The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
Period Ended December 31, 2013
(Unaudited)
1. Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S.) (GAAP) and, in the opinion of management, reflect all adjustments, consisting solely of normal recurring adjustments, needed to fairly present
the financial results of SurModics, Inc. and subsidiaries (SurModics or the Company) for the periods presented. These financial statements include some amounts that are based on managements best estimates and judgments.
These estimates may be adjusted as more information becomes available, and any adjustment could be significant. The impact of any change in estimates is included in the determination of earnings in the period in which the change in estimate is
identified. The results of operations for the three months ended December 31, 2013 are not necessarily indicative of the results that may be expected for the entire 2014 fiscal year.
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 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, 2013, and footnotes thereto included in the Companys Form 10-K as filed with the Securities and Exchange Commission on December 11, 2013.
2. Key Accounting Policies
Revenue recognition
The Company recognizes revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists;
(2) shipment has occurred or delivery has occurred if the terms specify destination; (3) the sales price is fixed or determinable; and (4) collectability is reasonably assured. When there are additional performance requirements,
revenue is recognized when all such requirements have been satisfied. Under revenue arrangements with multiple deliverables, the Company recognizes each separable deliverable as it is earned.
The Company derives its revenue from three primary sources: (1) royalties and license fees from licensing its proprietary drug delivery
and surface modification technologies and
in vitro
diagnostic formats to customers; (2) the sale of reagent chemicals to licensees and the sale of stabilization products, antigens, substrates and surface coatings to the diagnostic
and biomedical research markets; and (3) research and commercial development fees generated on customer projects.
Royalties and
license fees.
The Company licenses technology to third parties and collects royalties. Royalty revenue is generated when a customer sells products incorporating the Companys licensed technologies. Royalty revenue is recognized as
licensees report it to the Company, and payment is typically submitted concurrently with the report. For stand-alone license agreements, up-front license fees are recognized over the term of the related licensing agreement. Minimum royalty fees are
recognized in the period earned.
Revenue related to a performance milestone is recognized upon the achievement of the milestone, as
defined in the respective agreements and provided the following conditions have been met:
|
|
|
The milestone payment is non-refundable;
|
|
|
|
The milestone involved a significant degree of risk, and was not reasonably assured at the inception of the arrangement;
|
|
|
|
Accomplishment of the milestone involved substantial effort;
|
|
|
|
The amount of the milestone payment is commensurate with the related effort and risk; and
|
|
|
|
A reasonable amount of time passed between the initial license payment and the first and subsequent milestone payments.
|
If these conditions have not been met, the milestone payment is deferred and recognized over the term of the agreement.
Product sales.
Product sales to third parties consist of direct and distributor sales and are recognized at the time of shipment.
The Companys sales terms provide no right of return outside of the standard warranty policy. Payment terms are generally set at 30-45 days.
Research and development.
The Company performs third-party research and development activities, which are typically provided on a
time and materials basis. Generally, revenue for research and development is recorded as performance progresses under the applicable contract.
7
Arrangements with multiple deliverables.
Revenue arrangements with multiple deliverables requires the
Company to:
(i) disclose whether multiple deliverables exist, how the deliverables in an arrangement should be
separated, and how the consideration should be allocated;
(ii) allocate revenue in an arrangement using estimated
selling prices (ESP) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and
(iii) allocate revenue using the relative selling price method.
The Company accounts for revenue using a multiple attribution model in which consideration allocated to research and development activities is
recognized as performed, and milestone payments are recognized when the milestone events are achieved, when such activities and milestones are deemed substantive. Accordingly, in situations where a unit of accounting includes both a license and
research and development activities, and when a license does not have stand-alone value, the Company applies a multiple attribution model in which consideration allocated to the license is recognized ratably, consideration allocated to research and
development activities is recognized as performed and milestone payments are recognized when the milestone events are achieved, when such activities and milestones are deemed substantive.
The Company enters into license and development arrangements that may consist of multiple deliverables which could include a license(s) to
SurModics technology, research and development activities, manufacturing services, and product sales based on the needs of its customers. For example, a customer may enter into an arrangement to obtain a license to SurModics intellectual
property which may also include research and development activities, and supply of products manufactured by SurModics. For these services provided, SurModics could receive upfront license fees upon signing of an agreement and granting the license,
fees for research and development activities as such activities are performed, milestone payments contingent upon advancement of the product through development and clinical stages to successful commercialization, fees for manufacturing services and
supply of product, and royalty payments based on customer sales of product incorporating SurModics technology. The Companys license and development arrangements generally do not have refund provisions if the customer cancels or
terminates the agreement. Typically all payments made are non-refundable.
The Company is required to evaluate each deliverable in a
multiple element arrangement for separability. The Company is then required to allocate revenue to each separate deliverable using a hierarchy of VSOE, TPE, or ESP. In many instances, the Company is not able to establish VSOE for all deliverables in
an arrangement with multiple elements. This may be a result of the Company infrequently selling each element separately or having a limited history with multiple element arrangements. When VSOE cannot be established, the Company attempts to
establish a selling price of each element based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately.
When the Company is unable to establish a selling price using VSOE or TPE, the Company uses ESP in its allocation of arrangement
consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. ESP is generally used for highly customized offerings.
The Company determines ESP for undelivered elements by considering multiple factors including, but not limited to, market conditions,
competitive landscape and past pricing arrangements with similar features. The determination of ESP is made through consultation with the Companys management, taking into consideration the marketing strategies for each business unit.
