Surmodics Annual Report 2017

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended September 30, 2017Commission file number 0-23837 SURMODICS, INC.(Exact Name of Registrant as Specified in Its Charter) Minnesota41-1356149(State or other jurisdiction ofincorporation or organization)(IRS EmployerIdentification No.) 9924 West 74th StreetEden Prairie, Minnesota55344(Address of Principal Executive Offices)(Zip Code) (Registrant’s Telephone Number, Including Area Code)(952) 500-7000Securities registered pursuant to Section 12(b) of the Act: Title of Each ClassName of Exchange on Which RegisteredCommon Stock, $0.05 par valueNASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act:NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒Indicate by check mark whether the registrant: (1) has ﬁled all reports required to be ﬁled by Sec(cid:42)on 13 or 15(d) of the Securi(cid:42)es Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐Indicate by check mark whether the registrant has submi(cid:48)ed electronically and posted on its corporate Web site, if any, every Interac(cid:42)ve Data File required to be submi(cid:48)ed andposted pursuant to Rule 405 of Regula(cid:42)on S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post suchfiles). Yes ☒ No ☐Indicate by check mark if disclosure of delinquent ﬁlers pursuant to Item 405 of Regula(cid:42)on S-K is not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒Indicate by check mark whether the registrant is a large accelerated ﬁler, an accelerated ﬁler, a non-accelerated ﬁler, or a smaller repor(cid:42)ng company. See the deﬁni(cid:42)ons of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer☐ Accelerated filer☒Non-accelerated filer☐(Do not check if a smaller reporting company)Smaller reporting company☐ Emerging Growth Company☐If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transi(cid:42)on period for complying with any new or revised ﬁnancialaccounting standards provided pursuant to Section 1(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 aggregate market value of the Common Stock held by shareholders other than oﬃcers, directors or holders of more than 5% of the outstanding stock of the registrant as ofMarch 31, 2017 was approximately $176 million (based upon the closing sale price of the registrant’s Common Stock on such date).The number of shares of the registrant’s Common Stock outstanding as of November 25, 2017 was 13,098,716.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s Proxy Statement for the Registrant’s 2018 Annual Meeting of Shareholders are incorporated by reference into Part III. Table of Contents Page Forward-Looking Statements2 Part I Item 1.Business3 Executive Officers of the Registrant13Item 1A.Risk Factors15Item 1B.Unresolved Staff Comments24Item 2.Properties24Item 3.Legal Proceedings24Item 4.Mine Safety Disclosures24 Part II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities25Item 6.Selected Financial Data27Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations27Item 7A.Quantitative and Qualitative Disclosures About Market Risk40Item 8.Financial Statements and Supplementary Data41Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure41Item 9A.Controls and Procedures41Item 9B.Other Information43 Part III Item 10.Directors, Executive Officers and Corporate Governance44Item 11.Executive Compensation44Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters44Item 13.Certain Relationships and Related Transactions, and Director Independence44Item 14.Principal Accountant Fees and Services44 Part IV Item 15.Exhibits and Financial Statement Schedule45Signatures 50 Forward-Looking StatementsCertain statements contained in this Form 10-K, or in other reports of the Company and other wri(cid:48)en and oral statements made from (cid:42)me to (cid:42)me by theCompany, do not relate strictly to historical or current facts. As such, they are considered “forward-looking statements” that provide current expecta(cid:42)ons orforecasts of future events. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securi(cid:42)es Li(cid:42)ga(cid:42)on Reform Act of1995. Such statements can be iden(cid:42)ﬁed by the use of terminology such as “an(cid:42)cipate,” “believe,” “could,” “es(cid:42)mate,” “expect,” “forecast,” “intend,” “may,”“plan,” “possible,” “project,” “will” and similar words or expressions. Any statement that is not a historical fact, including es(cid:42)mates, projec(cid:42)ons, future trendsand the outcome of events that have not yet occurred, is a forward-looking statement. The Company’s forward-looking statements generally relate to its growthand transforma(cid:42)on strategy, including our whole-product solu(cid:42)ons strategy and our ability to develop and commercialize medical device products, ﬁnancialprospects, product development programs including development of the SurVeil® drug-coated balloon (“SurVeil DCB”), including the es(cid:42)mated cost associatedwith the TRANSCEND clinical trial, sales eﬀorts, the impact of signiﬁcant customer agreements, including its agreements with Medtronic plc (“Medtronic”), theimpact of acquisi(cid:42)ons, the Company’s whole-products solu(cid:42)ons strategy, and our expecta(cid:42)ons related to regulatory approvals. You should carefully considerforward-looking statements and understand that such statements involve a variety of risks and uncertain(cid:42)es, known and unknown, and may be aﬀected byinaccurate assump(cid:42)ons. Consequently, no forward-looking statement can be guaranteed and actual results may vary materially. The Company undertakes noobliga(cid:42)on to update any forward-looking statement. Investors are advised not to place undue reliance upon the Company’s forward-looking statements and toconsult any further disclosures by the Company on such topics in this and other ﬁlings with the Securi(cid:42)es and Exchange Commission (“SEC”). Factors that couldcause our actual results to diﬀer from those discussed in the forward-looking statements include, but are not limited to, those described in Item 1A “RiskFactors” below. 2PART IITEM 1. BUSINESS.Overview – GeneralSurmodics, Inc. and subsidiaries (referred to as “Surmodics,” the “Company,” “we,” “us,” “our” and other like terms) is a leading provider of medicaldevice and in vitro diagnos(cid:42)c technologies to the healthcare industry. Our mission is to improve the treatment and detec(cid:42)on of disease by using our technologyto provide solu(cid:42)ons to diﬃcult medical device and diagnos(cid:42)c challenges. Our business segments partner with many of the world’s leading and emerging medicaldevice, diagnostic and life science companies to develop and commercialize innovative products designed to improve patient diagnosis and treatment.In ﬁscal 2017, our business performance con(cid:42)nued to be driven by growth in our core Medical Device and In Vitro Diagnos(cid:42)cs (“IVD”) businesses, whilewe con(cid:42)nued medical device product and pla(cid:77)orm development leveraging the technologies and manufacturing capabili(cid:42)es acquired with the ﬁscal 2016acquisi(cid:42)ons of Creagh Medical Ltd. (“Creagh Medical”) and NorMedix, Inc. (“NorMedix”) (together the “Fiscal 2016 Acquisi(cid:42)ons”) in our Medical Device businessunit. The Company was organized as a Minnesota corpora(cid:42)on in June 1979. We make available, free of charge, copies of our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports ﬁled or furnished pursuant to Sec(cid:42)on 13(a) or 15(d) of theSecuri(cid:42)es Exchange Act of 1934 (the “Exchange Act”) on our website, www.surmodics.com, as soon as reasonably prac(cid:42)cable a(cid:79)er ﬁling such materialelectronically or otherwise furnishing it to the SEC. We are not including the informa(cid:42)on on our website as a part of, or incorpora(cid:42)ng it by reference into, ourForm 10-K.The informa(cid:42)on below provides an overview of the principal products, services and markets for each of our two business units. For more informa(cid:42)onregarding domes(cid:42)c and foreign revenue and revenue by our business units, also known as our opera(cid:42)ng segments, for each of our last three ﬁscal years, seeNote 12 to the consolidated ﬁnancial statements in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. The discussion ofother aspects of our business including research and development (“R&D”), intellectual property, marke(cid:42)ng and sales, future acquisi(cid:42)on strategy, signiﬁcantcustomers, compe(cid:42)(cid:42)on, manufacturing, government regula(cid:42)on and our employees applies to our business in general and we describe material segmentinformation within these sections where relevant.Medical Device SegmentAdvances in medical device technology have helped drive improved device eﬃcacy and pa(cid:42)ent outcomes. The convergence of the pharmaceu(cid:42)cal,biotechnology and medical device industries, o(cid:79)en made possible by surface coa(cid:42)ngs and device drug delivery technologies, (together, “surface modiﬁca(cid:42)oncoa(cid:42)ng technologies”) presents an opportunity for major advancements in the healthcare industry. We believe the beneﬁts of combining drugs and biologicswith implantable and minimally invasive devices are becoming increasingly valuable in applica(cid:42)ons in cardiology, peripheral vascular disease, ophthalmology,orthopedics and other large markets.In an eﬀort to improve their exis(cid:42)ng products or develop en(cid:42)rely new devices, a growing number of medical device manufacturers are exploring or usingsurface modiﬁca(cid:42)on and device drug delivery technologies as product diﬀeren(cid:42)ators or device enablers. The con(cid:42)nuing trend toward minimally invasivesurgical procedures, which o(cid:79)en employ catheter-based delivery technologies, has increased the demand for hydrophilic (i.e., lubricious or slippery) coa(cid:42)ngsand other coa(cid:42)ng technologies. For example, stents, par(cid:42)cularly drug-elu(cid:42)ng stents, have signiﬁcantly reduced the need for repeat intravascular procedures,and they have diminished the need for more invasive cardiac bypass surgery. Drug-coated balloons have further transformed intravascular therapies byenhancing pa(cid:42)ent outcomes while not leaving stents in the vascular system. Transcatheter heart valve repair or replacement via a minimally invasive catheter-based system has enabled the treatment of pa(cid:42)ents suﬀering from heart valve disease who are too ill to undergo open-heart surgery. Posi(cid:42)ve clinical outcomesand acceptance of these and other similar innova(cid:42)ons by pa(cid:42)ents, physicians and insurance companies has helped certain segments of the United States(“U.S.”) medical device industry grow at a faster pace than the economy as a whole. The a(cid:48)rac(cid:42)veness of the industry has drawn intense compe(cid:42)(cid:42)on among thecompanies participating in this area.Our Medical Device segment provides surface modiﬁca(cid:42)on coa(cid:42)ng technologies that impart lubricity, prohealing or biocompa(cid:42)bility characteris(cid:42)cs, ordrug delivery capabili(cid:42)es, as well as vascular device, catheter and balloon design, development and manufacturing capabili(cid:42)es. Historically, we have providedsurface modiﬁca(cid:42)on technologies to enhance our customers’ medical devices and delivery systems. Since ﬁscal 2013, with our investment in our drug-coatedballoon (“DCB”) pla(cid:77)orm, we have been focused on a strategy to develop and manufacture proprietary medical device products that combine our surfacemodification3coa(cid:42)ngs with medical devices or delivery systems (“whole-product solu(cid:42)ons”). This strategy does not change our focus on our core surface modiﬁca(cid:42)ontechnologies, however we believe it will greatly increase our relevance in the industry and is key to our future growth and proﬁtability, given the prospect ofcapturing more revenue and opera(cid:42)ng margin with whole-product solu(cid:42)ons. Our aim is to provide customers earlier access to highly diﬀeren(cid:42)ated whole-product solutions that address unmet clinical needs, and partner with them on successful commercialization.During ﬁscal 2017, we con(cid:42)nued inves(cid:42)ng in our whole-product solu(cid:42)ons strategy and achieved meaningful strategic milestones, including the ini(cid:42)a(cid:42)onof the TRANSCEND SurVeil® DCB pivotal clinical trial, as well as U.S. Food and Drug Administra(cid:42)on (“FDA”) and Conformité Européenne (“CE Mark”) clearance forour .014” low-proﬁle percutaneous transluminal angioplasty balloon dila(cid:42)on catheter (“.014” PTA balloon catheter”), designed for peripheral angioplastyprocedures.Overview of Interventional Peripheral Market and Whole-Products Solutions StrategyPeripheral artery disease (“PAD”) is a condi(cid:42)on that causes a narrowing of the blood vessels supplying the extremi(cid:42)es, most o(cid:79)en due to plaque buildupin the arterial walls. Le(cid:79) untreated, PAD may lead to symptoms such as large non-healing ulcers, infec(cid:42)ons, or gangrene, and may require limb amputa(cid:42)on or, inextreme cases, result in death.The American Heart Associa(cid:42)on has reported that an es(cid:42)mated 8.5 million Americans and 202 million people worldwide are living with PAD. Thenumber of people aﬀected by PAD is expected to increase as a result of an aging popula(cid:42)on, coupled with increasing prevalence of condi(cid:42)ons linked to PAD,such as diabetes and obesity. The interven(cid:42)onal PAD market u(cid:42)lizes a variety of access and therapy catheters to treat PAD. These technologies are deliveredthrough a number of access points into the vascular system including femoral (leg), radial (wrist or arm) and pedal (foot).Our business model for our whole-product solu(cid:42)ons strategy is to design, develop and manufacture products incorpora(cid:42)ng our proprietary catheter,balloon and surface modiﬁca(cid:42)on coa(cid:42)ng technologies. Our whole-product solu(cid:42)ons strategy has been built on the acquisi(cid:42)on of state-of-the-art medical devicedesign, development and manufacturing capabili(cid:42)es to complement our leadership in surface modiﬁca(cid:42)on coa(cid:42)ng technologies to develop whole-productsolu(cid:42)ons for treatment of PAD and other vascular diseases. The Creagh Medical acquisi(cid:42)on brought a state-of-the-art R&D and manufacturing facility oﬀeringrobust extrusion, balloon-forming, top-assembly, packaging and regulatory capabili(cid:42)es focused on balloon catheters. The NorMedix acquisi(cid:42)on provided ultra-thin-walled, minimally invasive catheter technologies. We have integrated our balloon catheter, ultra-thin-walled catheter and surface modiﬁca(cid:42)on technologiesto design, develop and manufacture proprietary products. We are currently seeking third-party companies to distribute our products to end users.During ﬁscal 2017 we received FDA 510(k) clearance and CE Mark for our ﬁrst whole-product solu(cid:42)on, a .014” PTA balloon catheter, and expect toreceive regulatory approval for several addi(cid:42)onal catheter and balloon-based products throughout calendar 2018. We are currently in discussions withpotential partners to distribute our .014” PTA balloon catheter.Surmodics is focused on the development of drug coated balloons to treat PAD. The development of the SurVeil DCB is a major step forward in ourstrategy to oﬀer whole-product solu(cid:42)ons for the medical device industry. During ﬁscal 2016, we ini(cid:42)ated PREVEIL, an early feasibility clinical trial of the SurVeilDCB, which is intended to treat PAD in the leg above the knee. Enrollment in PREVEIL was completed in the second quarter of ﬁscal 2017. We began enrollmentin the TRANSCEND SurVeil DCB pivotal clinical study in the fourth quarter of ﬁscal 2017, with the objec(cid:42)ve of obtaining data necessary to support regulatoryapprovals and reimbursement for this device in the U.S. We also plan to initiate SurVeil DCB clinical trials in Europe to support CE Mark approval. Un(cid:42)l regulatoryapprovals have been obtained, our SurVeil DCB is not approved for commercial sale.In addi(cid:42)on to our SurVeil DCB program, we are developing other DCB’s for treatment of PAD below-the-knee (“BTK”) and arteriovenous (“AV”) ﬁstulae,commonly associated with hemodialysis.Overview of Surmodics’ Surface Modification and Device Drug Delivery TechnologiesWe believe Surmodics is posi(cid:42)oned to take advantage of the con(cid:42)nuing trend of incorpora(cid:42)ng surface modiﬁca(cid:42)on and device drug deliverytechnologies into the design of combination products, potentially leading to more efficient and effective products as well as new product applications. We have agrowing proprietary technology por(cid:77)olio that incorporates our market exper(cid:42)se and insight, as well as unique collabora(cid:42)ve research, development andmanufacturing capabilities — key ingredients to bring innovation together to benefit patients, us, and the healthcare industry.4Coatings for Surface Modification and Device Drug DeliveryKey diﬀeren(cid:42)a(cid:42)ng characteris(cid:42)cs of our coa(cid:42)ng pla(cid:77)orms are their ﬂexibility, durability and ease of use. In terms of ﬂexibility, coa(cid:42)ngs can be applied tomany diﬀerent kinds of surfaces and can immobilize a variety of chemical, pharmaceu(cid:42)cal and biological agents. Addi(cid:42)onally, the surface modiﬁca(cid:42)on processcan be tailored to provide customers with the ability to improve their devices’ performance by choosing the speciﬁc coa(cid:42)ng proper(cid:42)es desired for par(cid:42)cularapplications. Our surface modification technologies also can be combined to deliver multiple surface-enhancing characteristics on the same device.Our proprietary PhotoLink® coa(cid:42)ng technology is a versa(cid:42)le, easily applied, coa(cid:42)ng technology that modiﬁes medical device surfaces by crea(cid:42)ngcovalent bonds between device surfaces and a variety of chemical agents. PhotoLink coa(cid:42)ngs can impart many performance enhancing characteris(cid:42)cs, such asadvanced lubricity (slippery) and hemocompa(cid:42)bility (preven(cid:42)ng blood clot forma(cid:42)on), when bound onto surfaces of medical devices or other biologicalmaterials without materially changing the dimensions or other physical properties of devices.PhotoLink reagents can be applied to a variety of substrates. The coa(cid:42)ng formula(cid:42)ons are easily applied to the material surface by a variety of methodsincluding, but not limited to, dipping, spraying, roll-coa(cid:42)ng or ink-je(cid:86)ng. We con(cid:42)nue to expand our proprietary reagent por(cid:77)olio for use by our customers.These reagents enable our customers to develop novel surface features for their devices, sa(cid:42)sfying the expanding healthcare industry requirements. We are alsocon(cid:42)nually working to expand the list of materials that are compa(cid:42)ble with our surface modiﬁca(cid:42)on and device drug delivery reagents. Addi(cid:42)onally, we developcoating processes and coating equipment to meet the device quality, manufacturing throughput and cost requirements of our customers.The PhotoLink coa(cid:42)ng process is rela(cid:42)vely simple to use and is easily integrated into the customer’s manufacturing process. In addi(cid:42)on, the process doesnot subject the coated products to harsh chemical or temperature condi(cid:42)ons, produces no hazardous byproducts, and does not require lengthy processing orcuring (cid:42)me. Further, our PhotoLink coa(cid:42)ngs are generally compa(cid:42)ble with accepted steriliza(cid:42)on processes, so the surface a(cid:48)ributes are not lost when themedical device is sterilized.We launched our Serene® hydrophilic coa(cid:42)ng pla(cid:77)orm in ﬁscal 2013, which op(cid:42)mizes