SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[x] Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1998
OR
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
Commission file number 0-23837
SurModics, Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
MINNESOTA 41-1356149
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
9924 West 74th Street
Eden Prairie, Minnesota 55344
(Address of Principal Executive Offices)
(612) 829-2700
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
As of July 31, 1998, there were 7,199,760 shares of Common Stock
outstanding.
Traditional Small Business Disclosure Format (check one): Yes No X
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SURMODICS, INC.
Condensed Balance Sheets
(In thousands, except share data)
June 30, September 30,
1998 1997
---------- ---------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash & cash equivalents $ 1,841 $ 492
Short-term investments 2,617 1,456
Accounts receivable, net 1,123 922
Inventories 304 264
Prepaids and other 215 74
-------- --------
Total current assets 6,100 3,208
-------- --------
PROPERTY AND EQUIPMENT, net 1,238 1,065
LONG-TERM INVESTMENTS 15,644 1,874
OTHER ASSETS, net 184 303
-------- --------
$ 23,166 $ 6,450
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 183 $ 280
Accrued liabilities 797 493
Deferred revenues 222 308
-------- --------
Total current liabilities 1,202 1,081
DEFERRED REVENUES AND OTHER, less current portion 162 267
-------- --------
Total liabilities 1,364 1,348
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock-
$.05 par value; none and 376,828 shares
issued and outstanding -- 19
Voting common stock-
$.05 par value, 15,000,000 shares authorized;
7,199,160 and 3,400,868 shares issued and outstanding 360 170
Additional paid-in capital 28,876 13,492
Unearned compensation (185) (259)
Stock purchase notes receivable (182) (160)
Accumulated deficit (7,067) (8,160)
-------- --------
Total stockholders' equity 21,802 5,102
-------- --------
$ 23,166 $ 6,450
======== ========
The accompanying notes are an integral part of these condensed balance sheets.
SURMODICS, INC.
Condensed Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
------ ------ ------ ------
REVENUES:
Royalties $1,240 $ 731 $3,447 $2,141
License fees 88 155 148 412
Product sales 831 588 2,063 1,514
Research and development 513 480 1,502 1,408
------ ------ ------ ------
Total revenues 2,672 1,954 7,160 5,475
------ ------ ------ ------
OPERATING COSTS AND EXPENSES:
Product 344 319 912 905
Research and development 1,184 955 3,244 2,781
Sales and marketing 361 267 1,105 754
General and administrative 453 394 1,180 1,013
------ ------ ------ ------
Total operating costs and expenses 2,342 1,935 6,441 5,453
------ ------ ------ ------
INCOME FROM OPERATIONS 330 19 719 22
INTEREST INCOME, net 248 54 399 155
------ ------ ------ ------
INCOME BEFORE PROVISION FOR INCOME TAXES 578 73 1,118 177
PROVISION FOR INCOME TAXES 12 -- 25 10
------ ------ ------ ------
NET INCOME $ 566 $ 73 $1,093 $ 167
====== ====== ====== ======
NET INCOME PER SHARE:
Basic $ 0.08 $ 0.01 $ 0.19 $ 0.03
Diluted $ 0.07 $ 0.01 $ 0.17 $ 0.03
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic weighted average common shares outstanding 7,218 4,864 5,897 4,848
Dilutive effect of outstanding stock options 646 508 543 485
------ ------ ------ ------
Diluted weighted average common shares outstanding 7,864 5,372 6,440 5,333
The accompanying notes are an integral part of these
condensed financial statements.
SURMODICS, INC.
Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended June 30,
---------------------------
1998 1997
-------- --------
OPERATING ACTIVITIES:
Net income $ 1,093 $ 167
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization 436 344
Amortization of unearned compensation, net 94 (125)
Change in deferred rent (12) (1)
Change in assets and liabilities:
Accounts receivable (201) (101)
Inventories (40) 3
Accounts payable and accrued liabilities 207 147
Deferred revenues (180) (286)
Prepaids and other (141) (108)
-------- --------
Net cash provided by operating activities 1,256 40
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (597) (145)
Purchases of investments available for sale (17,500) (3,324)
Sales of investments available for sale 2,569 1,832
Other (22) (171)
-------- --------
Net cash used in investing activities (15,550) (1,808)
-------- --------
FINANCING ACTIVITIES:
Issuance of common stock, net of offering costs 15,643 205
-------- --------
Net increase (decrease) in cash and cash equivalents 1,349 (1,563)
CASH AND CASH EQUIVALENTS:
Beginning of period 492 2,013
======== ========
End of period $ 1,841 $ 450
======== ========
The accompanying notes are an integral part of these
condensed financial statements.
SURMODICS, INC.
Notes to Condensed Financial Statements
(Unaudited)
(1) Basis of Presentation:
In the opinion of management, the accompanying unaudited condensed
financial statements have been prepared in accordance with generally accepted
accounting principles and reflect all adjustments, consisting solely of normal
recurring adjustments, needed to fairly present the financial results for these
interim periods. These financial statements include some amounts that are based
on management's best estimates and judgments. These estimates may be adjusted as
more information becomes available, and any adjustment could be significant. The
results of operations for the three months and nine months ended June 30, 1998
are not necessarily indicative of the results that may be expected for the
entire fiscal year.
According to the rules and regulations of the Securities and Exchange
Commission, the Company has omitted footnote disclosures that would
substantially duplicate the disclosures contained in the audited financial
statements of the Company. Read together with the disclosures below, management
believes the interim financial statements are presented fairly. However, these
unaudited condensed financial statements should be read together with the
financial statements for the year ended September 30, 1997 and footnotes thereto
included in the Company's Registration Statement on Form SB-2 as filed with the
Securities and Exchange Commission on March 4, 1998.
(2) New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components in financial statements. The Company will adopt the
provisions of SFAS No. 130 in fiscal 1999.
The FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes a new model for segment
reporting, called the "management approach" and requires certain disclosures for
each segment. The management approach is based on the way the chief operating
decision maker organizes segments within a company for making operating
decisions and assessing performance. The Company will adopt the provisions of
SFAS No. 131 in fiscal 1999.
(3) Initial Public Offering
On March 9, 1998, the Company completed an initial public offering of
2.0 million shares of Common Stock. Subsequently, on March 25, 1998, the
underwriters purchased an additional 300,000 shares of Common Stock pursuant to
the exercise of an overallotment option. In total, the offering generated net
proceeds to the Company of approximately $15.5 million after deducting all
offering expenses.
(4) Preferred Stock Conversion
Each share of the Series A Convertible Preferred Stock was
automatically converted into four shares of voting Common Stock upon the closing
of the initial public offering. The authorized shares of Series A Convertible
Preferred Stock were eliminated and this class of stock was canceled.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
General
The Company is a leading provider of surface modification solutions to
medical device manufacturers. The Company's revenues have come from four primary
sources: licensing of its patented technology to customers; royalties received
from licensees based on their sales of products incorporating SurModics'
technology; the sale of photo-reactive chemical compounds to licensees and
stabilization products to the diagnostics industry; and research and development
fees generated on projects for commercial customers and pursuant to government
grants. In March 1998, the Company completed an initial public offering of 2.3
million shares of Common Stock with proceeds of approximately $15.5 million, net
of related offering costs.
Results of Operations
Three Months Ended June 30, 1998 and 1997
Revenues. The Company's revenues were $2.7 million for the third
quarter of fiscal 1998, an increase of $718,000, or 36.7%, over the same period
of fiscal 1997. The revenue increase was primarily due to an increase in royalty
revenue received from licensed customers of $509,000 or 69.7%. Within this
total, royalties generated from PhotoLink(R) licenses increased 51.2% and
royalties from diagnostic licensing increased 87.6%. In addition, the Company's
product sales increased $243,000 or 41.4% between periods. The sales of reagent
chemicals, the chemicals used by licensees in the PhotoLink coating process,
increased 113.2%, while stabilization product sales increased 23.5%. These
increases were due to additional customer demand for the Company's chemical
products.