New Accounting Pronouncements
Accounting Standards to be Adopted
In
July 2013, the Financial Accounting Standards Board issued amended guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar to a tax loss, or tax credit carryforward exits. The
guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented as a reduction of a deferred tax asset when a net operating loss carryforward, or similar tax loss, or tax credit carryforward exits, with
certain exceptions. This accounting guidance is effective prospectively for the Company beginning in the first quarter of fiscal 2015, with early adoption permitted. While the Company is currently evaluating the impact, its adoption is not expected
to have a material impact on the Companys financial position, results of operation or cash flows.
No other new accounting
pronouncement issued or effective has had, or is expected to have, a material impact on the Companys consolidated financial statements.
8
3. Discontinued Operations
Beginning in the first quarter of fiscal 2012, the results of operations, cash flows, assets and liabilities of SurModics
Pharmaceuticals, Inc. (SurModics Pharmaceuticals), which were previously reported in the Pharmaceuticals segment as a separate operating segment, are classified as discontinued operations.
On November 1, 2011, the Company entered into a definitive agreement (the Purchase Agreement) to sell substantially all of
the assets of its wholly-owned subsidiary, SurModics Pharmaceuticals, to Evonik Degussa Corporation (Evonik). Under the terms of the Purchase Agreement, the entire portfolio of products and services of SurModics Pharmaceuticals,
including the Companys Current Good Manufacturing Practices (cGMP) development and manufacturing facility located in Birmingham, Alabama, were sold. The Company retained all accounts receivable and the majority of liabilities
associated with SurModics Pharmaceuticals incurred prior to closing. The sale (the Pharma Sale) closed on November 17, 2011. The total consideration received from the Pharma Sale was $30.0 million in cash. As part of the Pharma
Sale, SurModics agreed not to compete in the restricted business (as defined in the Purchase Agreement) for a period of five years and to indemnify Evonik against specified losses in connection with SurModics Pharmaceuticals, including certain
contingent consideration obligations related to the acquisition by SurModics Pharmaceuticals of the portfolio of intellectual property and drug delivery projects from PR Pharmaceuticals, Inc. (PR Pharma) SurModics retained responsibility
for repayment obligations related to an agreement with various governmental authorities associated with creation of jobs in Alabama. These obligations were settled or terminated in fiscal 2013 with payments totaling $325,000 repaid to the
governmental authorities and a gain of $1.3 million recognized in the fiscal year ended September 30, 2013.
There was no condensed
consolidated statement of income impact associated with discontinued operations for the three months ended December 31, 2013 and 2012.
The major classes of assets and liabilities of discontinued operations as of December 31, 2013 and September 30, 2013 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2013
|
|
Other current assets
|
|
$
|
46
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
Current assets of discontinued operations
|
|
|
46
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
Total assets of discontinued operations
|
|
$
|
46
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities payable
|
|
$
|
126
|
|
|
$
|
139
|
|
|
|
|
|
|
|
|
|
|
Current liabilities of discontinued operations
|
|
|
126
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
Total liabilities of discontinued operations
|
|
$
|
126
|
|
|
$
|
139
|
|
|
|
|
|
|
|
|
|
|
The assets and liabilities of discontinued operations as of December 31, 2013 are based on accruals
associated with the Southern Research Institute (SRI) litigation matter and a related deferred tax asset balance. See Note 17 for further discussion of the SRI litigation matter.
4. Fair Value Measurements
The accounting guidance on fair value measurements defines fair value, establishes a framework for measuring fair value
under GAAP, and expands disclosures about fair value measurements. The guidance is applicable for all financial assets and financial liabilities and for all nonfinancial assets and nonfinancial liabilities recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). Fair value is defined as the exchange price that would be received from selling an asset or paid to transfer a liability (an exit price) in an orderly transaction between market
participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would
transact and also considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.
Fair Value Hierarchy
Accounting guidance on fair value measurements requires that assets and liabilities carried at fair value be classified and disclosed in one of
the following three categories:
Level 1 Quoted (unadjusted) prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or
liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the
asset or liability.
9
The Companys Level 2 assets consist of money market funds, U.S. government and
government agency obligations, mortgage-backed securities, municipal bonds, asset-backed securities and corporate bonds. Fair market values for these assets are based on quoted vendor prices and broker pricing where all significant inputs are
observable. The Company performs limited tests of the quoted vendor prices based on available U.S. government security pricing on government websites as a means of validating the third party pricing. To ensure the accuracy of quoted vendor prices
and broker pricing, the Company performs regular reviews of investment returns to industry benchmarks and sample tests of individual securities to validate quoted vendor prices with other available market data.
Level 3 Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are
significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar
valuation techniques, as well as significant management judgment or estimation.
There were no Level 3 assets at December 31,
2013, September 30, 2013 or December 31, 2012 and there was no Level 3 activity in each of the first quarter of fiscal 2014 and fiscal 2013.
In valuing assets and liabilities, the Company is required to maximize the use of quoted market prices and minimize the use of unobservable
inputs. The Company did not change its valuation techniques from prior periods.