lubricity and durability while signiﬁcantly reducing par(cid:42)culatesgenera(cid:42)on. This next-genera(cid:42)on coa(cid:42)ng has demonstrated excellent lubricity on a wide range of substrates, and has been used on FDA-cleared coronary,peripheral and structural heart devices. Serene coatings are applied using our PhotoLink process.Our device drug delivery coa(cid:42)ng technologies allow therapeu(cid:42)c drugs to be incorporated within our proprietary polymer matrices to provide controlled,site-speciﬁc release of the drug into the surrounding environment. The drug release can be tuned to elute quickly (within minutes to a few days) or slowly (fromseveral months to over a year), illustra(cid:42)ng the wide range of release proﬁles that can be achieved with our coa(cid:42)ng systems. On a wide range of devices, drug-elu(cid:42)ng coa(cid:42)ngs can help improve device performance, increase pa(cid:42)ent safety and enable innova(cid:42)ve new treatments. Examples of short term use drug deliverydevices would include drug coated balloons and examples of longer-term drug delivery devices would include drug elu(cid:42)ng stents. We work with companies inthe medical device and biotechnology industries to develop specialized coa(cid:42)ngs that allow for the controlled release of drugs from device surfaces. We see atleast three primary areas with strong future poten(cid:42)al: (1) improving the func(cid:42)on of a device which itself is necessary to treat the medical condi(cid:42)on; (2) enablingsite-speciﬁc drug delivery while limi(cid:42)ng systemic exposure; and (3) enhancing the biocompa(cid:42)bility of a medical device to ensure that it con(cid:42)nues to func(cid:42)onover a long period of time.Licensing ArrangementsWe commercialize our surface modiﬁca(cid:42)on and device drug delivery technologies primarily through licensing arrangements with medical devicemanufacturers. We believe this approach allows us to focus our resources on further developing new technologies and expanding our licensing ac(cid:42)vi(cid:42)es. Manyof our technologies have been designed to allow manufacturers to implement them easily into their own manufacturing processes so customers can controlproduction and quality internally without the need to send their products to a contract manufacturer.We generate the largest por(cid:42)on of our revenue through licensing arrangements. Royal(cid:42)es and license fees represented 43.5%, 46.5% and 51.3% of ourtotal revenue in ﬁscal 2017, 2016 and 2015, respec(cid:42)vely. Greater than 96% of our royal(cid:42)es and license fees revenue in this three-year period were generatedfrom hydrophilic coa(cid:42)ng licenses. Revenue from these licensing arrangements typically includes license fees and milestone payments, minimum royal(cid:42)es, androyalties based on a percentage of licensees’ product sales. We also generate revenue from reagent chemical sales to licensees for use in their coating processes.5The licensing process begins with the customer specifying a desired product feature to be created such as lubricity or drug delivery. Because each deviceand coa(cid:42)ng applica(cid:42)on is unique, we rou(cid:42)nely conduct a feasibility study to qualify each new poten(cid:42)al product applica(cid:42)on, o(cid:79)en genera(cid:42)ng commercialdevelopment revenue. Feasibility studies can range in dura(cid:42)on from several months to a year. A(cid:79)er we complete a feasibility study, our customers cannotmarket their product un(cid:42)l they receive regulatory approval. As further described under the cap(cid:42)on “Government Regula(cid:42)on,” the regulatory approval processvaries in each country and ranges from several months to four or more years. At any (cid:42)me prior to a customer’s commercial launch, a license agreement may beexecuted gran(cid:42)ng the licensee rights to use our technology. We o(cid:79)en support our customers by providing coa(cid:42)ng assistance for parts required in animal testsand human clinical trials. Typically, we complete a technology transfer to most customers which enables those customers to apply the coa(cid:42)ng at their ownfacilities.License agreement terms are generally for a speciﬁed number of years or our patent’s life, whichever is longer, although a license generally may beterminated by the licensee for any reason upon 90 days’ advance wri(cid:48)en no(cid:42)ce. In cases where the royalty obliga(cid:42)on extends beyond the life of the applicablepatent, it is because the license also includes rights to our know-how or other proprietary rights. Under these circumstances, the royalty obliga(cid:42)on typicallycontinues at a reduced royalty rate for a specified number of years generally following the date on which the customer’s product was first sold.Our license agreements may include certain license fees and/or milestone payments. Substan(cid:42)ally all our licensed applica(cid:42)ons are nonexclusive, allowingus to license technology to mul(cid:42)ple customers. Moreover, even exclusive licenses generally are limited to a speciﬁc “ﬁeld of use,” allowing us the opportunity tofurther license technology to other customers. The royalty rate on a substan(cid:42)al number of the agreements has tradi(cid:42)onally been in the 2% to 3% range, butthere are certain contracts with lower or higher rates. In certain agreements, our royalty is based on an agreed-upon amount per unit. License fees, milestonepayments, and the royalty rates are based on various factors, including the licensed product’s or technology’s stage of development, the perceived value of ourtechnology to the customer’s product, the size of the poten(cid:42)al market, and whether the arrangement is exclusive or nonexclusive. Our agreements generallyincorporate a minimum royalty to be paid by the licensee. Royalty payments generally commence one quarter a(cid:79)er the customer’s actual product sales occurbecause of the delay in repor(cid:42)ng sales by our licensees. As such, we currently recognize royalty revenue in the quarter customer royalty payments are due tous. Commencing in ﬁscal 2019 we are required to adopt a new revenue recogni(cid:42)on accoun(cid:42)ng standard that will require us to recognize and accrue royaltyrevenue in the same quarter that the underlying customer product sale occurs.We have over 150 licensed product classes (customer products u(cid:42)lizing Surmodics technology) already in the market genera(cid:42)ng royal(cid:42)es and greaterthan 100 customer product classes incorpora(cid:42)ng our technology in various stages of pre-commercializa(cid:42)on. We signed 17, 18 and 22 new licenses in ﬁscal2017, 2016 and 2015, respectively.Under our customer license agreements, the responsibility for securing regulatory approval for and ul(cid:42)mately commercializing these products rests withour customers. Our reliance on our customers in this regard and the poten(cid:42)al risks to our opera(cid:42)ons as a result are discussed in Item 1A “Risk Factors” of thisForm 10-K. Moreover, we are o(cid:79)en contractually obligated to keep the details concerning our customers’ R&D eﬀorts (including the (cid:42)ming of expectedregulatory ﬁlings, approvals and market introduc(cid:42)ons) conﬁden(cid:42)al. Given the signiﬁcant uncertainty inherent in product development and regulatory approvalprocesses, the expected timing for regulatory approval and commercialization for the product classes pending regulatory approval is can vary greatly.Our licensing agreements generally require us to keep our customers’ iden(cid:42)(cid:42)es conﬁden(cid:42)al, unless they approve of such disclosure. Licensed customerswho allow the use of their name include: Abbo(cid:48) Laboratories (“Abbo(cid:48)”), Boston Scien(cid:42)ﬁc Corpora(cid:42)on (“Boston Scien(cid:42)ﬁc”), Cook Medical, Cordis Corpora(cid:42)on(a subsidiary of Cardinal Health, Inc.) (“Cordis”), Covidien PLC (a subsidiary of Medtronic), Edwards Lifesciences Corpora(cid:42)on, Evalve, Inc. (a subsidiary of Abbo(cid:48)),ev3 Inc. (a subsidiary of Medtronic), Medtronic, OrbusNeich Medical, Inc., and Spectranetics Corporation (a subsidiary of Koninklijke Philips N.V.).In Vitro Diagnostics SegmentOur In Vitro Diagnos(cid:42)cs (“IVD”) business unit sells stabiliza(cid:42)on products, substrates, an(cid:42)gens and surface coa(cid:42)ngs to diagnos(cid:42)cs customers. Wemanufacture or sell components for in vitro diagnos(cid:42)c immunoassay and molecular tests and we manufacture and sell surface coa(cid:42)ngs to the diagnos(cid:42)c,biomedical research, and life science markets.Immunoassay Diagnos(cid:41)cs. An immunoassay is a biochemical test that measures the presence or concentra(cid:42)on of a target molecule, or “analyte”, in abiological ﬂuid or sample. Analyte levels are correlated to the pa(cid:42)ent’s disease state or medical condi(cid:42)on of a pa(cid:42)ent to diagnose the presence, absence orseverity of disease. Analytes can range from large molecules such as proteins to small molecules such as hormones. Immunoassays are developed and producedusing multiple components. The component’s selection and optimization confer the assay quality and performance of the assay in terms of sensitivity and6speciﬁcity. IVD companies select these cri(cid:42)cal biochemical and reagent components to meet the assay’s diagnos(cid:42)c speciﬁca(cid:42)ons. We develop, manufacture andsell high-performing, consistent-quality and stable immunoassay component products to enable our customers’ diagnos(cid:42)c tests to detect the absence orpresence of disease.Molecular Diagnos(cid:41)cs - DNA and Protein Immobiliza(cid:41)on. Both DNA and protein microarrays are useful tools for the pharmaceu(cid:42)cal, diagnos(cid:42)c andresearch industries. During a DNA gene analysis, typically thousands of diﬀerent probes need to be placed in a pa(cid:48)ern on a surface, called a DNA microarray.These microarrays are used by the pharmaceu(cid:42)cal industry to screen for new drugs, by genome mappers to sequence human, animal or plant genomes, or bydiagnos(cid:42)c companies to search a pa(cid:42)ent sample for disease causing bacteria or viruses. However, DNA does not readily adhere to most surfaces. We havedeveloped various surface chemistries for both DNA and protein immobiliza(cid:42)on. Protein microarrays are used as diagnos(cid:42)c and research tools to determine thepresence and/or quan(cid:42)ty of proteins in a biological sample. The most common type of protein microarray is the an(cid:42)body microarray, where an(cid:42)bodies arespotted onto a surface and used as capture molecules for protein detection.The sales cycle for our IVD products generally begins when an IVD company ini(cid:42)ates the process to develop a new, or improve a current, diagnos(cid:42)c test.During product development, these companies will look to source the test’s cri(cid:42)cal components with reagents it produces internally or with reagents from asupplier, such as Surmodics.As IVD tests are developed and various reagents are tested, companies will generally seek to op(cid:42)mize the sensi(cid:42)vity (false nega(cid:42)ve reduc(cid:42)ons), speciﬁcity(false posi(cid:42)ve reduc(cid:42)ons), speed ((cid:42)me from sample to results), convenience (ideally as few steps as possible) and cost eﬀec(cid:42)veness. Upon regulatory approval orclearance, the customer’s diagnos(cid:42)c test can be sold in the marketplace. It may take several years a(cid:79)er approval or clearance for the test to achieve peak marketshare and optimize Surmodics’ revenue.Overview of In Vitro Diagnostics ProductsProtein Stabilizers. We oﬀer a full line of stabiliza(cid:42)on products for the IVD market. These products increase sensi(cid:42)vity, reduce false posi(cid:42)ve and falsenega(cid:42)ve results, while extending the diagnos(cid:42)c test’s shelf life, thereby producing more consistent assay results. Our stabiliza(cid:42)on products are ready-to-use,eliminating the in-house manufacturing preparation time and cost of producing stabilization and blocking reagents.Substrates. We also provide colorimetric and chemiluminescent substrates to the IVD market under our BioFX trademark. A substrate is the diagnos(cid:42)ctest kit component that detects and signals that a reac(cid:42)on has taken place so that a result can be recorded. Colorimetric substrates signal a posi(cid:42)ve diagnos(cid:42)cresult through a color change. Chemiluminescent substrates signal a posi(cid:42)ve diagnos(cid:42)c result by emi(cid:86)ng light. We believe that our substrates oﬀer a high levelof stability, sensitivity and consistency.Antigens. We are the exclusive distributor in the United States, Canada and Puerto Rico (and non-exclusive distributor in Japan) of DIARECT AG’s line ofan(cid:42)gens. Because of the lack of high-quality an(cid:42)gens from natural sources, DIARECT produces the majority of these an(cid:42)gens and other components usingrecombinant technology.Surface Coa(cid:41)ngs for Molecular Diagnos(cid:41)c Applica(cid:41)ons. We oﬀer custom coa(cid:42)ngs for molecular diagnos(cid:42)c applica(cid:42)ons, including DNA, RNA and proteinmicroarrays. Our TRIDIA™ surface coa(cid:42)ngs bind molecules to a variety of surfaces and geometries and may be customized for selec(cid:42)vity using passiva(cid:42)ngpolymers and reac(cid:42)ve groups. This proprietary technology immobilizes DNA and protein to adhere to tes(cid:42)ng surfaces. We oﬀer other surface coa(cid:42)ngs thatimprove flow characteristics through membranes and microfluidic channels on diagnostic devices including point-of-care components.Research and DevelopmentOur R&D personnel work to enhance and expand our technology and product oﬀerings in the area of whole-product solu(cid:42)ons, drug delivery, surfacemodification, and in vitro diagnos(cid:42)cs through internal scien(cid:42)ﬁc inves(cid:42)ga(cid:42)on and proprietary product development. These scien(cid:42)sts and engineers also evaluateexternal technologies in support of our corporate development ac(cid:42)vi(cid:42)es. Our R&D eﬀorts are all guided by the needs of the markets in which we do business.Addi(cid:42)onally, the R&D staﬀ support the business development staﬀ and business units in performing feasibility studies, providing technical assistance to exis(cid:42)ngand poten(cid:42)al customers. These services, which generate our research, development and other revenue, include op(cid:42)mizing the relevant technologies for speciﬁccustomer applica(cid:42)ons, suppor(cid:42)ng clinical trials, training customers, and integra(cid:42)ng our technologies and know-how into customer manufacturing opera(cid:42)onsand developing whole-product solutions that meet customers’ needs by integrating our coating, medical device and medical device delivery technologies.7In ﬁscal 2017, 2016 and 2015, our R&D expenses were $31.8 million, $18.5 million and $16.2 million, respec(cid:42)vely. Included in R&D expenses are thecosts associated with our research, development and other revenue. We intend to con(cid:42)nue signiﬁcantly inves(cid:42)ng in R&D to advance our whole-productsolu(cid:42)ons, surface modiﬁca(cid:42)on coa(cid:42)ngs, device drug delivery and in vitro diagnos(cid:42)c technologies and to expand uses for our technology pla(cid:77)orms. Wean(cid:42)cipate an increase in R&D expenses in ﬁscal 2018 primarily related to whole-product solu(cid:42)ons product development, including our DCB development andclinical study activities. In addition, we continue to pursue access to products and technologies developed outside the Company to complement our internal R&Defforts.Medical Device SegmentAs treatment technologies become more sophis(cid:42)cated and increasingly leverage minimally invasive techniques, we believe the need for improved medicaldevices that beneﬁt from surface modiﬁca(cid:42)on and device drug delivery will con(cid:42)nue to grow. We intend to con(cid:42)nue our development eﬀorts to expand ourwhole-product solu(cid:42)ons oﬀerings including advancing our surface modiﬁca(cid:42)on and device drug delivery technologies to be(cid:48)er meet these needs acrossmul(cid:42)ple medical markets and to capture more of the ﬁnal product value. Our whole-products solu(cid:42)ons R&D ac(cid:42)vi(cid:42)es are primarily focused on the peripheralvascular market, where we believe the integra(cid:42)on of our surface modiﬁca(cid:42)on, balloon catheter and ultra-thin-walled catheter technologies will result in uniquedevices capable of producing be(cid:48)er pa(cid:42)ent outcomes in complex, diﬃcult-to-treat arterial disease cases. We are doing this by developing or acquiringtechnologies and funding development activities that may include pre-clinical and clinical studies.With the Fiscal 2016 Acquisi(cid:42)ons and subsequent investments in our R&D infrastructure and facili(cid:42)es, we have strengthened our capabili(cid:42)es andbroadened our capacity for R&D ac(cid:42)vi(cid:42)es. Our facility in Ballinasloe, Ireland is fully equipped for R&D and manufacturing and is focused on design andmanufacture of peripheral vascular devices. This facility’s capabili(cid:42)es include balloon forming, extrusion, coa(cid:42)ng, braiding and assembly of ﬁnished products.The facility is equipped for medical device R&D and manufacturing with space for future growth. In the ﬁrst quarter of ﬁscal 2017, we completed an expansionof R&D and manufacturing clean rooms as well as an analy(cid:42)cal lab to support our whole-product solu(cid:42)ons strategy. With the NorMedix acquisi(cid:42)on, we obtaineda diﬀeren(cid:42)ated catheter-technology pla(cid:77)orm and addi(cid:42)onal design and development exper(cid:42)se that have enhanced the value we oﬀer our medical devicecustomers and accelerated our development of proprietary medical device products. We have con(cid:42)nued to develop surface modiﬁca(cid:42)on coa(cid:42)ng and DCBchemistry technologies in our Eden Prairie, Minnesota facili(cid:42)es. Our proprietary, whole-product solu(cid:42)ons integrate our surface modiﬁca(cid:42)on coa(cid:42)ngs, catheterand balloon technologies and are being developed with a combined team from our U.S. and Irish facili(cid:42)es. In addi(cid:42)on to our DCB-pla(cid:77)orm products, we areexecu(cid:42)ng on our plan to develop and commercialize 12-15 medical device products over the next 5 years. Addi(cid:42)onal planned ac(cid:42)vi(cid:42)es include ini(cid:42)a(cid:42)on ofsurface modiﬁca(cid:42)on experiments that improve medical device performance, as well as incorpora(cid:42)on of our catheter technology pla(cid:77)orm into various otherdevices intended for the emerging peripheral vascular treatment market. We received FDA clearance and CE Mark for the .014” PTA balloon catheter in thefourth quarter of fiscal 2017 and we expect to receive regulatory clearance for several additional, newly-developed products during calendar 2018.In addi(cid:42)on to proprietary medical device product development, we work with our customers to integrate the best possible surface modiﬁca(cid:42)on anddevice drug delivery technologies with their products, not only to meet their performance requirements, but also to perform services quickly so that the productmay reach the market ahead of the compe(cid:42)(cid:42)on. To quickly solve problems that might arise during the development and op(cid:42)miza(cid:42)on process, we havedeveloped extensive capabili(cid:42)es in analy(cid:42)cal chemistry and surface characteriza(cid:42)on within our R&D organiza(cid:42)on. Our state-of-the-art instrumenta(cid:42)on andextensive experience allow us to test the purity of coa(cid:42)ng reagents, to monitor the elu(cid:42)on rate of drug from coa(cid:42)ngs, to measure coa(cid:42)ng thickness andsmoothness, and to map the distribution of chemicals throughout coatings. We believe our capabilities