Product costs. The Company's product costs were $344,000 for the third
quarter of fiscal 1998, an increase of $25,000, or 7.8%, over the same period of
fiscal 1997. Overall product margins increased to 58.6% in the third quarter of
fiscal 1998 from 45.7% in the same period of fiscal 1997. These improvements
were primarily due to the continued impact of a formulation change in certain of
the stabilization products and production efficiencies achieved in manufacturing
reagent chemicals due to increased volumes.
Research and development expenses. Research and development expenses
were $1,184,000 for the third quarter of fiscal 1998, an increase of $229,000,
or 24.0%, over the same period of fiscal 1997. The change was primarily due to
the added compensation, benefit, and general business expenses associated with
additional technical personnel added by the Company over the last year; and
increased depreciation expense associated with the build-out of some additional
laboratory space.
Sales and marketing expenses. Sales and marketing expenses were
$361,000 for the third quarter of fiscal 1998, an increase of $94,000, or 35.2%,
over the same period of fiscal 1997. This increase was primarily due to the
additional compensation and travel expense associated with additional marketing
personnel and higher spending for advertising and promotions.
General and administrative expenses. General and administrative
expenses were $453,000 for the third quarter of fiscal 1998, an increase of
$59,000, or 15.0%, over the same period of fiscal 1997. The increase was due to
costs associated with a new directors and officers liability insurance policy
and other general business expenses incurred as a result of the Company's
overall business growth.
Interest income, net. The Company's net interest income was $248,000
for the third quarter of fiscal 1998, an increase of $194,000, or 359.3%, over
the same period of fiscal 1997 due to the increased interest income earned on
investments due to the proceeds received from the public stock offering.
Nine Months Ended June 30, 1998 and 1997
Revenues. The Company's revenues were $7.2 million for the first nine
months of fiscal 1998, an increase of $1.7 million or 30.8%, over the same
period of fiscal 1997. The revenue increases were primarily due to an increase
in royalty revenue of $1.3 million or 61.0%; an increase in sales of the
Company's stabilization products of $364,000 or 32.0%; an increase in sales of
the Company's reagent chemicals of $187,000 or 49.7%; and an increase in
customer-funded research and development revenue of $172,000 or 32.3% between
periods. Royalties generated from PhotoLink licenses increased 44.0% and
royalties from diagnostic licensing increased 77.6%. Much of the increase in
sales of stabilization products was due to larger shipments to one customer. The
increase in reagent chemicals is a result of additional coating activities by
existing PhotoLink customers. The increase in customer-funded research and
development was due to greater customer development activity, especially related
to work on drug delivery from coatings. Offsetting these revenue increases was a
reduction in license fees from $412,000 in the first nine months of fiscal 1997
to $148,000 in the same period of fiscal 1998. The fiscal 1997 results included
the receipt of one large license fee with no similar transaction in fiscal 1998.
Product costs. The Company's product costs were $912,000 for the first
nine months of fiscal 1998, an increase of $7,000, or 0.8%, over the same period
of fiscal 1997. Product margins increased to 55.8% in 1998 from 40.2% in 1997.
These improvements were primarily due to the continued impact of a formulation
change in certain of the stabilization products and production efficiencies
achieved in manufacturing reagent chemicals due to increased volumes.
Research and development expenses. Research and development expenses
were $3.2 million for the first nine months of fiscal 1998, an increase of
$463,000, or 16.6%, over the same period of fiscal 1997. The change was
primarily due to the added compensation and benefit costs associated with
additional technical personnel added by the Company over the last year and
increased depreciation expense associated with the build-out of some additional
laboratory space. These changes were offset by lower costs incurred on research
studies performed by external laboratories.
Sales and marketing expenses. Sales and marketing expenses were $1.1
million for the first nine months of fiscal 1998, an increase of $351,000, or
46.6%, over the same period of fiscal 1997. This increase was primarily due to
the additional compensation and travel expenses of additional marketing
personnel, a related increase in recruitment costs, and the costs associated
with a market research study completed by an external consulting firm.