Assets and Liabilities Measured at Fair Value on a
Recurring Basis
In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the
fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Companys assessment of the significance of a particular item to the fair value measurement in its
entirety requires judgment, including the consideration of inputs specific to the asset or liability. The following table presents information about the Companys assets and liabilities measured at fair value on a recurring basis as of
December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Quoted Prices
in Active Markets
for Identical
Instruments
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total Fair
Value as of
December 31,
2013
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
|
|
|
$
|
9,202
|
|
|
$
|
|
|
|
$
|
9,202
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agency obligations
|
|
|
|
|
|
|
21,767
|
|
|
|
|
|
|
|
21,767
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
7,977
|
|
|
|
|
|
|
|
7,977
|
|
Municipal bonds
|
|
|
|
|
|
|
2,877
|
|
|
|
|
|
|
|
2,877
|
|
Asset-backed securities
|
|
|
|
|
|
|
5,348
|
|
|
|
|
|
|
|
5,348
|
|
Corporate bonds
|
|
|
|
|
|
|
4,661
|
|
|
|
|
|
|
|
4,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
|
|
|
$
|
51,832
|
|
|
$
|
|
|
|
$
|
51,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
The following table presents information about the Companys assets and liabilities measured
at fair value on a recurring basis as of September 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Quoted
Prices in
Active
Markets for
Identical
Instruments
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total Fair
Value as of
September 30,
2013
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
|
|
|
$
|
4,402
|
|
|
$
|
|
|
|
$
|
4,402
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and government agency obligations
|
|
|
|
|
|
|
22,890
|
|
|
|
|
|
|
|
22,890
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
8,216
|
|
|
|
|
|
|
|
8,216
|
|
Municipal bonds
|
|
|
|
|
|
|
3,059
|
|
|
|
|
|
|
|
3,059
|
|
Asset-backed securities
|
|
|
|
|
|
|
3,537
|
|
|
|
|
|
|
|
3,537
|
|
Corporate bonds
|
|
|
|
|
|
|
4,907
|
|
|
|
|
|
|
|
4,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value
|
|
$
|
|
|
|
$
|
47,011
|
|
|
$
|
|
|
|
$
|
47,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Techniques
The valuation techniques used to measure the fair value of assets are as follows:
Cash equivalents These assets are classified as Level 2 and are carried at historical cost which is a reasonable estimate of fair
value because of the relatively short time between origination of the instrument and its expected realization.
Available-for-sale debt
securities These securities are classified as Level 2 and include various types of debt securities. These securities are valued based on quoted vendor prices in active markets underlying the securities.
5. Investments
Investments consist principally of U.S. government and government agency obligations, mortgage-backed securities,
municipal bonds, asset-backed securities and corporate bonds and they are classified as available-for-sale at December 31, 2013 and September 30, 2013. Available-for-sale securities are reported at fair value with unrealized gains and
losses, net of tax, excluded from the condensed consolidated statements of income and reported in the condensed consolidated statements of comprehensive income as well as a separate component of stockholders equity in the condensed
consolidated balance sheets, except for other-than-temporary impairments, which are reported as a charge to current earnings. A loss would be recognized when there is an other-than-temporary impairment in the fair value of any individual security
classified as available-for-sale, with the associated net unrealized loss reclassified out of accumulated other comprehensive income with a corresponding adjustment to other income. This adjustment results in a new cost basis for the investment.
Interest earned on debt securities, including amortization of premiums and accretion of discounts, is included in other income. Realized gains and losses from the sales of debt securities, which are included in other income, are determined using the
specific identification method.
The amortized cost, unrealized holding gains and losses, and fair value of available-for-sale securities
as of December 31, 2013 and September 30, 2013 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
(Dollars in thousands)
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
U.S. government and government agency obligations
|
|
$
|
21,783
|
|
|
$
|
22
|
|
|
$
|
(38
|
)
|
|
$
|
21,767
|
|
Mortgage-backed securities
|
|
|
7,939
|
|
|
|
101
|
|
|
|
(63
|
)
|
|
|
7,977
|
|
Municipal bonds
|
|
|
2,865
|
|
|
|
17
|
|
|
|
(5
|
)
|
|
|
2,877
|
|
Asset-backed securities
|
|
|
5,348
|
|
|
|
8
|
|
|
|
(8
|
)
|
|
|
5,348
|
|
Corporate bonds
|
|
|
4,657
|
|
|
|
24
|
|
|
|
(20
|
)
|
|
|
4,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,592
|
|
|
$
|
172
|
|
|
$
|
(134
|
)
|
|
$
|
42,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
(Dollars in thousands)
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
U.S. government and government agency obligations
|
|
$
|
22,889
|
|
|
$
|
28
|
|
|
$
|
(27
|
)
|
|
$
|
22,890
|
|
Mortgage-backed securities
|
|
|
8,149
|
|
|
|
118
|
|
|
|
(51
|
)
|
|
|
8,216
|
|
Municipal bonds
|
|
|
3,049
|
|
|
|
15
|
|
|
|
(5
|
)
|
|
|
3,059
|
|
Asset-backed securities
|
|
|
3,539
|
|
|
|
6
|
|
|
|
(8
|
)
|
|
|
3,537
|
|
Corporate bonds
|
|
|
4,896
|
|
|
|
17
|
|
|
|
(6
|
)
|
|
|
4,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,522
|
|
|
$
|
184
|
|
|
$
|
(97
|
)
|
|
$
|
42,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013 and September 30, 2013, the Company concluded that the unrealized losses
related to the available-for-sale securities shown above were not other-than-temporary as the Company does not have the intent to sell, nor is it more likely than not that the Company will be required to sell, before recovery of their amortized
cost.