in this area exceed those of our direct competitors.In Vitro Diagnostics SegmentOur R&D eﬀorts to grow our IVD business unit include iden(cid:42)fying and addressing unmet needs that exist in the global IVD market place. Our pipeline ofIVD products includes components for immunoassay and molecular diagnos(cid:42)c applica(cid:42)ons, such as, new protein stabilizers, detec(cid:42)on technologies, accessoryreagents and surface coa(cid:42)ngs that have the poten(cid:42)al to add greater sensi(cid:42)vity, speciﬁcity, speed, convenience and lower cost for IVD test manufacturers. Infiscal 2016 we launched StabilBlock® Immunoassay Stabilizer, our most advanced stabilizer product. Clinical TrialsOur PREVEIL ﬁrst in-human early feasibility study using the SurVeil DCB completed enrollment in the second quarter of ﬁscal 2017. In PREVEIL, six-monthresults indicated that acute success measures of safety were achieved in all pa(cid:42)ents, as well as 100 percent primary patency and encouraging late lumen loss atsix months post-procedure. In July 2017, we received an inves(cid:42)ga(cid:42)onal device exemp(cid:42)on (“IDE”) from the FDA to ini(cid:42)ate a pivotal clinical trial ofthe SurVeil DCB. The randomized clinical trial, TRANSCEND,8will evaluate the SurVeil DCB for treatment for PAD in the upper leg compared with the Medtronic IN.PACT® Admiral® DCB. The objec(cid:42)ve of theTRANSCEND clinical trial is to evaluate the safety and eﬀec(cid:42)veness of the SurVeil DCB device for treatment of subjects with symptoma(cid:42)c PAD due to stenosis ofthe femoral and/or popliteal arteries. If successful, the TRANSCEND clinical trial will be used to support regulatory approvals and reimbursement (U.S. andEurope). The trial will enroll up to 446 subjects at up to 60 sites in the U.S. and 18 outside the U.S. Study par(cid:42)cipants will be randomized to receive eithertreatment with SurVeil DCB or IN.PACT Admiral DCB. The trial’s primary eﬃcacy endpoint is primary patency, deﬁned as a composite of freedom from restenosisand clinically-driven target lesion revasculariza(cid:42)on through 12 months post-index procedure. All randomized subjects will be followed through 60 months post-index procedure. We initiated enrollment in the TRANSCEND clinical trial in October 2017 and have engaged a clinical research organiza(cid:42)on to assist us with theadministra(cid:42)on of the clinical trial. There is no assurance that the TRANSCEND clinical trial will support regulatory approval, or that any an(cid:42)cipated (cid:42)me framewill be met. We estimate that the cost of the TRANSCEND clinical trial will range between $32 million to $40 million over the next several years.In connec(cid:42)on with our whole-product solu(cid:42)ons strategy, we plan to con(cid:42)nue to sponsor and support clinical inves(cid:42)ga(cid:42)ons to evaluate pa(cid:42)ent safety andclinical eﬃcacy when necessary to support regulatory approval or clearance for new product ini(cid:42)a(cid:42)ves. We will generate the clinical data necessary to seekregulatory approval or clearance for our existing and emerging products.Patents and Proprietary RightsPatents and other forms of proprietary rights are an essen(cid:42)al part of Surmodics’ business. The Company aggressively pursues patent protec(cid:42)on coveringthe proprietary technologies that we consider strategically important to our business. In addi(cid:42)on to seeking patent protec(cid:42)on in the U.S., we also generally ﬁlepatent applica(cid:42)ons in European countries and, on a selec(cid:42)ve basis, other foreign countries. We strategically manage our patent por(cid:77)olio so as to ensure that wehave valid and enforceable patent rights protecting our technological innovations.We protect our extensive por(cid:77)olio of technologies through ﬁling and maintaining patent rights covering a variety of coa(cid:42)ngs, drug delivery methods,reagents, and formula(cid:42)ons, as well as par(cid:42)cular clinical device applica(cid:42)ons. During ﬁscal 2017, Surmodics ﬁled 4 original U.S. patent applica(cid:42)ons, as well as 9interna(cid:42)onal patent applica(cid:42)ons. As of September 30, 2017, Surmodics owned or had exclusive rights to 55 pending U.S. patent applica(cid:42)ons and 135 foreignpatent applications. Likewise, as of the same date, Surmodics owned or had exclusive rights to 147 issued U.S. patents and 198 international patents.We have licensed our PhotoLink hydrophilic technology on a non-exclusive basis to a number of our customers for use in a variety of medical devicesurface applica(cid:42)ons, including those described above. In par(cid:42)cular, we have 30 issued U.S. patents, 10 pending U.S. patent applica(cid:42)ons, 34 issued interna(cid:42)onalpatents, and 32 pending interna(cid:42)onal patent applica(cid:42)ons protec(cid:42)ng various aspects of these technologies, including composi(cid:42)ons, methods of manufacture andmethods of coa(cid:42)ng devices. The expira(cid:42)on dates for these patents and an(cid:42)cipated expira(cid:42)on dates of the patent applica(cid:42)ons range from ﬁscal 2020 to 2035.Moreover, these patents and patent applica(cid:42)ons represent dis(cid:42)nct families, with each family generally covering a successive genera(cid:42)on of the technology,including improvements that enhance coa(cid:42)ng performance, manufacturability, or other important features desired by our customers. Among these, our third-generation PhotoLink technology is protected by a family of patents that expired in November 2015 (in the U.S.) and October 2016 (in certain other countries).In addi(cid:42)on, our fourth-genera(cid:42)on of our PhotoLink technology is protected by a family of patents that is expected to expire in early ﬁscal 2020. As noted abovein “Licensing Arrangements,” the royalty obliga(cid:42)on in our typical license agreement is generally for a speciﬁed number of years or the patent life, whichever islonger. In cases where the royalty obliga(cid:42)on extends beyond the life of the applicable patent, it is because the license also includes rights to our know-how orother proprietary rights. Under these circumstances, the royalty obliga(cid:42)on will con(cid:42)nue at a reduced royalty rate for a speciﬁed number of years, as determinedbased on the speciﬁc terms and condi(cid:42)ons of the applicable customer agreement, generally (cid:42)ed to the date on which the customer’s product was ﬁrst sold. Inrecent years, we have successfully converted a number of our customer’s products u(cid:42)lizing this early genera(cid:42)on technology to our advanced genera(cid:42)ontechnologies.The royalty revenue associated with our third-genera(cid:42)on technology which has not yet converted, or is not in the process of conver(cid:42)ng, to our advancedgeneration technologies was approximately 12% of our fiscal 2017 revenue. Approximately 21% of our total revenue in ﬁscal 2017 was generated from the fourth genera(cid:42)on of our PhotoLink technology, which are protected by afamily of patents that will begin to expire in ﬁscal 2020. Of the license agreements using our early genera(cid:42)on technologies, most will con(cid:42)nue to generate royaltyrevenue at a reduced royalty rate beyond patent expiration.We also rely upon trade secrets, trademarks and other unpatented proprietary technologies. We seek to maintain the conﬁden(cid:42)ality of such informa(cid:42)onby requiring employees, consultants and other par(cid:42)es to sign conﬁden(cid:42)ality agreements and by limi(cid:42)ng access by par(cid:42)es outside the Company to suchinformation. There can be no assurance, however, that these measures will9prevent the unauthorized disclosure or use of this information, or that others will not be able to independently develop such information. Additionally, there canbe no assurance that any agreements regarding conﬁden(cid:42)ality and non-disclosure will not be breached, or, in the event of any breach, that adequate remedieswould be available to us.Marketing and SalesOur aim is to use our design, development, manufacturing and commercializa(cid:42)on capabili(cid:42)es to provide our customers earlier access to highlydiﬀeren(cid:42)ated products that address important unmet clinical needs, and partner with them on successful commercializa(cid:42)on of these products. While whole-product solu(cid:42)ons development and manufacturing capability and capacity scale-up have been a signiﬁcant focus, it does not change our business model toprovide world-class surface modification coating technologies to our medical device customers.Sales professionals working within our Medical Device business work in concert with our R&D personnel to coordinate customer ac(cid:42)vi(cid:42)es. Our salesprofessionals’ specializa(cid:42)on fosters an in-depth knowledge of the issues faced by our customers within these markets such as industry trends, technologychanges, biomaterial changes and the regulatory environment. As we complete development of our whole-product solu(cid:42)ons medical devices, we are seekingthird-parties to sell these products. With respect to our diagnostics products, our sales professionals sell directly to IVD kit manufacturers and we enter into salesand marke(cid:42)ng rela(cid:42)onships with third par(cid:42)es to distribute those products around the world. We also oﬀer those products for sale through our website. SeeNote 12 to the consolidated ﬁnancial statements in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for informa(cid:42)onregarding domestic and foreign revenue.To support our marke(cid:42)ng and sales ac(cid:42)vi(cid:42)es, we publish technical literature on our various surface modiﬁca(cid:42)on, drug delivery, and in vitro diagnos(cid:42)cstechnologies and products. In addi(cid:42)on, we exhibit at major trade shows and technical mee(cid:42)ngs, adver(cid:42)se in selected trade journals and through our website,and conduct direct mailings to appropriate target markets.We also oﬀer ongoing customer service and technical support to our customers. This service and support may begin with a feasibility study, and also mayinclude addi(cid:42)onal services such as assistance in the transfer of the technology to the customer, further op(cid:42)miza(cid:42)on, process control and troubleshoo(cid:42)ng,prepara(cid:42)on of product for clinical studies, and assistance with regulatory submissions for product approval. Some of these services are billable to customers,mainly feasibility and optimization activities.AcquisitionsTo further our strategic objec(cid:42)ves and strengthen our exis(cid:42)ng businesses, we intend to con(cid:42)nue to explore acquisi(cid:42)ons and strategic collabora(cid:42)ons todiversify and grow our business. As a result, we expect to make future acquisi(cid:42)ons where we believe that we can broaden or enhance our technology oﬀeringsand expand our revenue sources and the markets in which we par(cid:42)cipate. Mergers and acquisi(cid:42)ons of medical and diagnos(cid:42)c technology companies areinherently risky, and no assurance can be given that any of our previous or future acquisi(cid:42)ons will be successful or will not materially adversely aﬀect ourconsolidated results of operations, financial condition, or cash flows.Significant CustomersRevenue from Medtronic represented approximately 18% of our consolidated revenue for the year ended September 30, 2017 and was generated frommul(cid:42)ple products and ﬁelds of use, substan(cid:42)ally all of which were recognized in our Medical Device segment. The percentage of revenue from Medtronicdecreased in ﬁscal 2017 as our customer base was diversiﬁed with the Fiscal 2016 Acquisi(cid:42)ons. No other customer provided more than 6% of our consolidatedrevenue in fiscal 2017. Two customers in our IVD business accounted for 13% and 10%, respectively, of our IVD operating segment revenue.CompetitionMedical Device SegmentWe believe that the intense compe(cid:42)(cid:42)on within the medical device market creates opportuni(cid:42)es for our technologies as medical device manufacturersseek to diﬀeren(cid:42)ate their products through new enhancements or to remain compe(cid:42)(cid:42)ve with enhancements oﬀered by other manufacturers. Upon receivingregulatory clearance for our proprietary products, we plan to seek third par(cid:42)es to sell these whole-product solu(cid:42)ons products. Our core balloon and cathetercapabili(cid:42)es compete with larger original equipment manufacturer (OEM) suppliers, as well as some of our largest medical device partners that have in-houseresources to produce balloons and catheters. We provide diﬀeren(cid:42)ated whole-product solu(cid:42)ons that integrate our surface modiﬁca(cid:42)on, catheter, balloon andother proprietary technologies. 10Because a signiﬁcant por(cid:42)on of our revenue depends on royal(cid:42)es derived from our customers’ medical device product sales incorpora(cid:42)ng our surfacemodiﬁca(cid:42)on coa(cid:42)ng technologies, we are also aﬀected by compe(cid:42)(cid:42)on within the markets for such devices. As we typically license our surface modiﬁca(cid:42)oncoating technologies on a non-exclusive basis, we benefit by offering our technologies to multiple competing manufacturers of a device. However, competition inthe medical device market could also have an adverse eﬀect on us. While we seek to license our products to established manufacturers, in certain cases, oursurface modiﬁca(cid:42)on licensees may compete directly with larger, dominant manufacturers with extensive product lines and greater sales, marke(cid:42)ng anddistribu(cid:42)on capabili(cid:42)es. We also are unable to control other factors that may impact commercializa(cid:42)on of our whole-product solu(cid:42)ons and licensees withmedical devices that u(cid:42)lize our surface modiﬁca(cid:42)on coa(cid:42)ngs, such as regulatory approval, marke(cid:42)ng and sales eﬀorts of our customers and licensees orcompe(cid:42)(cid:42)ve pricing pressures within the par(cid:42)cular market. Many of our exis(cid:42)ng and poten(cid:42)al compe(cid:42)tors have greater ﬁnancial, technical and marke(cid:42)ngresources than we have.The ability for surface modiﬁca(cid:42)on coa(cid:42)ng technologies to improve the performance of medical devices and drugs and to enable new productcategories has resulted in increased compe(cid:42)(cid:42)on in these markets. Some of our compe(cid:42)tors oﬀer device drug delivery technologies, while others specialize inlubricious or hemocompa(cid:42)ble coa(cid:42)ng technology. Some of these companies target cardiovascular, peripheral or other medical device applica(cid:42)ons. In addi(cid:42)on,because of the many product possibilities afforded by surface modification technologies, many of the large medical device manufacturers have developed, or areengaged in efforts to develop, internal competency in the area of surface modification and device drug delivery.We a(cid:48)empt to diﬀeren(cid:42)ate ourselves from our compe(cid:42)tors by providing what we believe is a high value-added approach to drug delivery and surfacemodification technology. We believe that the primary factors customers consider in choosing a particular technology include performance (e.g., flexibility, abilityto ﬁne tune drug elu(cid:42)on proﬁles, biocompa(cid:42)bility), ease of manufacturing, (cid:42)me-to-market, intellectual property protec(cid:42)on, ability to produce mul(cid:42)ple productsfrom a single process, compliance with manufacturing regula(cid:42)ons, ability to manufacture clinical and commercial products, customer service and total cost ofgoods (including manufacturing process labor). We believe our technologies deliver excep(cid:42)onal performance in these areas, allowing us to compete favorablywith respect to these factors. With respect to our licensed surface modiﬁca(cid:42)on technologies, we believe that the cost and (cid:42)me required to obtain the necessaryregulatory approvals signiﬁcantly reduces the likelihood of a customer changing the manufacturing process it uses once a device or drug has been approved forsale.In Vitro Diagnostics SegmentCompe(cid:42)(cid:42)on in the diagnos(cid:42)cs market is highly fragmented. In the product lines in which we compete (protein stabiliza(cid:42)on reagents, substrates,recombinant autoimmune an(cid:42)gens and surface chemistry technologies), we face an array of compe(cid:42)tors ranging from large manufacturers with mul(cid:42)plebusiness lines to small manufacturers that oﬀer a limited selec(cid:42)on of products. Some of our compe(cid:42)tors have substan(cid:42)ally more capital resources, marke(cid:42)ngexperience, R&D resources and produc(cid:42)on facili(cid:42)es than we do. We believe that our products compete on performance, stability (shelf life), sensi(cid:42)vity (lowerlevels detected, faster results), consistency and price. We believe that our con(cid:42)nued compe(cid:42)(cid:42)ve success will depend on our ability to gain market share, todevelop or acquire new proprietary products, obtain patent or other protec(cid:42)on for our products and successfully market our products directly or throughpartners.ManufacturingWe manufacture our surface modiﬁca(cid:42)on and drug delivery reagents, and our IVD products in our Eden Prairie, Minnesota facility. In certain limitedcircumstances, we also provide contract manufacturing services for our customers, including, for example, coa(cid:42)ng their medical devices that are intended forpre-clinical and clinical development (including human clinical trials), and products that are sold for commercial use by our customers. We manufacture ballooncatheters in our Ballinasloe, Ireland facility, which oﬀers a suite of capabili(cid:42)es, including balloon forming, extrusion, coa(cid:42)ng, braiding and assembly of ﬁnishedproducts. We plan to manufacture substantially all of our whole-product solutions devices in our Irish facility by the end of fiscal 2018.We a(cid:48)empt to maintain mul(cid:42)ple sources of supply for the key raw materials used to manufacture our products. We do, however, purchase some rawmaterials from single sources, but we believe that addi(cid:42)onal sources of supply are readily available. Further, to the extent addi(cid:42)onal sources of supply are notreadily available, we believe that we could manufacture such raw materials.We follow quality management procedures in accordance with applicable regula(cid:42)ons and guidance for the development and manufacture of materialsand device, biotechnology or combina(cid:42)on products that support clinical trials and commercializa(cid:42)on. In an eﬀort to be(cid:48)er meet our customers’ needs in thisarea, our Eden Prairie, Minnesota facility is cer(cid:42)ﬁed to ISO 13485 and ISO 9001. Our facility in Ballinasloe, Ireland is cer(cid:42)ﬁed to ISO 13485. Each of thesefacilities is registered with the U.S. FDA as a “Contract Manufacturer.”11Government RegulationThe medical devices, IVD and biotechnology products incorpora(cid:42)ng our technologies are required to undergo long, expensive and uncertain regulatoryreview processes that are governed by the U.S. FDA and other international regulatory authorities. New medical devices utilizing our surface modification coatingtechnologies can only be marketed in the U.S. a(cid:79)er a 510(k) applica(cid:42)on has been cleared or a PMA applica(cid:42)on has been approved by the FDA. This process cantake anywhere from several months (e.g., for medical device products seeking regulatory approval under the 510(k) approval process) to several years (e.g., formedical device products seeking regulatory approval under the PMA applica(cid:42)on process). With respect to our customers’ products that incorporate our surfacemodiﬁca(cid:42)on coa(cid:42)ng and IVD technologies, the burden of securing regulatory