— |
|
|
|
25,300,000 |
|
Total |
|
|
815 |
|
|
|
33.21 |
|
|
|
— |
|
|
|
|
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.
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
During the nine months ended June 30, 2024, none of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act)
36
Item 6. Exhibits |
EXHIBIT INDEX |
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Exhibit |
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Description |
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Restated Bylaws of Surmodics, Inc., as amended May 27, 2024. |
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101.INS* |
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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* |
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Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents. |
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104* |
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Cover page formatted as Inline XBRL and contained in Exhibit 101. |
* Filed herewith
37
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.
July 31, 2024 |
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) |
38