The amortized cost and fair value of investments by contractual maturity at December 31, 2013 were as follows:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Debt securities due within:
|
|
|
|
|
|
|
|
|
One year
|
|
$
|
12,470
|
|
|
$
|
12,481
|
|
One to five years
|
|
|
21,046
|
|
|
|
21,046
|
|
Five years or more
|
|
|
9,076
|
|
|
|
9,103
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
42,592
|
|
|
$
|
42,630
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes sales of available-for-sale securities :
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
Proceeds from sales
|
|
$
|
2,867
|
|
|
$
|
805
|
|
Gross realized gains
|
|
$
|
|
|
|
$
|
4
|
|
Gross realized losses
|
|
$
|
|
|
|
$
|
|
|
6. Inventories
Inventories are principally stated at the lower of cost or market using the specific identification method and include
direct labor, materials and overhead. Inventories consisted of the following components:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2013
|
|
Raw materials
|
|
$
|
1,231
|
|
|
$
|
1,378
|
|
Finished products
|
|
|
1,601
|
|
|
|
1,950
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,832
|
|
|
$
|
3,328
|
|
|
|
|
|
|
|
|
|
|
12
7. Other Assets
Other assets consist principally of strategic investments as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2013
|
|
CeloNova BioSciences, Inc.
|
|
$
|
1,500
|
|
|
$
|
1,500
|
|
ThermopeutiX, Inc.
|
|
|
1,185
|
|
|
|
1,185
|
|
ViaCyte, Inc.
|
|
|
479
|
|
|
|
479
|
|
Other
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Other assets, net
|
|
$
|
3,166
|
|
|
$
|
3,166
|
|
|
|
|
|
|
|
|
|
|
The Company accounts for all of its strategic investments under the cost method as of December 31, 2013
and September 30, 2013.
In February 2011, the stent technology of Nexeon MedSystems, Inc. (Nexeon) was acquired by
CeloNova BioSciences, Inc. (CeloNova). Prior to the acquisition by CeloNova, Nexeon created a wholly-owned subsidiary, Nexeon Stent, to hold the companys stent-related assets. Nexeon distributed to its stockholders the Nexeon Stent
stock which was exchanged for Series B-1 preferred shares of CeloNova. CeloNova is a privately-held Texas-based medical technology company that is marketing a variety of medical products. The Companys investment in CeloNova, which is accounted
for under the cost method, represents less than a 2% ownership interest. The Company does not exert significant influence over CeloNovas operating or financial activities.
The Company has invested a total of $1.2 million in ThermopeutiX, Inc. (ThermopeutiX), a California-based early stage company
developing novel medical devices for the treatment of vascular and neurovascular diseases. In addition to the investment, SurModics has licensed its hydrophilic and hemocompatible coating technologies to ThermopeutiX for use with its devices. The
Companys investment in ThermopeutiX, which is accounted for under the cost method, represents an ownership interest of less than 20%. The Company does not exert significant influence over ThermopeutiXs operating or financial activities.
The Company has invested a total of $5.3 million in ViaCyte, Inc. (ViaCyte), a privately-held California-based
biotechnology firm that is developing a unique treatment for diabetes using coated islet cells, the cells that produce insulin in the human body. In fiscal 2006, the Company determined that its investment in ViaCyte was impaired and that the
impairment was other than temporary. Accordingly, the Company recorded an impairment loss of $4.7 million. In the second quarter of fiscal 2013, the Company recorded an additional other-than-temporary impairment loss on this investment totaling
$0.1 million based on a current financing round and market valuations. The balance of the investment of $0.5 million, which is accounted for under the cost method, represents less than a 1% ownership interest. The Company does not exert significant
influence over ViaCytes operating or financial activities.
The Company had invested a total of $2.5 million in Vessix
Vascular, Inc. (Vessix) and recognized an other-than-temporary impairment loss on this investment totaling $2.4 million in fiscal 2010, based on market valuations and a pending financing round for Vessix. Vessix was purchased by
Boston Scientific Corporation in November 2012. The Company recorded a gain of approximately $1.2 million in gain on sale of strategic investments section within the condensed consolidated statements of income, on the sale of this
investment in the first quarter of fiscal 2013. In the first quarter of fiscal 2014, the Company recorded a $0.7 million gain upon achievement by Vessix of a clinical milestone. Total potential maximum additional proceeds of $3.5 million may be
received in the remainder of fiscal 2014 through fiscal 2017 depending on Vessixs achievement of future sales milestones. No amounts have been recorded associated with these future milestones given the level of uncertainty that exists. Any
potential additional income will be recognized once the milestones are achieved.
The total carrying value of cost method investments is
reviewed quarterly for changes in circumstances or the occurrence of events that suggest the Companys investment may not be recoverable. The fair value of cost method investments is not adjusted if there are no identified events or changes in
circumstances that may have a material adverse effect on the fair value of the investment.
For the three months ended December 31,
2013 and 2012, the Company recognized revenue of less than $0.1 million for each period from activity with companies in which it had a strategic investment.
8. Intangible Assets
Intangible assets consist principally of acquired patents and technology, customer relationships, licenses and trademarks.
For the three months ended December 31, 2013 and 2012, the Company recorded amortization expense of $0.2 million for each period.