approval typically rests with our customers as the medical device manufacturers.During ﬁscal 2017, 2016 and 2015, Surmodics had mul(cid:42)ple customers obtain regulatory clearance on medical devices incorpora(cid:42)ng our Serene coa(cid:42)ngpla(cid:77)orm. With respect to our whole-product solu(cid:42)ons, including the SurVeil DCB and any addi(cid:42)onal medical device products that we develop, the burden ofsecuring regulatory approval will rest on us unless we partner with other organizations to pursue such approval.In support of our customers’ regulatory ﬁlings, we maintain various conﬁden(cid:42)al Device Master Files with the FDA and provide technical informa(cid:42)on toother regulatory agencies outside the U.S. regarding the nature, chemical structure and biocompa(cid:42)bility of our reagents. Our licensees generally do not havedirect access to these files. However, they may, with our permission, reference these files in their various regulatory submissions to these agencies. This approachallows regulatory agencies to understand in conﬁdence the details of our technologies without us having to share this highly conﬁden(cid:42)al informa(cid:42)on with ourcustomers.U.S. legisla(cid:42)on allows companies, prior to obtaining FDA clearance or approval to market a medical product in the U.S., to manufacture medical productsin the U.S. and export them for sale in interna(cid:42)onal markets. This generally allows us to realize earned royal(cid:42)es sooner. However, sales of medical productsoutside the U.S. are subject to interna(cid:42)onal requirements that vary from country to country. The (cid:42)me required to obtain approval for sale interna(cid:42)onally may belonger or shorter than that required by the FDA.EmployeesAs of November 30, 2017, we had 257 employees. Of these employees we employ 101 outside the U.S., primarily in R&D and manufacturing opera(cid:42)onsfunctions. We are not a party to any collective bargaining agreements.We believe that our future success will depend in part on our ability to a(cid:48)ract and retain qualiﬁed technical, management and marke(cid:42)ng personnel. Weare committed to developing and providing our employees opportunities to contribute to our growth and success.12EXECUTIVE OFFICERS OF THE REGISTRANTAs of December 1, 2017, the names, ages and positions of the Company’s executive officers are as follows: Name Age PositionGary R. Maharaj 54 President and Chief Executive OfficerTimothy J. Arens 50 Vice President of Corporate Development and StrategyThomas A. Greaney 51 Chief Operating Officer, Medical DevicesAndrew D. C. LaFrence 54 Vice President of Finance and Information Systems and Chief FinancialOfficerCharles W. Olson 53 Senior Vice President of Commercial and Business Development,Medical DevicesBryan K. Phillips 46 Senior Vice President, Legal and Human Resources, General Counsel andSecretaryJoseph J. Stich 52 Vice President and General Manager, In Vitro DiagnosticsGregg S. Sutton 58 Vice President of Research and Development, Medical Devices Gary R. Maharaj joined the Company in December 2010 as President and Chief Execu(cid:42)ve Oﬃcer and was also appointed to the Surmodics Board ofDirectors at such (cid:42)me. Prior to joining Surmodics, Mr. Maharaj served as President and Chief Execu(cid:42)ve Oﬃcer of Arizant Inc., a provider of pa(cid:42)ent temperaturemanagement systems in hospital opera(cid:42)ng rooms, from 2006 to 2010. Previously, Mr. Maharaj served in several senior level management posi(cid:42)ons forAugus(cid:42)ne Medical, Inc. (predecessor to Arizant Inc.) from 1996 to 2006, including Vice President of Marke(cid:42)ng, and Vice President of Research andDevelopment. During his approximately 30 years in the medical device industry, Mr. Maharaj has also served in various management and research posi(cid:42)ons forthe orthopedic implant and rehabilita(cid:42)on divisions of Smith & Nephew, PLC. Mr. Maharaj holds an M.B.A. from the University of Minnesota’s Carlson School ofManagement, an M.S. in biomedical engineering from the University of Texas at Arlington and the University of Texas Southwestern Medical Center at Dallas, anda B.Sc. in Physics from the University of the West Indies.Timothy J. Arens joined the Company in February 2007 as Director, Business Development and became Senior Director of Financial Planning and Analysisand General Manager, In Vitro Diagnos(cid:42)cs in October 2010. He was promoted to Vice President of Finance and Interim Chief Financial Oﬃcer in August 2011and in February 2013 became Vice President Corporate Development and Strategy. Prior to joining Surmodics, Mr. Arens was employed at St. Jude Medical, Inc.,a medical technology company, from 2003 to 2007, in posi(cid:42)ons of increasing responsibility related to business development and strategic planning func(cid:42)ons.Mr. Arens received a B.S. degree in Finance from the University of Wisconsin Eau Claire in 1989 and an M.B.A. degree from the University of Minnesota’s CarlsonSchool of Management in 1996.Thomas A. Greaney joined the Company in November 2015 as Vice President of Opera(cid:42)ons and General Manager of Creagh Medical, a(cid:79)er we acquiredit. In August 2017, Mr. Greaney was promoted to Chief Opera(cid:42)ng Oﬃcer, Medical Devices. Prior to joining Surmodics, he served as Chief Execu(cid:42)ve Oﬃcer forCreagh Medical, from September 2005 to November 2015. Prior to his tenure in Creagh Medical, Mr. Greaney served in a variety of roles with Boston Scien(cid:42)ﬁcfor 10 years including the world-wide opera(cid:42)ons responsibility for the Taxus Stent commercializa(cid:42)on. From 1989 to 1995 he worked for a number ofElectronics companies in a variety of engineering and management roles. Mr. Greaney received a B.E in Industrial Engineering in 1988 and a post grad Diploma inQuality Assurance in 1989, both from the National University of Ireland Galway.Andrew D. C. LaFrence joined the Company in February 2013 as Vice President of Finance and Chief Financial Oﬃcer and was also named Vice Presidentof Informa(cid:42)on Systems in August 2016. Prior to joining Surmodics, he served as Chief Financial Oﬃcer for CNS Therapeu(cid:42)cs, which developed and marketedpharmaceu(cid:42)cals for site-speciﬁc drug delivery to the central nervous system, from January 2011 to January 2013. Prior to joining CNS, Mr. LaFrence served asinterim Chief Financial Oﬃcer of Interna(cid:42)onal Green Power from July 2010 to January 2011. Mr. LaFrence has over 30 years of ﬁnancial and managementexperience including 26 years at KPMG LLP where, from 1996 to 2010, he was an audit partner focusing on suppor(cid:42)ng venture-backed, high-growth medicaltechnology, pharmaceutical, biotech and clean tech private and public companies. Mr. LaFrence is a certified public accountant and received a bachelor's degreein accounting and a minor in business administration from Illinois State University in 1984.Charles W. Olson joined the Company in July 2001 as Market Development Manager, was promoted in December 2002 to Director, BusinessDevelopment, named General Manager of the Hydrophilic Technologies business unit in April 2004, and promoted to Vice President and General Manager,Hydrophilic Technologies in October 2004. In April 2005, the posi(cid:42)on of Vice President, Sales was added to his responsibili(cid:42)es. In November 2008, Mr. Olsonwas named Vice President of our Cardiovascular business unit,13in October 2010, he was named Senior Vice President and General Manager, Medical Device, and in August 2016 he was named Senior Vice President ofCommercial and Business Development, Medical Devices. Prior to joining Surmodics, Mr. Olson was employed as General Manager at Minnesota Extrusion from1998 to 2001 and at Lake Region Manufacturing in project management and technical sales from 1993 to 1998. Mr. Olson received a B.S. degree in Marke(cid:42)ngfrom Winona State University in 1987.Bryan K. Phillips joined the Company in July 2005 as Patent Counsel and Assistant General Counsel. In January 2006, Mr. Phillips was appointedCorporate Secretary, and he was promoted to Deputy General Counsel in October 2007. He was promoted to Vice President, General Counsel and CorporateSecretary in September 2008 and was promoted to Senior Vice President in October 2010. In August 2011, he became Senior Vice President, Legal and HumanResources, General Counsel and Secretary. Prior to joining Surmodics, Mr. Phillips served as patent counsel at Guidant Corpora(cid:42)on’s Cardiac RhythmManagement Group where he was responsible for developing and implemen(cid:42)ng intellectual property strategies and also for suppor(cid:42)ng the company’s businessdevelopment func(cid:42)on. He also prac(cid:42)ced law at the Minneapolis-based law ﬁrm of Merchant & Gould P.C. Mr. Phillips received a B.S. degree in MechanicalEngineering from the University of Kansas in 1993 and a law degree from the University of Minnesota Law School in 1999. He is admi(cid:48)ed to the Minnesota barand is registered to practice before the U.S. Patent and Trademark Office.Joseph J. Stich joined the Company in March 2010 as Vice President of Marke(cid:42)ng, Corporate Development and Strategy. In August 2011, he became VicePresident, Business Opera(cid:42)ons and General Manager, In Vitro Diagnos(cid:42)cs and in September 2013 his role was adjusted to Vice President and General Manager,In Vitro Diagnos(cid:42)cs. Before joining Surmodics, Mr. S(cid:42)ch was Vice President of Corporate Development for Abraxis BioScience, LLC, a biotechnology companyfocused on oncology therapeu(cid:42)cs, from 2009 to 2010. Prior to joining Abraxis, he was a Vice President for MGI Pharma, Inc., a biopharmaceu(cid:42)cal company,from 2005 to 2009. Mr. S(cid:42)ch’s prior experience also includes serving as President/COO of Pharmaceu(cid:42)cal Corp. of America (a subsidiary of Publicis HealthcareSpecialty Group), and posi(cid:42)ons of increasing responsibility in sales and marke(cid:42)ng at Sanoﬁ-Aven(cid:42)s Pharmaceu(cid:42)cals. He received a B.B.A. degree from theUniversity of Wisconsin — Whitewater in 1988, and an M.B.A. degree from Rockhurst University in Kansas City, Missouri in 1996.Gregg S. Su(cid:53)on joined the Company in January 2016 as Vice President of Research and Development, Medical Devices. Prior to joining Surmodics, heserved as President and CEO of NorMedix, Inc., which we acquired in fiscal 2016, since June 2009. Mr. Sutton is a veteran medical device designer and developerwith over 25 years of engineering experience in the medical device industry. He co-founded and held execu(cid:42)ve posi(cid:42)ons at several highly successful, early-stagedevelopment device companies, including Atritech, Angioguard, Vascular Solu(cid:42)ons, and Navarre Biomedical, leading teams in development and launch of high-proﬁle, ﬁrst-of-their-kind devices. With a degree in mechanical engineering and over 50 patents granted, he has substan(cid:42)al experience in all aspects of medicaldevice development, including intellectual property, design, product development, and manufacturing.The execu(cid:42)ve oﬃcers of the Company are elected by and serve at the discre(cid:42)on of the Board of Directors. None of our execu(cid:42)ve oﬃcers are related toany other executive officer or any of our directors.14ITEM 1A. RISK FACTORS.RISKS RELATING TO OUR BUSINESS, STRATEGY AND INDUSTRYThe loss of, or signiﬁcant reduc(cid:33)on in business from, one or more of our major customers could signiﬁcantly reduce our revenue, earnings or otheroperating results.A signiﬁcant por(cid:42)on of our revenue is derived from a rela(cid:42)vely small number of customers. We have one customer that provided more than 10% of ourrevenue in ﬁscal 2017. Revenue from Medtronic represented approximately 18% of our total revenue for the ﬁscal year ended September 30, 2017 and wasgenerated from mul(cid:42)ple products and ﬁelds of use. The loss of Medtronic or any of our largest customers, or reduc(cid:42)ons in business from them, could have amaterial adverse eﬀect on our business, ﬁnancial condi(cid:42)on, results of opera(cid:42)ons, and cash ﬂow. There can be no assurance that revenue from any customer willcon(cid:42)nue at their historical levels. If we cannot broaden our customer base, we will con(cid:42)nue to depend on a small number of customers for a signiﬁcant por(cid:42)onof our revenue.The long-term success of our business may suffer if we are unable to expand our licensing base.We intend to con(cid:42)nue pursuing a strategy of licensing our coa(cid:42)ngs technologies to a diverse array base of medical device companies, thereby expandingthe commercializa(cid:42)on opportuni(cid:42)es for our technologies. A signiﬁcant por(cid:42)on of our revenue is derived from customer devices used in connec(cid:42)on withprocedures in cardiovascular, peripheral vascular and other applica(cid:42)ons. As a result, our business is suscep(cid:42)ble to adverse trends in procedures. Further, wemay also be subject to adverse trends in speciﬁc markets such as the cardiovascular industry, including declines in procedures using our customers’ products aswell as declines in average selling prices from which we earn royal(cid:42)es. Our success will depend, in part, on our ability to a(cid:48)ract new licensees, to enter intoagreements for addi(cid:42)onal applica(cid:42)ons with exis(cid:42)ng licensees and to develop technologies for use in applica(cid:42)ons outside of cardiovascular. There can be noassurance that we will be able to iden(cid:42)fy, develop and adapt our technologies for new applica(cid:42)ons in a (cid:42)mely and cost-eﬀec(cid:42)ve manner; that new licenseagreements will be executed on terms favorable to us; that new applica(cid:42)ons will be accepted by customers in our target markets; or that products incorpora(cid:42)ngnewly licensed technology, including new applica(cid:42)ons, will gain regulatory approval, be commercialized or gain market acceptance. Delays or failures in theseefforts could have an adverse effect on our business, financial condition and operating results.Surface modiﬁca(cid:33)on, device drug delivery and medical device products are compe(cid:33)(cid:33)ve markets and carry the risk of technological obsolescence andwe face increased competition in our In Vitro Diagnostics segment.We operate in a compe(cid:42)(cid:42)ve and evolving ﬁeld, and new developments are expected to con(cid:42)nue at a rapid pace. Our success depends, in part, upon ourability to maintain a compe(cid:42)(cid:42)ve posi(cid:42)on in the development of technologies and products in the ﬁeld of surface modiﬁca(cid:42)on and device drug delivery. Oursurface modiﬁca(cid:42)on and device drug delivery technologies compete with technologies developed by a number of other companies. In addi(cid:42)on, many medicaldevice manufacturers have developed, or are engaged in eﬀorts to develop, drug delivery or surface modiﬁca(cid:42)on technologies for use on their own products.With respect to commercializa(cid:42)on of our whole-product solu(cid:42)ons, we expect to face compe(cid:42)(cid:42)ve pricing pressures from larger OEM suppliers, as well as someof our largest medical device partners that have in-house resources that produce similar products. Some of our exis(cid:42)ng and poten(cid:42)al compe(cid:42)tors (especiallymedical device manufacturers pursuing coa(cid:42)ng solu(cid:42)ons through their own R&D eﬀorts) have greater ﬁnancial and technical resources as well as produc(cid:42)onand marke(cid:42)ng capabili(cid:42)es than us. Further, even if we are successful with respect to our plan to develop 12-15 medical device products over the next ﬁve years,we will be competing with companies that may be better able to leverage existing sales forces. Competitors may succeed in developing competing technologies orobtaining governmental approval for products before us. Products incorpora(cid:42)ng our compe(cid:42)tors’ technologies may gain market acceptance more rapidly thanproducts using ours. Developments by compe(cid:42)tors may render our exis(cid:42)ng and poten(cid:42)al products uncompe(cid:42)(cid:42)ve or obsolete. Furthermore, there can be noassurance that new products or technologies developed by others, or the emergence of new industry standards, will not render our products or technologies orlicensees’ products incorpora(cid:42)ng our technologies uncompe(cid:42)(cid:42)ve or obsolete. Any new technologies that make our drug delivery, surface modiﬁca(cid:42)on or InVitro Diagnostics technologies less competitive or obsolete would have a material adverse effect on our business, financial condition and results of operations.We may not be successful in implementing our whole-products solutions strategy and related important strategic initiativesSince ﬁscal 2013, with our investment in our DCB pla(cid:77)orm, we have been focused on a key growth strategy for our medical device business by expandingto oﬀer whole-product solu(cid:42)ons to our medical device customers. Our aim is to provide customers earlier access to highly diﬀeren(cid:42)ated products that addressunmet clinical needs, and partner with them on successful commercializa(cid:42)on. If we are unable to iden(cid:42)fy and enter into arrangements with our medical devicecustomers for the15commercialization of our products, we may seek to market and sell these products through third-party distributors or via direct sales. Successfully implemen(cid:42)ng our whole-products solu(cid:42)ons strategy and related strategic ini(cid:42)a(cid:42)ves will place substan(cid:42)al demands on our resources andmanagement’s time, and require, among other things: •con(cid:42)nued enhancement of our medical device R&D capabili(cid:42)es, including those needed to support the clinical evalua(cid:42)on and regulatory approvalfor our whole-product solutions; •effective coordination and integration of our research facilities and teams, particularly those located in different facilities; •successful hiring and training of personnel; •effective management of a business geographically located both in the United States and Ireland; •commercializa(cid:42)on of our products, including through strategic partnerships with our medical device customers, third-party distributors, or viadirect sales; •sufficient liquidity to support substantial investments in R&D required to make our strategy successful; and •increased marketing and sales-support activities.There is no assurance that we will be able to successfully implement our whole-products strategy and related strategic ini(cid:42)a(cid:42)ves in accordance with ourexpecta(cid:42)ons, which could impact our ability to realize an acceptable return on the investments we are making in connec(cid:42)on with this strategy, and may result inan adverse impact on our business and financial results.Failure to identify acquisition opportunities or to integrate acquired businesses into our operations successfully may limit our growth.An important part of our growth in the future may involve the acquisi(cid:42)on of complementary businesses or technologies. Our iden(cid:42)ﬁca(cid:42)on of suitableacquisi(cid:42)on candidates involves risks inherent in assessing the technology, value, strengths, weaknesses, overall risks and proﬁtability, if any, of acquisi(cid:42)oncandidates. We may not be able to iden(cid:42)fy suitable acquisi(cid:42)on candidates, or we may be unable to execute acquisi(cid:42)ons due to compe(cid:42)(cid:42)on from buyers withmore resources. If we do not make suitable investments and acquisitions, we may find it more difficult to realize our growth objectives.The process of integrating acquired businesses into our operations, including our Fiscal 2016 Acquisitions, poses numerous risks, including: •an inability to integrate acquired