General and administrative expenses. General and administrative
expenses were $1.2 million for the first nine months of fiscal 1998, an increase
of $167,000, or 16.5%, over the same period of fiscal 1997. The increase was
primarily due to higher compensation, benefit, and general business costs as
described above.
Interest income, net. The Company's net interest income was $399,000
for the first nine months of fiscal 1998, an increase of $244,000, or 157.4%,
over the same period of fiscal 1997 due to the increased interest income earned
on investments due to the proceeds received from the public stock offering.
Year 2000 Compliance
The Company has evaluated its information technology infrastructure for
Year 2000 compliance and does not expect that the cost to modify its information
technology infrastructure to be Year 2000 compliant will be material to its
financial condition or results of operations. The Company does not anticipate
any material disruption in its operations as a result of any failure by the
Company or its suppliers or customers to be in compliance.
Liquidity and Capital Resources
On March 9, 1998, the Company completed an initial public offering of
2.0 million shares of Common Stock. Subsequently, on March 25, 1998, the
underwriters purchased an additional 300,000 shares of Common Stock pursuant to
the exercise of an overallotment option. In total, the offering generated net
proceeds to the Company of approximately $15.5 million after deducting all
offering expenses.
As of June 30, 1998, the Company had working capital of approximately
$2.9 million. For the last three fiscal years and for the first nine months of
fiscal 1998, the Company has generated positive cash flow from operations.
As of June 30, 1998, the Company had cash, cash equivalents and
investments totaling approximately $20.1 million. The Company's funds are
currently invested in money market funds and investment grade, interest-bearing
securities with maturity dates of less than three years. As of June 30, 1998,
the Company had no debt, nor did it have any credit agreements.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
(a) The following stock option exercises ocurred during the quarter
ended June 30, 1998:
Date Relationship Shares Option Price
---- ------------ ------ ------------
April 30, 1998 Former employee 320 $5.00
May 1, 1998 Former employee 1,920 $5.00
May 28, 1998 Former employee 400 $4.00
June 8, 1998 Current employee 100 $5.00
The Company relied on the exemption from registration available under
section 3(b) of the Securities Act of 1933, as amended, and Rule 701 thereunder.
(b) Use of Proceeds for the period ending June 30, 1998.
(1) Effective Date: March 3, 1998
SEC File Number: 333-43217
(2) Offering Date: March 3, 1998
(4)(i) The offering has terminated; all securities
registered were sold.
(4)(ii) Managing Underwriter: John G. Kinnard and
Company, Incorporated
(4)(iii) Title of Securities: Common Stock
(4)(iv) Amount Registered: 2,300,000
Aggregate Offering Price: $17,250,000
Amount Sold: 2,300,000
Aggregate Offering Price Sold: $17,250,000
(4)(v) Underwriting Discount and Commissions $ 1,293,750
Other Expenses $ 435,148 Total Expenses $ 1,728,898
All the above items represented direct or
indirect payments to others.
(4)(vi) Net Offering Proceeds $15,521,102
(4)(vii) Use of Net Offering Proceeds:
Research and development $ 74,184
Sales and marketing $ 166,460
Equipment upgrades $ 139,150
Patent protection $ --
Working capital and general corporate
purposes $ 84,449
Money market funds $15,056,859
All the above items represented direct or
indirect payments to others.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits - 27 Financial Data Schedule
(b) Reports on Form 8-K - None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SurModics, Inc.
August 13, 1998 By: /s/ Stephen C. Hathaway
Stephen C. Hathaway
Vice President & CFO
(Principal Financial Officer)
Exhibit Index
Exhibit Number Description
27 Financial Data Schedule
5
1,000
U.S. Dollars
9-MOS
SEP-30-1998
OCT-01-1997
JUN-30-1998
1
1,841
2,617
1,123
0
304
6,100
4,461
3,223
23,166
1,202
0
0
0
360
21,442
23,166
2,063
7,160
912
6,441
0
0
0
1,118
25
1,093
0
0
0
1,093
0.19
0.17