13
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
(Dollars in thousands)
|
|
Weighted Average
Original Life (Years)
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
|
|
9.0
|
|
|
$
|
4,857
|
|
|
$
|
(3,409
|
)
|
|
$
|
1,448
|
|
Core technology
|
|
|
8.0
|
|
|
|
530
|
|
|
|
(425
|
)
|
|
|
105
|
|
Patents and other
|
|
|
16.8
|
|
|
|
2,256
|
|
|
|
(887
|
)
|
|
|
1,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
7,643
|
|
|
|
(4,721
|
)
|
|
|
2,922
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
|
580
|
|
|
|
|
|
|
|
580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
8,223
|
|
|
$
|
(4,721
|
)
|
|
$
|
3,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2013
|
|
(Dollars in thousands)
|
|
Weighted Average
Original Life (Years)
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
|
|
9.0
|
|
|
$
|
4,857
|
|
|
$
|
(3,274
|
)
|
|
$
|
1,583
|
|
Core technology
|
|
|
8.0
|
|
|
|
530
|
|
|
|
(409
|
)
|
|
|
121
|
|
Patents and other
|
|
|
16.8
|
|
|
|
2,256
|
|
|
|
(852
|
)
|
|
|
1,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
7,643
|
|
|
|
(4,535
|
)
|
|
|
3,108
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
|
580
|
|
|
|
|
|
|
|
580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
8,223
|
|
|
$
|
(4,535
|
)
|
|
$
|
3,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on the intangible assets in service as of December 31, 2013, estimated amortization expense for the
remainder of fiscal 2014 and each of the next five fiscal years is as follows
(Dollars in thousands)
:
|
|
|
|
|
Remainder of 2014
|
|
$
|
557
|
|
2015
|
|
|
731
|
|
2016
|
|
|
594
|
|
2017
|
|
|
183
|
|
2018
|
|
|
137
|
|
2019
|
|
|
137
|
|
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, or other factors.
9. Goodwill
Goodwill represents the excess of the cost of an acquired entity over the fair value assigned to the assets purchased and
liabilities assumed in connection with a business acquisition. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment in accordance with accounting guidance for goodwill. The carrying amount of goodwill is evaluated
annually, and between annual evaluations if events occur or circumstances change indicating that the carrying amount of goodwill may be impaired.
The $8.0 million of goodwill at December 31, 2013 and September 30, 2013 is related to the In Vitro Diagnostics reporting unit and
represents the gross value from the acquisition of BioFX Laboratories, Inc. (BioFX) in 2007. The goodwill was not impaired based on the outcome of the fiscal 2013 annual impairment test, and there have been no events or circumstances
that have occurred in the first quarter of fiscal 2014 associated with the In Vitro Diagnostics reporting unit to indicate that the goodwill may be impaired.
10. Stock-based Compensation
The Company has stock-based compensation plans under which it grants stock options, restricted stock awards, performance
share awards and restricted stock units. Accounting guidance requires all share-based payments to be recognized as an operating expense, based on their fair values, over the requisite service period.
14
The Companys stock-based compensation expenses were allocated to the following expense
categories:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
Product costs
|
|
$
|
4
|
|
|
$
|
3
|
|
Research and development
|
|
|
52
|
|
|
|
23
|
|
Selling, general and administrative
|
|
|
757
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
813
|
|
|
$
|
392
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013, approximately $5.1 million of total unrecognized compensation costs related to
non-vested awards is expected to be recognized over a weighted average period of approximately 2.4 years. The unrecognized compensation costs above include $1.6 million based on payout levels associated with performance share awards that are
currently anticipated to be fully expensed because the performance conditions are expected to be met at or above target levels.
Stock Option Awards
The Company uses the Black-Scholes option pricing model to determine the weighted average grant date fair value of stock options
granted. The weighted average per share fair values of stock options granted during the three months ended December 31, 2013 and 2012 were $8.80 and $8.48, respectively. The assumptions used as inputs in the model were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Risk-free interest rates
|
|
|
1.2
|
%
|
|
|
0.6
|
%
|
Expected life (years)
|
|
|
4.6
|
|
|
|
4.8
|
|
Expected volatility
|
|
|
45.1
|
%
|
|
|
49.2
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The risk-free interest rate assumption was based on the U.S. Treasurys rates for U.S. Treasury
zero-coupon bonds with maturities similar to those of the expected term of the award. The expected life of options granted is determined based on the Companys experience. Expected volatility is based on the Companys stock price movement
over a period approximating the expected term. Based on managements judgment, dividend rates are expected to be zero for the expected life of the options. The Company also estimates forfeitures of options granted, which are based on historical
experience.
Non-qualified stock options are granted at fair market value on the date of grant. Non-qualified stock options expire in
seven to ten years or upon termination of employment or service as a Board member. Non-qualified stock options granted prior to May 2008 generally become exercisable with respect to 20% of the shares on each of the first five anniversaries
following the grant date, and non-qualified stock options granted subsequent to April 2008 generally become exercisable with respect to 25% of the shares on each of the first four anniversaries following the grant date.
The total pre-tax intrinsic value of options exercised during the three months ended December 31, 2013 and 2012 was $0.5 million and less
than $0.1 million, respectively. The intrinsic value represents the difference between the average exercise price and the fair market value of the Companys common stock on the last day of the respective fiscal period end.
Restricted Stock Awards
The Company has
entered into restricted stock agreements with certain key employees, covering the issuance of common stock (Restricted Stock). Under accounting guidance these shares are considered to be non-vested shares. The Restricted Stock is
released to the key employees if they are employed by the Company at the end of the vesting period. Compensation has been recognized for the estimated fair value of the common shares and is being charged to income over the vesting term. The
stock-based compensation table above includes Restricted Stock expenses recognized related to these awards, which totaled less than $0.1 million and $0.1 million during the three months ended December 31, 2013 and 2012, respectively.