operations, personnel, technology, information systems, and internal control systems and products; •a lack of understanding of tax, legal and cultural differences; •diversion of management’s attention, including the need to manage several remote locations with a limited management team; •difficulties and uncertainties in transitioning the customers or other business relationships from the acquired entity to us; and •the loss of key employees of acquired companies.In addi(cid:42)on, future acquisi(cid:42)ons by us may be dilu(cid:42)ve to our shareholders’ ownership, and cause large one-(cid:42)me expenses or create goodwill or otherintangible assets that could result in future signiﬁcant asset impairment charges. In addi(cid:42)on, if we acquire en(cid:42)(cid:42)es that have not yet commercialized products butrather are developing technologies for future commercializa(cid:42)on, our earnings per share may ﬂuctuate as we expend signiﬁcant funds for con(cid:42)nued R&D eﬀortsnecessary to commercialize such acquired technology. We cannot guarantee that we will be able to successfully complete any acquisi(cid:42)ons or that we will realizeany anticipated benefits from acquisitions that we complete.16Our failure to expand our management systems and controls to support an(cid:33)cipated growth or integrate acquisi(cid:33)ons could seriously harm ouroperating results and business.Our opera(cid:42)ons are expanding, and we expect this trend to con(cid:42)nue as we execute our business strategy. Execu(cid:42)ng our business strategy has placedsigniﬁcant demands on management and our administra(cid:42)ve, development, opera(cid:42)onal, informa(cid:42)on technology, manufacturing, ﬁnancial and personnelresources. Accordingly, our future opera(cid:42)ng results will depend on the ability of our oﬃcers and other key employees to con(cid:42)nue to implement and improveour opera(cid:42)onal, development, customer support and ﬁnancial control systems, and eﬀec(cid:42)vely expand, train and manage our employee base. Otherwise, we maynot be able to manage our growth successfully.Goodwill or other assets on our balance sheet may become impaired, which could have a material adverse effect on our operating results.We have a signiﬁcant amount of goodwill and intangible assets on our balance sheet in connec(cid:42)on with our acquisi(cid:42)ons. As of September 30, 2017, wehad $27.3 million of goodwill and indeﬁnite-lived intangible assets on our consolidated balance sheet related to our Medical Device and IVD segments, of which$19.3 million related to our Fiscal 2016 Acquisi(cid:42)ons in our Medical Device repor(cid:42)ng unit. As required by the accoun(cid:42)ng guidance for non-amor(cid:42)zing intangibleassets, we evaluate at least annually the poten(cid:42)al impairment of the goodwill and trademark. Tes(cid:42)ng for impairment of non-amor(cid:42)zing intangible assets involvesthe determina(cid:42)on of the fair value of our repor(cid:42)ng units. The es(cid:42)ma(cid:42)on of fair values involves a high degree of judgment and subjec(cid:42)vity in the assump(cid:42)onsused. We also evaluate other assets on our balance sheet, including strategic investments and intangible assets, whenever events or changes in circumstancesindicate that their carrying value may not be recoverable. Our es(cid:42)mate of the fair value of the assets may be based on fair value appraisals or discounted cashﬂow models using various inputs. During ﬁscal 2017 and 2016, we recorded impairment charges on our indeﬁnite-lived intangible assets of $0.4 million and$0.1 million, respec(cid:42)vely, related to non-amor(cid:42)zing intangible assets arising from the Creagh Medical acquisi(cid:42)on. Future impairment of the goodwill or otherassets on our balance sheet could materially adversely affect our results of operations.Research and development costs may adversely affect our operating results.The success of our business depends on a number of factors, including our con(cid:42)nued research and development of new technologies for futurecommercializa(cid:42)on. In recent years, we have expended considerable resources researching and developing our DCB pla(cid:77)orm. In ﬁscal 2018, we expect tocontinue the clinical evaluation of the SurVeil DCB and will conduct addi(cid:42)onal development ac(cid:42)vi(cid:42)es for the below-the-knee, AV ﬁstula and other whole-productsolu(cid:42)ons products, which will result in signiﬁcant expenses that will adversely aﬀect our opera(cid:42)ng results, including our proﬁtability, in ﬁscal 2018 and futureperiods. Addi(cid:42)onally, these ac(cid:42)vi(cid:42)es are subject to risks of failure that are inherent in the development of new medical technologies or products. There can beno assurance that we will be successful in developing new technologies or products, or that any such technology will be commercialized.We recognize revenue in accordance with various complex accoun(cid:33)ng standards, and changes in circumstances or interpreta(cid:33)ons may lead toaccounting adjustments.Our revenue recogni(cid:42)on policies involve applica(cid:42)on of various complex accoun(cid:42)ng standards, including accoun(cid:42)ng guidance associated with revenuearrangements with mul(cid:42)ple deliverables. Our compliance with such accoun(cid:42)ng standards o(cid:79)en involves management’s judgment regarding whether the criteriaset forth in the standards have been met such that we can recognize as revenue the amounts that we receive as payment for our products or services. We baseour judgments on assump(cid:42)ons that we believe to be reasonable under the circumstances. However, these judgments, or the assump(cid:42)ons underlying them, maychange over (cid:42)me. In addi(cid:42)on, the SEC or the Financial Accoun(cid:42)ng Standards Board (“FASB”) may issue new posi(cid:42)ons or revised guidance on the treatment ofcomplex accoun(cid:42)ng ma(cid:48)ers. Changes in circumstances or third-party guidance could cause our judgments to change with respect to our interpreta(cid:42)ons ofthese complex standards, and transactions recorded, including revenue recognized, for one or more prior reporting periods, could be adversely affected.As described below in “Part II, Item 7 Management’s Discussion and Analysis of Financial Condi(cid:42)on and Results of Opera(cid:42)ons.”, the FASB issued newrevenue recogni(cid:42)on guidance for recognizing revenue from contracts with customers in May 2014. This accoun(cid:42)ng standard will be eﬀec(cid:42)ve for us beginning inthe ﬁrst quarter of ﬁscal 2019. We are currently evalua(cid:42)ng the impact that the adop(cid:42)on of this standard will have on our business model and consolidatedresults of opera(cid:42)ons, cash ﬂows and ﬁnancial posi(cid:42)on. We currently believe the impact will be material due to the risks associated with implemen(cid:42)ng the newstandards and ensuring accuracy in our repor(cid:42)ng during the transi(cid:42)on, the accelera(cid:42)on of minimum license fees and a one-quarter accelera(cid:42)on of royaltyrevenue pursuant to our hydrophilic license agreements, as well as requiring several additional financial17statement footnote disclosures. We will also need to update and enhance our internal accoun(cid:42)ng systems, processes and our internal controls over ﬁnancialrepor(cid:42)ng. This has required, and will con(cid:42)nue to require, addi(cid:42)onal investments by us, and may require incremental resources and system conﬁgura(cid:42)ons thatcould increase our opera(cid:42)ng costs in future periods. If we are not able to properly implement the new revenue recogni(cid:42)on standards in a (cid:42)mely manner, therevenue that we recognize and the related disclosures that we provide under the new standards may not be complete or accurate, and we could fail to meet ourfinancial reporting obligations in a timely manner, which could result in, among other things, regulatory discipline and adversely affect our stock price.With our fiscal 2016 acquisition of Creagh Medical, our business includes foreign operations which exposes us to certain risks related to fluctuations inU.S. dollar and foreign currency exchange rates.The Company reports its consolidated ﬁnancial statements in U. S. dollars. In a period where the U.S. dollar is strengthening or weakening as comparedwith the Euro, our revenue and expenses denominated in the Euro are translated into U.S. dollars at a lower or higher value than they would be in an otherwiseconstant currency exchange rate environment. In addi(cid:42)on, we have Euro-denominated con(cid:42)ngent considera(cid:42)on liabili(cid:42)es that are subject to exchange rateﬂuctua(cid:42)ons, which are scheduled to be paid in the ﬁrst quarter of our ﬁscal 2019 and we have not hedged this foreign currency exposure. During ﬁscal 2017and 2016, we recorded foreign currency exchange losses of $0.5 million and $0.4 million, respec(cid:42)vely. The losses were primarily related to these Euro-denominated liabilities. As our foreign operations expand, the effects may become material to our consolidated financial statements.We have previously iden(cid:33)ﬁed material weaknesses in our internal control over ﬁnancial repor(cid:33)ng. While these par(cid:33)cular material weaknesses havebeen remediated, if we do not maintain eﬀec(cid:33)ve internal control over ﬁnancial repor(cid:33)ng, our opera(cid:33)ng results could require material modiﬁca(cid:33)onand our financial reports may not be reliable.A material weakness was iden(cid:42)ﬁed in a prior year related to the design and opera(cid:42)ng eﬀec(cid:42)veness of our transac(cid:42)onal and review controls related torecogni(cid:42)on of royalty revenue. We have since remediated the material weakness by taking the steps described below in “Part II, Item 9A. Controls andProcedures.”. The Company conducted an evalua(cid:42)on under the supervision and with the par(cid:42)cipa(cid:42)on of the Company’s management, including the Company’sChief Execu(cid:42)ve Oﬃcer and Chief Financial Oﬃcer regarding the eﬀec(cid:42)veness of the design and opera(cid:42)on of the Company’s disclosure controls and procedurespursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evalua(cid:42)on, the Chief Execu(cid:42)ve Oﬃcer and Chief Financial Oﬃcer concluded that theCompany’s disclosure controls and procedures were effective as of September 30, 2017.Although we are commi(cid:48)ed to con(cid:42)nuing to improve our internal control processes to ensure the adequacy of the internal controls over ﬁnancialrepor(cid:42)ng, any control system, regardless of how well designed, operated and evaluated, can provide only reasonable, not absolute, assurance that its objec(cid:42)veswill be met. Therefore, we cannot be certain that, in the future, addi(cid:42)onal material weaknesses or signiﬁcant deﬁciencies will not exist or otherwise bediscovered. If other deﬁciencies or material weaknesses exist, it could result in misstatements of our results of opera(cid:42)ons, a restatement of our ﬁnancialstatements for one or more prior periods, a decline in our stock price and investor conﬁdence or other material eﬀects on our business, reputa(cid:42)on, results ofoperations, financial condition or liquidity.RISKS RELATING TO OUR OPERATIONS AND RELIANCE ON THIRD PARTIESWe rely on third parties to market, distribute and sell most products incorporating our coating technologies.A principal element of our business strategy is to enter into licensing arrangements with medical device and other companies that manufacture productsincorpora(cid:42)ng our technologies. For the ﬁscal years ended September 30, 2017, 2016 and 2015, we have derived 44%, 47%, and 51%, respec(cid:42)vely, of ourrevenue from royal(cid:42)es and license fees derived from such licensing arrangements. The revenue that we derive from such arrangements is dependent on ourlicensees’ ability to successfully develop, obtain successful regulatory approval for, manufacture (if applicable), market and sell products incorpora(cid:42)ng ourtechnologies.Addi(cid:42)onally, a licensee could modify their product in such a way that it no longer incorporates our technology. Many of these factors are outside of ourcontrol and the failure on the part of our licensees to successfully meet these requirements could have a material adverse eﬀect on our business, ﬁnancialcondition and results of operations.Moreover, under our standard license agreements, licensees can terminate the license for any reason upon 90 days’ prior wri(cid:48)en no(cid:42)ce. Exis(cid:42)ng andpotential licensees have no obligation to deal exclusively with us and may pursue parallel development18or licensing of compe(cid:42)ng technologies on their own or with third par(cid:42)es. A decision by a licensee to terminate its rela(cid:42)onship with us could materially adverselyaffect our business, financial condition and results of operations.Failure on the part of our licensees to successfully meet these requirements could have a material adverse eﬀect on our business, ﬁnancial condi(cid:42)on andresults of operations.A por(cid:33)on of our IVD business relies on distribu(cid:33)on agreements and rela(cid:33)onships with various third par(cid:33)es and any adverse change in thoserelationships could result in a loss of revenue and harm that business.We sell many of our IVD products outside of the United States through distributors. Some of our distributors also sell our compe(cid:42)tors’ products, and ifthey favor our compe(cid:42)tors’ products for any reason, they may fail to market our products as eﬀec(cid:42)vely or to devote resources necessary to provide eﬀec(cid:42)vesales, which would cause our results to suffer. Additionally, we serve as the exclusive distributor in the United States, Canada and Puerto Rico for DIARECT AG forits recombinant and na(cid:42)ve an(cid:42)gens. The success of these arrangements with these third par(cid:42)es depends, in part, on the con(cid:42)nued adherence to the terms ofour agreements with them. Any disruption in these arrangements will adversely affect our financial condition and results of operations.We rely on our customers to accurately report and make payments under our agreements with them.We rely on our customers to determine whether the products that they sell are royalty-bearing and, if so, report and pay the amount of royal(cid:42)es owed tous under our agreements with them. The majority of our license agreements with our customers give us the right to audit their records to verify the accuracy oftheir reports to us. However, these audits can be expensive, (cid:42)me-consuming and possibly detrimental to our ongoing business rela(cid:42)onships with our customers.While we have undertaken audits of certain of our customers in the past, we generally rely on the accuracy of the reports that they provide to us.Inaccuracies in these reports has resulted in, and could result in addi(cid:42)onal overpayments or underpayments of royal(cid:42)es, which could have a materialadverse effect on our business, financial condition and results of operations.We have limited or no redundancy in our manufacturing facili(cid:33)es, and we may lose revenue and be unable to maintain our customer rela(cid:33)onships ifwe lose our production capacity.We manufacture all of our Medical Device coa(cid:42)ng reagents (and provide coa(cid:42)ng manufacturing services for certain customers) and our IVD products atour Eden Prairie, Minnesota facility. We also manufacture balloon catheter products at our facility in Ballinasloe, Ireland and catheter-based medical devices inlimited quan(cid:42)(cid:42)es in Plymouth, Minnesota. If our exis(cid:42)ng produc(cid:42)on facili(cid:42)es becomes incapable of manufacturing products for any reason, we may be unableto meet produc(cid:42)on requirements, we may lose revenue and we may not be able to maintain our rela(cid:42)onships with our customers, including certain of ourlicensees. In par(cid:42)cular, because most of our customers use our coa(cid:42)ng reagents to manufacture their own products that generate royalty revenue for us, failureby us to supply these reagents could result in decreased royalty revenue, as well as decreased revenue from our surface modiﬁca(cid:42)on coa(cid:42)ng technologiesproduct sales. Without our exis(cid:42)ng produc(cid:42)on facili(cid:42)es, we would have no other means of manufacturing products un(cid:42)l we were able to restore themanufacturing capability at these facili(cid:42)es or develop one or more alterna(cid:42)ve manufacturing facili(cid:42)es. Although we carry business interrup(cid:42)on insurance tocover lost revenue and proﬁts in an amount we consider adequate, this insurance does not cover all possible situa(cid:42)ons. In addi(cid:42)on, our business interrup(cid:42)oninsurance would not compensate us for the loss of opportunity and potential adverse impact on relations with our existing customers resulting from our inabilityto produce products for them.We may face product liability claims related to participation in clinical trials or the use or misuse of our products.The development and sale of medical devices and component products involves an inherent risk of product liability claims. For medical device productsthat incorporate our coa(cid:42)ng technology, most of the license provide us with indemniﬁca(cid:42)on against such claims. However, there can be no guarantee thatproduct liability claims will not be ﬁled against us for such products, or for medical device products that we manufacture as part of our whole-product solu(cid:42)onsstrategy, that par(cid:42)es indemnifying us will have the ﬁnancial ability to honor their indemniﬁca(cid:42)on obliga(cid:42)ons or that such manufacturers will not seekindemniﬁca(cid:42)on or other relief from us for any such claims. Any product liability claims, with or without merit, could result in costly li(cid:42)ga(cid:42)on, reduced sales,signiﬁcant liabili(cid:42)es and diversion of our management’s (cid:42)me, a(cid:48)en(cid:42)on and resources. We have obtained a level of liability insurance coverage that we believe isappropriate to our activities, however, we cannot be sure that our product liability insurance coverage is adequate or that it will continue to be available to us onacceptable terms, if at all. Furthermore, we do not expect to be able to obtain insurance covering our costs and losses as a result of any recall of products ordevices incorporating our technologies19because of alleged defects, whether such recall is ins(cid:42)tuted by us, by a customer, or is required by a regulatory agency. A product liability claim, recall or otherclaim with respect to uninsured liabili(cid:42)es or for amounts in excess of insured liabilities could have a material adverse eﬀect on our business, ﬁnancial condi(cid:42)onand results of operations.Our revenue will be harmed if we cannot purchase sufficient components that we use in our manufacture of reagents.We currently purchase some of the components we use to manufacture reagents from sole suppliers. If any of our sole suppliers becomes unwilling tosupply components to us, experiences an interrup(cid:42)on in its produc(cid:42)on or is otherwise unable to provide us with suﬃcient material to manufacture ourreagents, we will experience produc(cid:42)on interrup(cid:42)ons. If we lose our sole supplier of any par(cid:42)cular reagent component or are otherwise unable to procure allcomponents required for our reagent manufacturing for an extended period of (cid:42)me, we may lose the ability to manufacture the reagents our customers requireto commercialize products incorpora(cid:42)ng our technology. This could result in lost royal(cid:42)es and product sales, which would harm our ﬁnancial results. Addingsuppliers to our approved vendor list may require signiﬁcant (cid:42)me and resources. We rou(cid:42)nely a(cid:48)empt to maintain mul(cid:42)ple suppliers of each of our signiﬁcantmaterials, so we have alterna(cid:42)ve suppliers, if necessary. However, if the number of suppliers of a material is reduced, or if we are otherwise unable to obtain ourmaterial requirements on a timely basis and on favorable terms, our operations may be harmed.We are dependent upon key personnel and may not be able to attract qualified personnel in the future.Our success is dependent upon our ability to retain and a(cid:48)ract highly qualiﬁed management and technical personnel. We face intense compe(cid:42)(cid:42)on forsuch qualiﬁed personnel. We do not maintain key person insurance, and we generally do not enter into employment agreements, except with certain execu(cid:42)veoﬃcers. Although we have non-compete agreements with most employees, there can be no assurance that such agreements will be enforceable. The loss of theservices of one or more key employees or the failure to a(cid:48)ract and retain addi(cid:42)onal qualiﬁed personnel could have a material adverse eﬀect on our business,financial condition and results of operations.Security breaches and other disrup(cid:33)ons could compromise our informa(cid:33)on and expose us to liability, which would cause our business and reputa(cid:33)onto suffer.We collect and store sensi(cid:42)ve data, including intellectual property, our proprietary business informa(cid:42)on and that of our customers, suppliers andbusiness partners, and personally iden(cid:42)ﬁable informa(cid:42)on of our customers and employees, on our networks. The secure maintenance of this informa(cid:42)on iscri(cid:42)cal to our opera(cid:42)ons and business strategy. Despite our security measures, our informa(cid:42)on technology and infrastructure may be vulnerable to a(cid:48)acks byhackers resul(cid:42)ng from employee error, malfeasance or other disrup(cid:42)ons. Any such breach could compromise our networks and the informa(cid:42)on stored therecould be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of informa(cid:42)on could result in legal claims or proceedings, andregulatory penal(cid:42)es, disrupt our opera(cid:42)ons and the services that we provide to our customers, damage our reputa(cid:42)on and cause a loss of conﬁdence in ourproducts and services, any of which could adversely affect our business and competitive position.RISKS RELATING TO OUR INTELLECTUAL PROPERTYWe may not be able to obtain, maintain or protect proprietary rights necessary for the commercialization of our technologies.Our success depends, in large part, on our ability to obtain and maintain patents, maintain trade secret protec(cid:42)on, operate without infringing on theproprietary rights of third par(cid:42)es and protect our proprietary rights against infringement by third par(cid:42)es. We have been granted U.S. and foreign patents andhave U.S. and foreign patent applications pending related to our proprietary technologies. There can be no assurance that any pending patent application will beapproved, that we will develop addi(cid:42)onal proprietary technologies that are patentable, that any patents issued will provide us with compe(cid:42)(cid:42)ve advantages orwill not be challenged or invalidated by third par(cid:42)es, that the patents of others will not prevent the commercializa(cid:42)on of products incorpora(cid:42)ng ourtechnologies, or that others will not independently develop similar technologies or design around our patents. Furthermore, because we generate a signiﬁcantamount of our revenue through licensing arrangements, the loss or expira(cid:42)on of patent protec(cid:42)on for our licensed technologies will result in a reduc(cid:42)on of therevenue derived from these arrangements which may have a material adverse eﬀect on our business, cash ﬂow, results of opera(cid:42)ons, ﬁnancial posi(cid:42)on andprospects.20We may become involved in expensive and unpredictable patent li(cid:33)ga(cid:33)on or other intellectual property proceedings which could result in liability fordamages, or impair our development and commercialization efforts.Our commercial success also will depend, in part, on our ability to avoid infringing patent or other intellectual property rights of third par(cid:42)es. There hasbeen substan(cid:42)al li(cid:42)ga(cid:42)on regarding patent and other intellectual property rights in the medical device and pharmaceu(cid:42)cal industries, and intellectual propertyli(cid:42)ga(cid:42)on may be used against us as a means of gaining a compe(cid:42)(cid:42)ve advantage. Intellectual property li(cid:42)ga(cid:42)on is complex, (cid:42)me consuming and expensive, andthe outcome of such li(cid:42)ga(cid:42)on is diﬃcult to predict. If we were found to be infringing any third-party patent or other intellectual property right, we could berequired to pay signiﬁcant damages, alter our products or processes, obtain licenses from others, which we may not be able to do on commercially reasonableterms, if at all, or cease commercializa(cid:42)on of our products and processes. Any of these outcomes could have a material adverse eﬀect on our business, ﬁnancialcondition and results of operations.Patent li(cid:42)ga(cid:42)on or certain other administra(cid:42)ve proceedings may also be necessary to enforce our patents or to determine the scope and validity of third-party proprietary rights. These ac(cid:42)vi(cid:42)es could result in substan(cid:42)al cost to us, even if the eventual outcome is favorable to us. An adverse outcome of any suchli(cid:42)ga(cid:42)on or interference proceeding could subject us to signiﬁcant liabili(cid:42)es to third par(cid:42)es, require disputed rights to be licensed from third par(cid:42)es or requireus to cease using our technology. Any ac(cid:42)on to defend or prosecute intellectual property would be costly and result in signiﬁcant diversion of the eﬀorts of ourmanagement and technical personnel, regardless of outcome, and could have a material adverse eﬀect on our business, ﬁnancial condi(cid:42)on and results ofoperations.If we are unable to keep our trade secrets confidential, our technology and proprietary information may be used by others to compete against us.We rely signiﬁcantly upon proprietary technology, informa(cid:42)on, processes and know-how that are not subject to patent protec(cid:42)on. We seek to protectthis informa(cid:42)on through trade secret or conﬁden(cid:42)ality agreements with our employees, consultants, poten(cid:42)al licensees, or other par(cid:42)es as well as throughother security measures. There can be no assurance that these agreements or any security measure will provide meaningful protec(cid:42)on for our unpatentedproprietary informa(cid:42)on. In addi(cid:42)on, our trade secrets may otherwise become known or be independently developed by compe(cid:42)tors. If we determine that ourproprietary rights have been misappropriated, we may seek to enforce our rights which would draw upon our ﬁnancial resources and divert the (cid:42)me and eﬀortsof our management, and could have a material adverse effect on our business, financial condition and results of operations.If we are unable to convert our customers to our advanced generation of hydrophilic coating technology, our royalty revenue may decrease.In our Medical Device business unit, we have licensed our PhotoLink hydrophilic technology to a number of our customers for use in a variety of medicaldevice surface applica(cid:42)ons. We have several U.S. and interna(cid:42)onal issued patents and pending interna(cid:42)onal patent applica(cid:42)ons protec(cid:42)ng various aspects ofthese technologies, including composi(cid:42)ons, methods of manufacture and methods of coa(cid:42)ng devices. The expira(cid:42)on dates for these patents and the an(cid:42)cipatedexpira(cid:42)on dates of the patent applica(cid:42)ons range from ﬁscal 2020 to 2035. These patents and patent applica(cid:42)ons represent dis(cid:42)nct families, with each familygenerally covering a successive genera(cid:42)on of the technology, including improvements that enhance coa(cid:42)ng performance, manufacturability, or other importantfeatures desired by our customers. Among these, our third-genera(cid:42)on PhotoLink hydrophilic technology is protected by a family of patents that expired inNovember 2015 (in the U.S.) and October 2016 (in certain other countries). The royalty revenue associated with our third-genera(cid:42)on technology wasapproximately 12% of our fiscal 2017 revenue.Approximately 21% of our total revenue in ﬁscal 2017 was generated from our fourth-genera(cid:42)on PhotoLink technology, which are protected by a familyof patents that will begin to expire in ﬁscal 2020. Of the license agreements using our early genera(cid:42)on technologies, most will con(cid:42)nue to generate royaltyrevenue at a reduced royalty rate beyond patent expiration.In recent years, we have successfully converted a number of our customers’ products u(cid:42)lizing these early genera(cid:42)on technologies to one of ouradvanced genera(cid:42)on technologies. While we are ac(cid:42)vely seeking to convert our customers to one of our advanced genera(cid:42)ons of our hydrophilic coa(cid:42)ngtechnology, there can be no assurance that we will be successful in doing so, or that those customers that have converted, or will convert, will sell productsutilizing our technology which will generate earned royalty revenue for us.21If we or any of our licensees breach any of the agreements under which we have in-licensed intellectual property from others, we could be deprived ofimportant intellectual property rights and future revenue.We are a party to various agreements through which we have in-licensed or otherwise acquired rights to certain technologies that are important to ourbusiness. In exchange for the rights granted to us under these agreements, we have agreed to meet certain research, development, commercializa(cid:42)on,sublicensing, royalty, indemniﬁca(cid:42)on, insurance or other obliga(cid:42)ons. If we or one of our licensees fails to comply with these obliga(cid:42)ons set forth in the relevantagreement through which we have acquired rights, we may be unable to eﬀec(cid:42)vely use, license, or otherwise exploit the relevant intellectual property rights andmay be deprived of current or future revenue that is associated with such intellectual property.RISKS RELATING TO CLINICAL AND REGULATORY MATTERSThe development of new products and enhancement of exis(cid:33)ng products requires signiﬁcant research and development, clinical trials and regulatoryapprovals, all of which may be very expensive and time-consuming and may not result in commercially viable products.The development of new products and enhancement of exis(cid:42)ng products requires signiﬁcant investment in research and development, clinical trials andregulatory approvals. During ﬁscal 2017, we con(cid:42)nued the development of the SurVeil DCB, including inves(cid:42)ga(cid:42)ng addi(cid:42)onal clinical applica(cid:42)ons and uses ofthe platform. In October 2017, commenced enrollment of patients in TRANSCEND, the pivotal clinical trial for the SurVeil DCB.There can be no assurance that any products now in development, or that we may seek to develop in the future, will achieve technological feasibility,obtain regulatory approval or gain market acceptance. If we are unable to obtain regulatory approval for new products or enhanced products, our ability tosuccessfully compete in the markets in which we par(cid:42)cipate may be materially adversely impacted. A delay in the development or approval of new products andtechnologies may also adversely impact the timing of when these products contribute to our future revenue and earnings growth.Healthcare policy changes may have a material adverse effect on us.Healthcare costs have risen signiﬁcantly during the past decade. There have been and con(cid:42)nue to be proposals by legislators, regulators and third-partypayers to keep these costs down. Certain proposals, if implemented, would impose limita(cid:42)ons on the prices our customers will be able to charge for ourproducts, or the amounts of reimbursement available for their products from governmental agencies or third-party payers, or otherwise nega(cid:42)vely impactpricing and reimbursement. Because a signiﬁcant por(cid:42)on of our revenue is currently derived from royal(cid:42)es on products which cons(cid:42)tute a percentage of ourcustomer’s product’s selling price, these limitations could have an adverse effect on our revenue.The Pa(cid:42)ent Protec(cid:42)on and Aﬀordable Care Act (the “ACA”) imposes signiﬁcant new taxes on medical device makers who make up a signiﬁcant por(cid:42)on ofour customers. Although signiﬁcant components of these taxes have been suspended for calendar 2016 and 2017, their status is unclear for 2018 andsubsequent years, as is the future of the ACA itself. The legisla(cid:42)on has resulted in a signiﬁcant total cost increase to the medical device and diagnos(cid:42)c industries,which could have a material, nega(cid:42)ve impact on both the ﬁnancial condi(cid:42)on of our customers as well as on our customers’ ability to a(cid:48)ract ﬁnancing, theirwillingness to commit capital to development projects or their ability to commercialize their products u(cid:42)lizing our technology, any of which could have amaterial adverse eﬀect on our business, ﬁnancial condi(cid:42)on and results of opera(cid:42)ons. There con(cid:42)nues to be substan(cid:42)al risk to our customers, and therefore us,from the uncertainty which con(cid:42)nues to surround the future of health care delivery and reimbursement both in the U.S. and abroad. In par(cid:42)cular, we cannotpredict what other healthcare programs and regula(cid:42)ons will ul(cid:42)mately be implemented at the federal or state level or the eﬀect of any future legisla(cid:42)on orregulation in the United States or abroad may have on our business.Whole-product solu(cid:33)ons medical devices and other products incorpora(cid:33)ng our technologies are subject to increasing scru(cid:33)ny and regula(cid:33)ons,including extensive approval/ clearance processes and manufacturing requirements. Any adverse regulatory and/ or enforcement action (for us or ourlicensees) may materially affect our financial condition and business operations.Our products and our business ac(cid:42)vi(cid:42)es are subject to a complex regime of regula(cid:42)ons. Addi(cid:42)onally, certain state governments and the federalgovernment have enacted legisla(cid:42)on aimed at increasing transparency of industry interac(cid:42)ons with health care providers. Any failure to comply with these legaland regulatory requirements could impact our business. In addi(cid:42)on, we will con(cid:42)nue to devote substan(cid:42)al addi(cid:42)onal (cid:42)me and ﬁnancial resources to furtherdevelop and implement policies, systems, and22processes to comply with enhanced legal and regulatory requirements, which may also impact our business. We an(cid:42)cipate that governmental authori(cid:42)es willcon(cid:42)nue to scru(cid:42)nize our industry closely, and that addi(cid:42)onal regula(cid:42)on may increase compliance and legal costs, exposure to li(cid:42)ga(cid:42)on, and other adverseeffects to our operations.To varying degrees, the FDA and comparable agencies outside the US require us to comply with laws and regula(cid:42)ons governing the development, tes(cid:42)ng,manufacturing, labeling, marke(cid:42)ng, and distribu(cid:42)on of our products. Our compliance with these laws and regula(cid:42)ons takes signiﬁcant (cid:42)me/ resources, involvesstringent tes(cid:42)ng/ surveillance, involves a(cid:48)en(cid:42)on to any needed product improvements (such as modiﬁca(cid:42)ons, repairs, or replacements), and may includesignificant limitations of the uses of our products.Changes in exis(cid:42)ng regula(cid:42)ons or adop(cid:42)on of new governmental regula(cid:42)ons or policies could prevent or delay regulatory approval of productsincorpora(cid:42)ng our technologies or subject us to addi(cid:42)onal regula(cid:42)on. Failure or delay by us or our licensees in obtaining FDA and other necessary regulatoryapproval or clearance, or the loss of previously obtained approvals, could have a material adverse eﬀect on our business, ﬁnancial condi(cid:42)on and results ofoperations.Our facili(cid:42)es and procedures are subject to periodic inspec(cid:42)ons by the FDA to determine compliance with the FDA’s requirements. The results of theseinspec(cid:42)ons can include inspec(cid:42)onal observa(cid:42)ons on FDA’s Form-483, warning le(cid:48)ers, or other forms of enforcement. The FDA has signiﬁcantly increased itsoversight of companies subject to its regula(cid:42)ons, including medical device companies. If the FDA were to conclude that we are not in compliance with applicablelaws or regula(cid:42)ons, or that any of our medical devices are ineﬀec(cid:42)ve or pose an unreasonable health risk, the FDA could ban such medical devices, detain orseize adulterated or misbranded medical devices, order a recall, repair, replacement, or refund of such devices, refuse to grant pending pre-market approvalapplica(cid:42)ons or require cer(cid:42)ﬁcates of non-U.S governments for exports, and/or require us to no(cid:42)fy health professionals and others that the devices presentunreasonable risks of substan(cid:42)al harm to the public health. The FDA may also assess civil or criminal penal(cid:42)es against us, our oﬃcers or employees and imposeopera(cid:42)ng restric(cid:42)ons on a company-wide basis, or enjoin and/or restrain certain conduct resul(cid:42)ng in viola(cid:42)ons of applicable law. The FDA may also recommendprosecu(cid:42)on to the U. S. Department of Jus(cid:42)ce. Any adverse regulatory ac(cid:42)on, depending on its magnitude, may restrict us from eﬀec(cid:42)vely marke(cid:42)ng and sellingour products and limit our ability to obtain future pre-market clearances or approvals, and could result in a substan(cid:42)al modiﬁca(cid:42)on to our business prac(cid:42)cesand operations.We may face liability if we mishandle or improperly dispose of the hazardous materials used in some of our research, development and manufacturingprocesses.Our research, development and manufacturing ac(cid:42)vi(cid:42)es some(cid:42)mes involve the controlled use of various hazardous materials. Although we believe thatour safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regula(cid:42)ons, the risk of accidentalcontamina(cid:42)on or injury from these materials cannot be completely eliminated. While we currently maintain insurance in amounts that we believe areappropriate, we could be held liable for any damages that might result from any such event. Any such liability could exceed our insurance and availableresources and could have a material adverse effect on our business, financial condition and results of operations.Addi(cid:42)onally, certain of our ac(cid:42)vi(cid:42)es are regulated by federal and state agencies in addi(cid:42)on to the FDA. For example, ac(cid:42)vi(cid:42)es in connec(cid:42)on with disposalof certain chemical waste are subject to regula(cid:42)on by the U.S. Environmental Protec(cid:42)on Agency. We could be held liable in the event of improper disposal ofsuch materials, even if these acts were done by third par(cid:42)es. Some of our reagent chemicals must be registered with the agency, with basic informa(cid:42)on ﬁledrelated to toxicity during the manufacturing process as well as the toxicity of the ﬁnal product. Failure to comply with exis(cid:42)ng or future regulatory requirementscould have a material adverse effect on our business, financial condition and results of operations.RISKS RELATING TO OUR SECURITIESOur stock price has been volatile and may continue to be volatile.The trading price of our common stock has been, and is likely to con(cid:42)nue to be, highly vola(cid:42)le, in large part a(cid:48)ributable to developments andcircumstances related to factors iden(cid:42)ﬁed in “Forward-Looking Statements” and “Risk Factors.” Our common stock price may rise or fall sharply at any (cid:42)mebecause of this vola(cid:42)lity, as a result of sales executed by signiﬁcant holders of our stock, and also because of short posi(cid:42)ons taken by investors from (cid:42)me to (cid:42)mein our stock. In the ﬁscal year ended September 30, 2017, the sale price for our common stock ranged from $21.90 to $31.80 per share. The market prices forsecuri(cid:42)es of medical technology, drug delivery and biotechnology companies historically have been highly vola(cid:42)le, and the market has experienced signiﬁcantprice and volume fluctuations that may be unrelated to the operating performance of particular companies.23ITEM 1B. UNRESOLVED STAFF COMMENTS.None.ITEM 2. PROPERTIES.Our principal operations are located in Eden Prairie, a suburb of Minneapolis, Minnesota, where we own a building that has approximately 64,000 squarefeet of space. We also own a 30,000 square foot building in Ballinasloe, Ireland dedicated to our Medical Device opera(cid:42)ng segment. We lease a warehouse nearour Eden Prairie facility through 2021 and a R&D-focused facility in Plymouth, Minnesota through May 2018. Upon termina(cid:42)on of the Plymouth lease in May2018, we plan to move substan(cid:42)ally all of our U.S. Medical Device whole-product solu(cid:42)ons R&D opera(cid:42)ons into a 36,000 square foot leased facility in EdenPrairie Minnesota. We also own an undeveloped parcel of land adjacent to our principal facility, which we intend to use to accommodate our growth needs.ITEM 3. LEGAL PROCEEDINGS.See the discussion of “Li(cid:42)ga(cid:42)on” in Note 11 to the consolidated ﬁnancial statements in “Item 8. Financial Statements and Supplementary Data” in thisAnnual Report on Form 10-K.ITEM 4. MINE SAFETY DISCLOSURES.Not Applicable. 