Performance Share Awards
The Company has entered into performance share agreements with certain key employees, covering the issuance of common stock (Performance
Shares). The Performance Shares vest upon the achievement of all or a portion of certain performance objectives, which must be achieved during the performance period. Performance objectives selected by the Organization and Compensation
15
Committee of the Board of Directors (the Committee) were cumulative earnings per share and cumulative revenue for the three-year performance periods for fiscal 2011 (2011
2013), fiscal 2012 (2012 2014), fiscal 2013 (2013 2015) and fiscal 2014 (2014 2016). Assuming that the minimum performance level is attained, the number of shares that may actually vest will vary based on performance from 20%
(minimum) to 200% (maximum). Shares will be issued to participants as soon as practicable following the end of the performance periods subject to Committee approval and verification of results. The fiscal 2011 awards were finalized in the three
months ended December 31, 2013 and resulted in issuance of 122,053 shares (maximum was 137,066 shares) based on the performance objective results. The compensation cost related to the number of shares to be granted under each performance period
is fixed on the grant date, which is the date the performance period begins. Compensation is recognized in each period based on managements best estimate of the achievement level of the specified performance objectives for Performance Shares.
For the three months ended December 31, 2013 and 2012, the Company recognized expense of $0.3 million and $0.2 million, respectively. The stock-based compensation table above includes the Performance Shares expenses.
The fair values of the Performance Shares, at target, were $0.9 million, $0.9 million and $0.8 million for grants awarded in fiscal 2014, 2013
and 2012, respectively.
The aggregate number of shares that could be awarded to key employees if the minimum, target and maximum
performance goals are met, based upon the fair value at the date of grant is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Period
|
|
Minimum Shares
|
|
|
Target Shares
|
|
|
Maximum Shares
|
|
Fiscal 2012 - 2014
|
|
|
12,499
|
|
|
|
62,497
|
|
|
|
124,994
|
|
Fiscal 2013 - 2015
|
|
|
8,551
|
|
|
|
42,753
|
|
|
|
85,506
|
|
Fiscal 2014 - 2016
|
|
|
7,861
|
|
|
|
39,303
|
|
|
|
78,606
|
|
1999 Employee Stock Purchase Plan
Under the 1999 Employee Stock Purchase Plan (Stock Purchase Plan), the Company is authorized to issue up to 400,000 shares of
common stock. All full-time and part-time employees can choose to have up to 10% of their annual compensation withheld, with a limit of $25,000, to purchase the Companys common stock at purchase prices defined within the provisions of the
Stock Purchase Plan. As of December 31, 2013 and 2012, there were $0.1 million and less than $0.1 million, respectively, of employee contributions in each period included in accrued liabilities in the condensed consolidated balance sheets.
Stock compensation expense recognized related to the Stock Purchase Plan for the three months ended December 31, 2013 and 2012 totaled less than $0.1 million in each period. The stock-based compensation table above includes the Stock Purchase
Plan expenses.
Restricted Stock Units
The Company has awarded 22,400 restricted stock units (RSU) in fiscal 2014 and 2013 under the 2009 Equity Incentive Plan to
non-employee directors. The RSU awards vest annually at a rate of 33%. RSU awards are not considered issued or outstanding common stock of the Company until they vest. The estimated fair value of the RSU awards was calculated based on the closing
market price of SurModics common stock on the date of grant. Compensation has been recognized for the estimated fair value of the common shares and is being charged to income over the vesting term. Directors can also elect to receive their
cash retainers for services to the Board of Directors and its committees in the form of RSUs. Certain directors elected this option beginning on January 1, 2013 which has resulted in 7,821 units issued with a total value of $184,000. These RSUs
are fully vested. The stock-based compensation table above includes RSU expenses recognized related to these awards, which totaled $0.1 million and less than $0.1 million for the three months ended December 31, 2013 and 2012, respectively.
11. Restructuring Charges
During the three months ended December 31, 2013 and 2012, the Company did not incur any restructuring charges.
In September 2013 (fiscal 2013), the Company announced a realignment of its business to enhance focus on key growth initiatives. As a result
of the organizational change, the Company eliminated approximately 6% of its workforce. These employee terminations occurred across various functions, and the reorganization plan was completed by the end of fiscal 2013. The Company recorded total
pre-tax restructuring charges of $0.5 million in the fourth quarter of fiscal 2013, which consisted of severance pay and benefits expenses.
16
The following table summarizes the restructuring accrual activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Employee
Severance
and Benefits
|
|
|
Facility-
Related
Costs
|
|
|
Total
|
|
Balance at September 30, 2013
|
|
$
|
399
|
|
|
$
|
17
|
|
|
$
|
416
|
|
Cash payments
|
|
|
(173
|
)
|
|
|
(15
|
)
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
226
|
|
|
$
|
2
|
|
|
$
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining restructuring accrual balance relates to the fiscal 2013 restructuring and is expected to be
paid within the next 12 months. As such, the total balance is recorded as a current liability within other current liabilities on the consolidated balance sheet as of December 31, 2013.
12. Revolving Credit Facility
On November 4, 2013, the Company entered into a three-year $20.0 million secured revolving credit facility. The
Companys obligations under the credit facility are secured by substantially all of its and its subsidiaries assets, other than intellectual property and real estate. Borrowings under the credit facility, if any, will bear interest at a
benchmark rate plus a margin ranging from 1.375% to 2.00% based on the Companys leverage ratio. A facility fee is payable on unused commitments at a rate of 0.20% per annum. In connection with the credit facility, the Company is required
to maintain financial covenants related to a maximum leverage ratio and a minimum EBITDA amount and nonfinancial covenants. As of December 31, 2013, the Company has no debt outstanding and was in compliance with all financial and nonfinancial
covenants.
13. Income Per Share Data
Basic income per common share is calculated based on the weighted average number of common shares outstanding during the
period. Diluted income per common share is computed by dividing income by the weighted average number of common and common equivalent shares outstanding during the period. The Companys only potentially dilutive common shares are those that
result from dilutive common stock options, non-vested stock relating to restricted stock awards, restricted stock units and performance shares.
The following table sets forth the denominator for the computation of basic and diluted income per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Basic weighted average shares outstanding
|
|
|
13,756
|
|
|
|
14,655
|
|
Dilutive effect of outstanding stock options, non-vested restricted stock and performance shares
|
|
|
253
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
14,009
|
|
|
|
14,863
|
|
|
|
|
|
|
|
|
|
|
The calculation of weighted average diluted shares outstanding excludes outstanding stock options associated
with the right to purchase 0.4 million and 0.7 million shares of common stock for the three months ended December 31, 2013 and 2012, respectively, as their inclusion would have had an antidilutive effect on diluted income per share.
During the first quarter of fiscal 2014, the Company repurchased 380,011 shares of common stock for a total of $8.9 million under the
July 2013 authorization, including $0.5 million associated with open repurchases at December 31, 2013. During the first quarter of fiscal 2013, there were no purchases of common stock of the Company. As of December 31, 2013, the Company
has $2.6 million available for future repurchases under the current authorization. In January 2014, the $2.6 million remaining under the repurchase program was used to repurchase additional shares of common stock, and the repurchase authorization is
now completed.
14. Income Taxes
The Company recorded income tax provisions associated with income from continuing operations of $1.5 million and $1.9
million for the three months ended December 31, 2013 and 2012, respectively, representing effective tax rates of 28.8% and 30.6%, respectively. The difference between the U.S. federal statutory tax rate of 35% and the Companys effective
tax rate for the three months ended December 31, 2013 and 2012 reflects the impact of state income taxes, permanent tax items and discrete tax benefits. The three months ended December 31, 2013 and 2012 also reflects the impact of a gain
related to a Vessix contingent consideration payment and gain on sale of our ownership interest in Vessix stock, neither of which resulted in recognition of tax expense as a result of the reversal of a capital loss valuation allowance.
17
The total amount of unrecognized tax benefits including interest and penalties that, if
recognized, would affect the effective tax rate as of December 31, 2013 and September 30, 2013, respectively, are $0.9 million and $1.0 million for each period. Currently, the Company does not expect the liability for unrecognized tax
benefits to change significantly in the next 12 months with the above balances classified on the condensed consolidated balance sheets in other long-term liabilities. Interest and penalties related to unrecognized tax benefits are recorded in income
tax expense.
The Company files income tax returns, including returns for its subsidiaries, in the U.S. federal jurisdiction and in
various state jurisdictions. Uncertain tax positions are related to tax years that remain subject to examination. The Internal Revenue Service has commenced an examination of the Companys U.S. income tax return for fiscal 2012 in the first
quarter of fiscal 2014. U.S. income tax returns for years prior to fiscal 2010 are no longer subject to examination by federal tax authorities. For tax returns for state and local jurisdictions, the Company is no longer subject to examination for
tax years generally before fiscal 2003.
15. Amounts Reclassified Out of Accumulated Other Comprehensive Income
Amounts reclassified out of accumulated other comprehensive income (AOCI) were less than $0.1 million on a
pre-tax basis for each of the three months ended December 31, 2013 and 2012. The amounts reclassified out of AOCI are associated with unrealized gains on available-for-sale securities that were realized on the sale of the securities and are
presented in other income, net in the condensed consolidated statements of income.
16. Operating Segments
Operating segments are defined as components of an enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker, who is the Companys Chief Executive Officer, in deciding how to allocate resources and in assessing performance. For financial accounting and reporting purposes, the Company reports
its results for the two reportable segments as follows: (1) the Medical Device unit, which is comprised of surface modification coating technologies to improve access, deliverability, and predictable deployment of medical devices, as well as
drug delivery coating technologies to provide site-specific drug delivery from the surface of a medical device, with end markets that include coronary, peripheral, and neuro-vascular, and urology, among others, and (2) the In Vitro Diagnostics
unit, which consists of component products and technologies for diagnostic test kits and biomedical research applications, with products that include protein stabilization reagents, substrates, antigens and surface coatings.
The tables below present segment revenue, operating income and depreciation and amortization, as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
December 31,
|
|
(Dollars in thousands)
|
|
2013
|
|
|
2012
|
|
Revenue:
|
|
Medical Device
|
|
$
|
10,549
|
|
|
$
|
10,531
|
|
In Vitro Diagnostics
|
|
|
3,334
|
|
|
|
3,320
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
13,883
|
|
|
$
|
13,851
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
Medical Device
|
|
$
|
5,328
|
|
|
$
|
5,840
|
|
In Vitro Diagnostics
|
|
|
671
|
|
|
|
751
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income
|
|
|
5,999
|
|
|
|
6,591
|
|
Corporate
|
|
|
(1,670
|
)
|
|
|
(1,714
|
)
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
4,329
|
|
|
$
|
4,877
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Medical Device
|
|
$
|
294
|
|
|
$
|
317
|
|
In Vitro Diagnostics
|
|
|
214
|
|
|
|
215
|
|
Corporate
|
|
|
189
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
697
|
|
|
$
|
722
|
|
|
|
|
|
|
|
|
|
|
18
The Corporate category includes expenses for administrative corporate functions, such as
executive, corporate accounting, legal, human resources and Board of Directors related, that have not been fully allocated to the Medical Device and In Vitro Diagnostics segments. Corporate also includes expenses, such as litigation, which are not
specific to a segment and thus not allocated to the operating segments.