24PART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.Our stock is traded on the NASDAQ Global Select Market under the symbol “SRDX.” The table below sets forth the quarterly high and low sales priceranges for our Common Stock, as reported by NASDAQ, in each of the last two fiscal years. Fiscal Quarter Ended: High Low September 30, 2017 $31.80 $24.24 June 30, 2017 29.26 22.35 March 31, 2017 26.50 21.90 December 31, 2016 30.75 23.45 September 30, 2016 30.28 22.58 June 30, 2016 24.23 18.45 March 31, 2016 21.45 17.45 December 31, 2015 24.98 19.64 Our transfer agent is:Broadridge Corporate Issuer Solutions, Inc.P.O. Box 1342Brentwood, NY 117171-877-830-4936According to the records of our transfer agent, as of November 24, 2017, there were 170 holders of record of our common stock.To date, Surmodics has not paid or declared any cash dividends on its common stock. The declara(cid:42)on and payment by Surmodics of future dividends, ifany, on its common stock will be at the sole discre(cid:42)on of the Board of Directors and will depend on Surmodics’ con(cid:42)nued earnings, ﬁnancial condi(cid:42)on, capitalrequirements and other factors that the Board of Directors deems relevant.On November 6, 2015, the Company’s Board of Directors authorized it to repurchase up to an addi(cid:42)onal $20.0 million (“ﬁscal 2016 authoriza(cid:42)on”) ofthe Company’s outstanding common stock in open-market purchases, privately nego(cid:42)ated transac(cid:42)ons, block trades, accelerated share repurchase (“ASR”)transactions, tender offers or by any combination of such methods. The share repurchase program does not have a fixed expiration date.On November 5, 2014, the Company’s Board of Directors authorized it to repurchase up to $30.0 million (“ﬁscal 2015 authoriza(cid:42)on”) of the Company’soutstanding common stock in open-market purchases, privately nego(cid:42)ated transac(cid:42)ons, block trades, accelerated share repurchase ASR transac(cid:42)ons, tenderoﬀers or by any combina(cid:42)on of such methods. An aggregate of $20.0 million of the ﬁscal 2015 authoriza(cid:42)on was u(cid:42)lized in ﬁscal 2015. The share repurchaseprogram does not have a fixed expiration date.During the three months ended September 30, 2017, the Company repurchased 26,322 shares of its common stock in open market purchases for anaverage price of $24.92 per share. The Company has an aggregate of $25.3 million available for future common stock purchases under the currentauthorization. 25Stock Performance ChartThe following chart compares the cumula(cid:42)ve total shareholder return on the Company’s Common Stock with the cumula(cid:42)ve total return on the NASDAQUS Benchmark Total Return (our broad equity market index) and the NASDAQ Medical Supplies Index (our published industry index). The comparisons assume$100 was invested on September 30, 2012 and assume reinvestment of dividends. 26ITEM 6. SELECTED FINANCIAL DATA.The data presented below as of September 30, 2017 and 2016 and for the ﬁscal years ended September 30, 2017, 2016 and 2015 is derived from ouraudited consolidated ﬁnancial statements included elsewhere in this report. The data as of September 30, 2015, 2014 and 2013 and for the years endedSeptember 30, 2014 and 2013 is derived from audited consolidated ﬁnancial statements not included in this report. The informa(cid:42)on set forth below should beread in conjunc(cid:42)on with the Company’s “Management’s Discussion and Analysis of Financial Condi(cid:42)on and Results of Opera(cid:42)ons” contained in Item 7 of thisreport and our consolidated financial statements and related notes beginning on page F-1 and other financial information included in this report. Fiscal Year 2017 2016 2015 2014 2013 (Dollars in thousands, except per share data) Statement of Operations Data: Total revenue $73,112 $71,366 $61,898 $57,439 $56,132 Operating income from continuing operations 7,103 16,859 19,089 18,576 18,820 Income from continuing operations 3,926 9,985 11,947 12,207 14,579 (Loss) income from discontinued operations — — — (176) 588 Net income 3,926 9,985 11,947 12,031 15,167 Diluted income (loss) per share: Continuing operations 0.29 0.76 0.90 $0.88 $0.99 Discontinued operations — — — (0.01) 0.04 Net income 0.29 0.76 0.90 0.87 1.03 Balance Sheet Data: Cash, short-term and long-term investments $48,336 $46,941 $55,588 $63,374 $58,104 Total assets 136,593 132,894 98,710 104,889 101,923 Retained earnings 102,072 98,146 88,161 93,881 91,036 Total stockholders’ equity 111,557 106,833 81,873 98,751 93,817 Statement of Cash Flows Data: Net cash provided by operating activities from continuing operations $14,053 $25,166 $15,066 $18,537 $17,781 Note: Fiscal 2017 and 2016 figures include the effects of our acquisitions of Creagh Medical and NorMedix, as further discussed below. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.The following discussion and analysis of our ﬁnancial condi(cid:42)on and results of opera(cid:42)ons should be read together with “Selected Financial Data” and ouraudited consolidated ﬁnancial statements and related notes appearing elsewhere in this report. Any discussion and analysis regarding our future ﬁnancialcondi(cid:42)on and results of opera(cid:42)ons are forward-looking statements that involve risks, uncertain(cid:42)es and assump(cid:42)ons, as more fully iden(cid:42)ﬁed in “Forward-Looking Statements” and “Risk Factors.” Our actual future ﬁnancial condi(cid:42)on and results of opera(cid:42)ons may diﬀer materially from those an(cid:42)cipated in theforward-looking statements.OverviewSurmodics is a leading provider of medical device and in vitro diagnos(cid:42)c technologies to the healthcare industry, with the mission of improving thedetec(cid:42)on and treatment of disease. In ﬁscal 2017, our business performance con(cid:42)nued to be driven by growth in our core Medical Device and In VitroDiagnos(cid:42)cs (“IVD”) businesses, while we con(cid:42)nued medical device product and pla(cid:77)orm development leveraging the technologies and manufacturingcapabili(cid:42)es acquired with the Fiscal 2016 Acquisi(cid:42)ons in our Medical Device business unit. Revenue in the Medical Device business consists of medical deviceand reagent product sales, royalty revenue from licenses of our surface modiﬁca(cid:42)on coa(cid:42)ng technologies as well as contract coa(cid:42)ng and other design anddevelopment services. Our In Vitro Diagnos(cid:42)cs business sells diagnos(cid:42)c technology products and coa(cid:42)ngs technologies to the diagnos(cid:42)c, biomedical research,and life science markets.We operate two reportable business or segments as follows: (1) the Medical Device unit, which is comprised of manufacturing balloons and cathetersused for a variety of interventional cardiology, peripheral and other applications, surface modification coating technologies to improve access, deliverability, andpredictable deployment of medical devices, as well as drug delivery coa(cid:42)ng technologies to provide site-speciﬁc drug delivery from the surface of a medicaldevice, with end markets that include coronary, peripheral, and neurovascular, and urology, among others, and (2) the In Vitro Diagnos(cid:42)cs unit, which consistsof27component products and technologies for diagnos(cid:42)c immunoassay as well as molecular tests and biomedical research applica(cid:42)ons, with products that includeprotein stabilization reagents, substrates, antigens and surface coatings.We derive our revenue from three primary sources: (1) product revenues from the sale of reagent chemicals to licensees, the sale of stabiliza(cid:42)onproducts, an(cid:42)gens, substrates and surface coa(cid:42)ngs to the diagnos(cid:42)c and biomedical research markets as well as the sale of medical devices and related products(such as balloons and catheters) to original equipment manufacturer (OEM) suppliers and distributors; (2) royal(cid:42)es and license fees from licensing ourproprietary surface modiﬁca(cid:42)on and device drug delivery technologies to customers; the vast majority (typically in excess of 90%) of revenue in the “royal(cid:42)esand license fees” category is in the form of royal(cid:42)es; and (3) contract coa(cid:42)ng, design, research and commercial development fees generated on customerprojects. Revenue ﬂuctuates from quarter to quarter depending on, among other factors: our customers’ success in selling products incorpora(cid:42)ng ourtechnologies; the (cid:42)ming of introduc(cid:42)ons of licensed products by us and our customers; the (cid:42)ming of introduc(cid:42)ons of products that compete with ourcustomers’ products; the number and ac(cid:42)vity level associated with customer development projects; the number and terms of new license agreements that arefinalized; and the value of reagent chemicals, medical device and diagnostic products sold to our customers.Greater than 96% of our royalty and license fee revenue in ﬁscal 2017, 2016 and 2015 is associated with our hydrophilic coa(cid:42)ng technology licenses. Wehave an extensive por(cid:77)olio of U.S. and interna(cid:42)onal patents and patent applica(cid:42)ons protec(cid:42)ng various aspects of these technologies, including composi(cid:42)ons,methods of manufacture and methods of coa(cid:42)ng devices. The expira(cid:42)on dates for these patents and the an(cid:42)cipated expira(cid:42)on dates of the patent applica(cid:42)onsrange from ﬁscal 2020 to 2035. Among these, our third-genera(cid:42)on PhotoLink hydrophilic technology is protected by a family of patents that expired inNovember 2015 (in the U.S.) and October 2016 (in certain other countries). The royalty revenue associated with our third-genera(cid:42)on technology wasapproximately 12% of our ﬁscal 2017 revenue. Approximately 21% of our total revenue in ﬁscal 2017 was royalty and license fee revenue generated fromfourth-genera(cid:42)on hydrophilic coa(cid:42)ng technologies, which are protected by a family of patents that begin to expire in ﬁscal 2020. Of the license agreementsusing our early generation technologies, most will continue to generate royalty revenue at a reduced royalty rate beyond patent expiration. The remainder of ourroyalty revenues are derived from other Surmodics coatings that are protected by a number of patents that extend to at least fiscal 2035.Critical Accounting Policies and Significant EstimatesThe discussion and analysis of our ﬁnancial condi(cid:42)on and results of opera(cid:42)ons is based upon our consolidated ﬁnancial statements, which have beenprepared in accordance with accoun(cid:42)ng principles generally accepted in the U.S. (“GAAP”). The prepara(cid:42)on of these consolidated ﬁnancial statements is basedin part on the applica(cid:42)on of signiﬁcant accoun(cid:42)ng policies, many of which require management to make es(cid:42)mates and assump(cid:42)ons (see Note 2 to theconsolidated ﬁnancial statements in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K). Actual results may diﬀer fromthese es(cid:42)mates and such diﬀerences could materially impact our results of opera(cid:42)ons. Cri(cid:42)cal accoun(cid:42)ng policies are those policies that require the applica(cid:42)onof management’s most challenging subjec(cid:42)ve or complex judgment, o(cid:79)en as a result of the need to make es(cid:42)mates about the eﬀect of ma(cid:48)ers that are inherentlyuncertain and may change in subsequent periods. Cri(cid:42)cal accoun(cid:42)ng policies involve judgments and uncertain(cid:42)es that are suﬃciently likely to result inmaterially diﬀerent results under diﬀerent assump(cid:42)ons and condi(cid:42)ons. We believe the following are cri(cid:42)cal areas in the applica(cid:42)on of our accoun(cid:42)ng policiesthat currently affect our financial condition and results of operations.Revenue recognition. Revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) shipment hasoccurred or delivery has occurred if the terms specify des(cid:42)na(cid:42)on; (3) the sales price is ﬁxed or determinable; and (4) collectability is reasonably assured. Whenthere are addi(cid:42)onal performance requirements, revenue is recognized when all such requirements have been sa(cid:42)sﬁed. We license technology to third par(cid:42)esand collect royal(cid:42)es based on the greater of the contractual percentage of a customer’s sales of products incorpora(cid:42)ng our licensed technologies or minimumcontractual royal(cid:42)es. Royalty revenue is recognized as our licensees report it to us, and payment is typically submi(cid:48)ed concurrently with their repor(cid:42)ng. Forstand-alone license agreements, up-front license fees are recognized over the term of the related licensing agreement. Minimum royalty fees are recognized inthe period earned. Revenue related to a performance milestone is recognized upon the achievement of the milestone and mee(cid:42)ng speciﬁc revenue recogni(cid:42)oncriteria.Under revenue arrangements with mul(cid:42)ple deliverables, we recognize each separable deliverable as it is earned. We account for revenue using a mul(cid:42)plea(cid:48)ribu(cid:42)on model in which considera(cid:42)on allocated to R&D ac(cid:42)vi(cid:42)es is recognized as performed, and milestone payments are recognized when the milestoneevents are achieved, when such ac(cid:42)vi(cid:42)es and milestones are deemed substan(cid:42)ve. Accordingly, in situa(cid:42)ons where a unit of accoun(cid:42)ng includes both a licenseand R&D ac(cid:42)vi(cid:42)es, and when a license does not have stand-alone value, we apply a mul(cid:42)ple a(cid:48)ribu(cid:42)on model in which considera(cid:42)on allocated to the license isrecognized28ratably, considera(cid:42)on allocated to R&D ac(cid:42)vi(cid:42)es is recognized as performed and milestone payments are recognized when the milestone events are achieved,when such activities and milestones are deemed substantive.As further described in the New Accoun(cid:42)ng Pronouncements sec(cid:42)on, we will adopt a new accoun(cid:42)ng standard for recognizing revenue on October 1,2018. We currently plan to adopt the standard using the modiﬁed retrospec(cid:42)ve approach and expect the impact will be material to the consolidated ﬁnancialstatements due to an an(cid:42)cipated one-quarter accelera(cid:42)on of minimum license fees and royalty revenue earned under our hydrophilic coa(cid:42)ngs licenseagreements.Customer advances are accounted for as a liability until all criteria for revenue recognition have been met.Goodwill and other indeﬁnite-lived intangible assets. We record all assets and liabili(cid:42)es acquired in purchase acquisi(cid:42)ons, including goodwill and otherintangible assets, at fair value as required by accoun(cid:42)ng guidance for business combina(cid:42)ons. The ini(cid:42)al recogni(cid:42)on of goodwill and other intangible assetsrequires management to make subjec(cid:42)ve judgments concerning es(cid:42)mates of how the acquired assets will perform in the future using valua(cid:42)on methodsincluding discounted cash flow analysis.Goodwill and certain indeﬁnite-lived intangible assets are not amor(cid:42)zed but are subject, at a minimum, to annual tests for impairment in accordance withaccoun(cid:42)ng guidance for goodwill. These tests require management to make signiﬁcant judgments and es(cid:42)mates in evalua(cid:42)ng whether impairment has occurredand, if so, the amount of that impairment. Evalua(cid:42)ng goodwill and indeﬁnite-lived intangible assets for impairment involves the determina(cid:42)on of the fair value ofour repor(cid:42)ng units in which we have recorded goodwill. A repor(cid:42)ng unit is an opera(cid:42)ng segment, or component thereof, for which discrete ﬁnancialinformation is available and reviewed by management on a regular basis. Our reporting units are comprised of our Medical Device and IVD business units.Goodwill in our repor(cid:42)ng units is evaluated for impairment in two ways. First, an assessment of qualita(cid:42)ve factors is performed to determine whether theexistence of events or circumstances leads to a determina(cid:42)on that it is more likely than not that the fair value of a repor(cid:42)ng unit is less than its carrying amount.If, a(cid:79)er assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a repor(cid:42)ng unit is less thanits carrying amount, then performing an impairment test, as described below, becomes unnecessary. If events or circumstances occur that would indicate thatthe carrying amount may be impaired, or if the Company otherwise determines it necessary, the impairment test will be performed.The impairment test is a quan(cid:42)ta(cid:42)ve analysis, whereby Surmodics compares the es(cid:42)mated fair value of the repor(cid:42)ng units to which goodwill was assignedto their respec(cid:42)ve carrying values. This analysis requires the alloca(cid:42)on of certain shared corporate assets, liabili(cid:42)es and expenses between the repor(cid:42)ng units. Incalcula(cid:42)ng fair value, the Company uses the income and market approaches as its primary indicators of fair value. The income approach is a valua(cid:42)on techniqueunder which the Company es(cid:42)mates future cash ﬂows using the repor(cid:42)ng units’ ﬁnancial forecasts, discounted to their present value to es(cid:42)mate the fair valuefrom the perspec(cid:42)ve of an unrelated market par(cid:42)cipant. The discount rate used is the Company’s es(cid:42)mated weighted average cost of capital, es(cid:42)mated byobserving similar metrics in publicly traded guideline companies, adjusted for Company-speciﬁc risk factors. The market approach establishes fair value bycomparing Surmodics’ repor(cid:42)ng units to publicly traded guideline companies or by analysis of actual