Asset information by segment is not presented because the Company
does not provide its chief operating decision maker assets by segment, as the data is not readily available.
17. Commitments and Contingencies
Litigation.
From time to time, the Company has been, and may become, involved in various legal actions involving
its operations, products and technologies, including intellectual property and employment disputes. The outcomes of these legal actions are not within the Companys complete control and may not be known for prolonged periods of time. In some
actions, the claimants seek damages, as well as other relief, including injunctions barring the sale of products that are the subject of the lawsuit, which, if granted, could require significant expenditures or result in lost revenue. The Company
records a liability in the consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount
within the range is a better estimate, the minimum amount of the range is accrued. If a loss is possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. In most cases, significant
judgment is required to estimate the amount and timing of a loss to be recorded.
Southern Research Institute (SRI)
Litigation.
On July 31, 2009, the Companys SurModics Pharmaceuticals subsidiary was named as a defendant in litigation pending in the circuit court of Jefferson County, Alabama, between SRI and two of SRIs former employees
(the Plaintiffs). In the litigation, the Plaintiffs allege that they contributed to or invented certain intellectual property while they were employed at SRI, and pursuant to SRIs policies then in effect, they are entitled to,
among other things, a portion of the purchase price consideration paid by the Company to SRI as part of the Companys acquisition of SurModics Pharmaceuticals pursuant to a stock purchase agreement made effective on July 31, 2007 (the
Stock Purchase Agreement). The Plaintiffs have also alleged that they are entitled to a portion of the intellectual property income derived from license agreements with certain customers of SurModics Pharmaceuticals that make use of
patents to which the Plaintiffs invented or contributed. A trial is expected to take place in the May to July 2014 timeframe. Based on the facts known to date, the Company recorded a $100,000 expense in discontinued operations for the year ended
September 30, 2013. The Company has not recorded additional accruals as the probability of the outcome is currently not determinable and any potential loss is not estimable. The Company believes that it has meritorious defenses to the
Plaintiffs claims and will vigorously defend and prosecute this matter. Following the Pharma Sale, the Company remains responsible for this litigation and has agreed to indemnify Evonik against certain losses, including those that may be
incurred in connection with this litigation.
Pursuant to the Stock Purchase Agreement, the Company has certain rights of indemnification
against losses (including without limitation, damages, expenses and costs) incurred as a result of the litigation. The Company had recorded cumulative unreimbursed legal expenses totaling $1.3 million as of June 30, 2013, related to this
litigation, within selling, general and administrative expenses from continuing operations in the condensed consolidated statements of income. In June 2011, the Company sued SRI in United States District Court for the District of Minnesota seeking a
judicial declaration regarding the scope of the Companys indemnification rights under the Stock Purchase Agreement. On April 17, 2013, the District Court entered a judgment in the Companys favor requiring SRI to indemnify the
Company for prior and future legal expenditures related to this matter. On July 30, 2013, the Company and SRI entered into a settlement and release agreement resolving the litigation relating to indemnification rights. The settlement and
release agreement does not relate to claims for indemnification under the Stock Purchase Agreement for any substantive liability, judgment, or settlement in or related to the ongoing litigation in Alabama discussed above. The Company received
payment of $1.0 million associated with the historical cumulative unreimbursed legal expenses and recognized the receipt as an expense offset in the fourth quarter ended September 30, 2013. This settlement included $0.6 million of legal
expenses incurred prior to fiscal 2013. Additionally, under the settlement and release agreement, the Company will be reimbursed for 75% of the legal fees, costs and expenses that the Company may incur in the future in connection with the Alabama
litigation that are not considered excessive.
InnoRx, Inc.
In January 2005, the Company entered into a merger agreement
whereby SurModics acquired all of the assets of InnoRx, Inc. (InnoRx), an early stage company developing drug delivery devices and therapies for the ophthalmology market. SurModics will be required to issue up to approximately 480,059
additional shares of its common stock to the stockholders of InnoRx upon the successful completion of the remaining development and commercial milestones involving InnoRx technology acquired in the transaction. The Company has not recorded any
accrual for this contingency as of December 31, 2013 as the milestones have not been achieved and the probability of achievement is low.
19
InnoCore Technologies BV.
In March 2006, the Company entered into a license agreement
whereby SurModics obtained an exclusive license to a drug delivery coating for licensed products within the vascular field which included peripheral, coronary and neurovascular biodurable stent product. The license requires an annual minimum payment
of 200,000 euros (equivalent to $275,000 using a euro to U.S. $ exchange rate of 1.3766 as of December 31, 2013) until the last patent expires which is currently estimated to be September 2027. The total minimum future payments associated with
this license are approximately $3.9 million. The license is currently utilized with one of SurModics drug delivery customers.
PR
Pharmaceuticals, Inc.
In November 2008, SurModics Pharmaceuticals acquired certain contracts and assets of PR Pharma to enhance its portfolio of drug delivery technologies for the pharmaceutical and biotechnology industries. The Company agreed
to indemnify Evonik, for a period of five years, for up to $2.5 million of contingent consideration obligations to the sellers of PR Pharma related to a future patent issuance milestone when it sold substantially all of the SurModics Pharmaceuticals
assets to Evonik on November 17, 2011. The Company has not recorded any accrual for this contingency as of December 31, 2013 as the milestone has not been achieved and the probability of achievement is low.
20