transac(cid:42)ons of similar businesses or assets sold. Theincome approach is tailored to the circumstances of the Company’s business, and the market approach is completed to ensure that the results of the incomeapproach are reasonable and in line with comparable companies in the industry. The summa(cid:42)on of the Company’s repor(cid:42)ng units’ fair values is compared andreconciled to its market capitalization as of the date of its impairment test as a test of reasonableness.We performed our annual impairment test of goodwill as of August 31, 2017, and 2016. Based on the results of the assessments, no goodwill impairmentcharges were recorded during ﬁscal 2017 or 2016. During ﬁscal 2017 and 2016, we recorded impairment charges on our indeﬁnite-lived intangible assets of$0.4 million and $0.1 million, respectively, as a result of decreases in future revenue estimates associated with these assets.Income tax accruals and valua(cid:41)on allowances. When preparing the consolidated ﬁnancial statements, we are required to es(cid:42)mate the income taxobliga(cid:42)ons in each of the jurisdic(cid:42)ons in which we operate. This process involves es(cid:42)ma(cid:42)ng the actual current tax obliga(cid:42)ons based on expected income,statutory tax rates and tax planning opportuni(cid:42)es in the various jurisdic(cid:42)ons. In the event there is a signiﬁcant unusual or one-(cid:42)me item recognized in the resultsof opera(cid:42)ons, the tax a(cid:48)ributable to that item would be separately calculated and recorded in the period the unusual or one-(cid:42)me item occurred. Tax lawrequires certain items to be included in our tax return at diﬀerent (cid:42)mes than the items are reﬂected in our results of opera(cid:42)ons. As a result, the annual eﬀec(cid:42)vetax rate reﬂected in our results of opera(cid:42)ons is diﬀerent than that reported on our tax return (i.e., our cash tax rate). Some of these diﬀerences are permanent,such as expenses that are not deduc(cid:42)ble in our tax return, and some are temporary diﬀerences that will reverse over (cid:42)me, such as deprecia(cid:42)on expense oncapital assets. These temporary differences result in deferred tax assets29and liabili(cid:42)es, which are included in our consolidated balance sheets. Deferred tax assets generally represent items that can be used as a tax deduc(cid:42)on or creditin our tax returns in future years, for which we have already recorded the expense in our consolidated statements of income. We must assess the likelihood thatour deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valua(cid:42)onallowance against those deferred tax assets. Deferred tax liabili(cid:42)es generally represent items for which we have already taken a deduc(cid:42)on in our tax return, butwe have not yet recognized the items as expense in our results of operations.Signiﬁcant judgment is required in evalua(cid:42)ng our tax posi(cid:42)ons, and in determining our provision for income taxes, our deferred tax assets and liabili(cid:42)esand any valua(cid:42)on allowance recorded against our deferred tax assets. We had total deferred tax assets in excess of total deferred tax liabili(cid:42)es of $4.0 millionand $5.0 million, respec(cid:42)vely, as of September 30, 2017 and 2016, including valua(cid:42)on allowances of $4.5 million and $3.8 million, respec(cid:42)vely, as ofSeptember 30, 2017 and 2016. The valua(cid:42)on allowances related to three items as of September 30, 2017 and 2016. First, ﬁnancial statement other-than-temporary losses on strategic investments that were unrealized for tax purposes as we did not foresee future oﬀse(cid:86)ng taxable capital gains. Therefore, as ofSeptember 30, 2017 and 2016, a valua(cid:42)on allowance has been recorded for all other-than-temporary impairment losses as realized tax capital losses from salesof the underlying strategic assets have not occurred. Second, deferred tax assets related to net opera(cid:42)ng losses of Creagh Medical, including those incurredprior to the acquisi(cid:42)on and in ﬁscal 2016, have been oﬀset by a valua(cid:42)on allowance as it is not more likely than not that the tax assets will be realized in futureperiods, due to Creagh Medical’s history of taxable losses. Accordingly, the alloca(cid:42)on of the purchase price of Creagh Medical to the acquired deferred taxassets related to the net opera(cid:42)ng loss carryforwards was also oﬀset by a valua(cid:42)on allowance. Third, deferred tax assets related to state R&D tax creditcarryforwards have been offset by valuation allowances to the extent they are not expected to be utilized future years.We applied the accoun(cid:42)ng guidance associated with uncertain tax posi(cid:42)ons which deﬁnes standards for recognizing the beneﬁts of tax return posi(cid:42)onsin the consolidated ﬁnancial statements as “more-likely-than-not” to be sustained by the taxing authori(cid:42)es based solely on the technical merits of the posi(cid:42)on. Ifthe recogni(cid:42)on threshold is met, the tax beneﬁt is measured and recognized as the largest amount of tax beneﬁt that, in our judgment, is greater than 50% likelyto be realized. The total gross amount of unrecognized tax beneﬁts as of September 30, 2017, 2016 and 2015 was $1.5 million, $1.5 million and $1.2 million,respec(cid:42)vely, excluding accrued interest and penal(cid:42)es. Of these unrecognized tax beneﬁts, $1.2 million, $1.2 million and $0.9 million would aﬀect our eﬀec(cid:42)vetax rate for ﬁscal 2017, 2016 and 2015, respec(cid:42)vely. Interest and penal(cid:42)es recorded for uncertain tax posi(cid:42)ons are included in our income tax provision. As ofSeptember 30, 2017, 2016 and 2015, $0.5 million of interest and penal(cid:42)es were accrued at each ﬁscal year-end, excluding the tax beneﬁts of deduc(cid:42)bleinterest. The Internal Revenue Service (“IRS”) commenced an examina(cid:42)on of our ﬁscal 2016 U.S. federal income tax return in the fourth quarter of ﬁscal 2017.The examina(cid:42)on has not been completed. The IRS completed an examina(cid:42)on of our U.S. income tax return for ﬁscal 2012 in ﬁscal 2014 with an insigniﬁcantpayment made associated with a (cid:42)ming adjustment. U.S. income tax returns for years prior to ﬁscal 2013 are no longer subject to examina(cid:42)on by federal taxauthori(cid:42)es. For tax returns for state and local jurisdic(cid:42)ons, the Company is no longer subject to examina(cid:42)on for tax years generally before ﬁscal 2007. For taxreturns for non-U.S. jurisdic(cid:42)ons, the Company is no longer subject to income tax examina(cid:42)on for years prior to 2012. Addi(cid:42)onally, the Company has beenindemniﬁed of liability for any taxes rela(cid:42)ng to Creagh Medical and NorMedix for periods prior to the respec(cid:42)ve acquisi(cid:42)on dates, pursuant to the terms of therelated purchase agreements.In the event that we have determined not to ﬁle tax returns with a par(cid:42)cular state or local jurisdic(cid:42)on, all years remain subject to examina(cid:42)on by the taxauthori(cid:42)es. The ul(cid:42)mate outcome of tax ma(cid:48)ers may diﬀer from our es(cid:42)mates and assump(cid:42)ons. Unfavorable se(cid:48)lement of any par(cid:42)cular issue would requirethe use of cash and could result in increased income tax expense. Favorable resolu(cid:42)on could result in reduced income tax expense. Within the next 12 months,we do not expect that our unrecognized tax beneﬁts will change signiﬁcantly. See Note 8 to the consolidated ﬁnancial statements in “Item 8. Financial Statementsand Supplementary Data” in this Annual Report on Form 10-K for further informa(cid:42)on regarding changes in unrecognized tax beneﬁts during ﬁscal 2017, 2016and 2015.Valua(cid:41)on of business combina(cid:41)ons. The fair value of considera(cid:42)on, including con(cid:42)ngent considera(cid:42)on, transferred in acquisi(cid:42)ons accounted for asbusiness combina(cid:42)ons is ﬁrst allocated to the iden(cid:42)ﬁable tangible and intangible assets acquired and liabili(cid:42)es assumed based on their es(cid:42)mated fair values atthe date of acquisi(cid:42)on. Any excess purchase considera(cid:42)on is allocated to goodwill. Further, for those arrangements that involve liability classiﬁed con(cid:42)ngentconsidera(cid:42)on, we record on the date of acquisi(cid:42)on a liability equal to the discounted fair value of the es(cid:42)mated addi(cid:42)onal considera(cid:42)on we may be obligated tomake in the future. Liability classiﬁed con(cid:42)ngent considera(cid:42)on is adjusted to its fair value each repor(cid:42)ng period through earnings. Acquisi(cid:42)on transac(cid:42)on costsare expensed as incurred.30The fair value of iden(cid:42)ﬁable intangible assets requires management es(cid:42)mates and judgments based on market par(cid:42)cipant assump(cid:42)ons. Using alterna(cid:42)vevalua(cid:42)on assump(cid:42)ons, including es(cid:42)mated revenue projec(cid:42)ons, growth rates, cash ﬂows, discount rates, es(cid:42)mated useful lives, and probabili(cid:42)es surroundingthe achievement of milestones could result in diﬀerent fair value es(cid:42)mates of our net tangible and intangible assets and related amor(cid:42)za(cid:42)on expense in currentand future periods.Con(cid:42)ngent considera(cid:42)on liabili(cid:42)es are remeasured to their fair value each repor(cid:42)ng period using projected revenue, discount rates, probabili(cid:42)es ofpayment, and projected payment dates. Increases or decreases in the fair value of the con(cid:42)ngent considera(cid:42)on liability can result from changes in the (cid:42)ming andamount of revenue es(cid:42)mates or in the (cid:42)ming or likelihood of achieving value-enhancing milestones, and changes in discount periods and rates. Projectedcon(cid:42)ngent payment amounts are discounted back to the current period using a discounted cash ﬂow model. See further discussion of con(cid:42)ngent considera(cid:42)onobliga(cid:42)ons to former Creagh Medical and NorMedix shareholders, including fair value adjustments recorded in ﬁscal 2017 and 2016 related to these liabili(cid:42)es,below under “Con(cid:42)ngent considera(cid:42)on (gain) accre(cid:42)on expense” in this Item 7 and in Note 3, “Business Combina(cid:42)ons,” to the consolidated ﬁnancial statementsin “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.Results of OperationsYears Ended September 30, 2017, 2016 and 2015Revenue. Fiscal 2017 revenue was $73.1 million, a $1.7 million, or 2% increase from ﬁscal 2016 revenue of $71.4 million. Fiscal 2016 revenue was $71.4million, a $9.5 million, or 15% increase from ﬁscal 2015 revenue of $61.9 million. Fiscal 2016 revenue included $4.1 million from our Fiscal 2016 Acquisi(cid:42)onsconsummated in the ﬁrst two quarters of ﬁscal 2016. The table below provides a summary of each opera(cid:42)ng segment’s annual revenue for the three-year periodended September 30, 2017. For the Year Ended September 30, Increase/(Decrease) Increase/(Decrease) (dollars in thousands) 2017 2016 2015 2017 vs. 2016 2016 vs. 2015 Revenue Medical Device $53,983 $53,202 $45,944 $781 1% $7,258 16%In Vitro Diagnostics 19,129 18,164 15,954 965 5% 2,210 14%Total Revenue $73,112 $71,366 $61,898 $1,746 2% $9,468 15% Medical Device. Revenue in Medical Device was $53.9 million in ﬁscal 2017, a 1% increase from $53.2 million in ﬁscal 2016. The increase in ﬁscal 2017revenue was a result of growth in product sales and research, development and other revenue, par(cid:42)ally oﬀset by a reduc(cid:42)on in royalty and license fee revenue.Increases in product sales were driven primarily by increased demand for reagents as well as balloon catheter sales. Product revenue increased by $0.4 millionfrom reagents sales and $0.4 million from balloon catheters and other medical device sales. The increase in research, development and other revenue of $1.4million was primarily due to an increase in demand from new and exis(cid:42)ng customers for our coa(cid:42)ng and feasibility services. Royalty and licensing revenuedeclined by $1.4 million. The decrease in royalty revenue was primarily a(cid:48)ributable to two prior-year royalty revenue items which posi(cid:42)vely impacted ﬁscal2016 revenue by a net of $1.5 million, as well as the eﬀect of previously disclosed patent expira(cid:42)ons of patents covering our third-genera(cid:42)on PhotoLinkhydrophilic technology. The prior-year royalty revenue items consisted of a $2.9 million catch-up payment for previously unreported royal(cid:42)es owed to theCompany by one customer for the period from ﬁscal 2009 through ﬁscal 2016, partly oﬀset by a se(cid:48)lement agreement entered into with a customer pursuant towhich we agreed to pay the customer $1.4 million to refund overpaid royal(cid:42)es, of which $1.0 million related to years prior to ﬁscal 2016. In addi(cid:42)on, in ﬁscal2017 we realized a $1.1 million license fee related to a customer’s acquisi(cid:42)on and our sale of related jointly-owned intellectual property to the acquirer. Royaltyrevenue associated with our third-genera(cid:42)on hydrophilic coa(cid:42)ngs decreased $3.7 million from ﬁscal 2016 to ﬁscal 2017 as a result of the previously disclosedpatent expirations, partially offset by a $1.3 million increase from other hydrophilic royalties over the same time period.During ﬁscal 2017, 2016 and 2015, $8.4 million, $12.1 million, and $11.0 million, respec(cid:42)vely, of Medical Device royalty revenue was generated fromour third-genera(cid:42)on PhotoLink technology. As discussed above, the family of patents that protects this technology expired in November 2015 (in the U.S.) andOctober 2016 (in certain other countries). While we believe we will retain a majority of this royalty revenue, there is a royalty rate step down for licensedcustomers at the (cid:42)me these patents expire, which resulted in a $3.7 million decrease in royalty revenue in ﬁscal 2017. We are ac(cid:42)vely seeking to convertcustomers using this genera(cid:42)on of PhotoLink coa(cid:42)ngs to our Serene coa(cid:42)ng technologies. We expect an addi(cid:42)onal decline of $2.5 million to $3.5 million inhydrophilic coating royalties in fiscal 2018 as the result of these patent expirations.31Revenue in Medical Device was $53.2 million in ﬁscal 2016, a 16% increase from $45.9 million in ﬁscal 2015. The increase in ﬁscal 2016 revenue was aresult of growth in each of our revenue categories, driven primarily by increased demand for reagents as well as incremental product and research, developmentand other revenue from our Fiscal 2016 Acquisi(cid:42)ons. Product revenue increased by $1.5 million from reagents sales and $2.4 million from our Fiscal 2016Acquisi(cid:42)ons. Royalty and licensing revenue improved by $1.4 million, primarily due to the aforemen(cid:42)oned ﬁscal 2016 royalty revenue items. Further, werealized a $3.1 million increase in other hydrophilic royal(cid:42)es, which was oﬀset by $2.1 million decline in hydrophilic royal(cid:42)es as a result of the aforemen(cid:42)onedpatent expira(cid:42)ons. The increase in research, development and other revenue of $1.9 million was primarily due to incremental revenue from the Fiscal 2016Acquisitions. There were limited product price increases in fiscal 2017, 2016 and 2015.In Vitro Diagnos(cid:41)cs. In Vitro Diagnos(cid:42)cs revenue was $19.1 million in ﬁscal 2017, a 5% increase from $18.2 million in ﬁscal 2016. The increase in 2017revenue reﬂected strong growth in stabiliza(cid:42)on, substrate, and an(cid:42)gen product sales which more than oﬀset by a revenue decline from a signiﬁcant microarraycustomer that was acquired by one of its competitors.In Vitro Diagnos(cid:42)cs revenue was $18.2 million in ﬁscal 2016, a 14% increase from $16.0 million in ﬁscal 2015. The increase in 2016 revenue was theresult of unit volume increases in substantially all product lines. There were limited product price increases in fiscal 2017, 2016 and 2015.The following is a summary of major costs and expenses as a percentage of total revenue: For the Year Ended September 30, 2017 2016 2015 (dollars in thousands) Amount % TotalRevenue Amount % TotalRevenue Amount % TotalRevenue Product costs $11,422 16% $10,908 15% $8,619 14%Research and development 31,817 44% 18,498 26% 16,165 26%Selling, general and administrative 20,478 28% 18,000 25% 14,906 24%Acquisition transaction, integration and other costs — — 3,187 4% — — Acquired intangible asset amortization 2,419 3% 2,422 1% 619 1%Contingent consideration (gain) expense (127) 0% 1,492 — — — Claim settlement — — — — 2,500 — Product costs. Product gross margins (deﬁned as product sales less related product costs) were 65% of product sales in ﬁscal 2017, 2016 and 2015. Theincrease in product costs was largely the result of increased product sales, driven by increased demand for our IVD products and, to a lesser extent, increases inreagent and medical device product sales. We expect product gross margins to decrease slightly in ﬁscal 2018 as we engage in larger-scale manufacturing of ourwhole-product solu(cid:42)ons products in our Irish facility. It will take at least two years to op(cid:42)mize the manufacturing and supply chain infrastructure at this facilityas we execute our whole-product solutions strategy.Research and development expenses. The ﬁscal 2017 increase in R&D expense of $13.3 million, or 72%, as compared with ﬁscal 2016 was primarily theresult of addi(cid:42)onal internal R&D expense related to development of our whole-products solu(cid:42)ons products, including our DCB development and clinical studyac(cid:42)vi(cid:42)es. Internal R&D costs include employee costs, professional consul(cid:42)ng fees, supplies, materials, facili(cid:42)es and overhead related to the design, development,tes(cid:42)ng and pursuit of regulatory approval for our products. Addi(cid:42)onally, in ﬁscal 2017, we recognized impairment charges totaling $0.3 million related to inprocess R&D intangible assets acquired with the Creagh Medical acquisi(cid:42)on. The ﬁscal 2016 increase from ﬁscal 2015 of $2.3 million, or 14%, was primarily theresult of $1.8 million from our Fiscal 2016 Acquisi(cid:42)ons and increased costs from our DCB development ac(cid:42)vi(cid:42)es. We an(cid:42)cipate R&D expenses will rangebetween 55% and 60% of ﬁscal 2018 revenue as we have begun enrollment in our TRANSCEND clinical trial for the SurVeil DCB and con(cid:42)nue to invest inproprietary product development to execute our whole-products strategy.Selling, general and administra(cid:41)ve expenses. Selling, general and administra(cid:42)ve (“SG&A”) expenses increased by $2.5 million or 14%, compared withﬁscal 2016, primarily as the result of infrastructure investments to support our whole-products solu(cid:42)ons strategy, as well as a $1.2 million increase inprofessional services costs associated with accoun(cid:42)ng, audit and legal services. The ﬁscal 2016 increase of $3.1 million or 21%, compared with ﬁscal 2015 wasprimarily the result of $1.4 million of higher stock-based compensa(cid:42)on expense as the result of favorable trends in revenue, including the impact of the Fiscal2016 Acquisi(cid:42)ons, and increased compensa(cid:42)on under our incen(cid:42)ve plans as a result of favorable opera(cid:42)ng results. Addi(cid:42)onally, ﬁscal 2016 SG&A expensesincluded $1.7 million attributable to fiscal 2016 acquisitions. We expect SG&A expenses as a percent of fiscal 2018 revenue to increase slightly from fiscal 2017.32Acquisition transaction, integration and other costs. In ﬁscal 2016, we incurred $3.2 million in acquisi(cid:42)on transac(cid:42)on, integra(cid:42)on and other costs relatedto our Fiscal 2016 Acquisitions. No acquisitions were completed in fiscal 2017 or 2015.Acquisi(cid:41)on related intangible asset amor(cid:41)za(cid:41)on. We acquired certain intangible assets in our Fiscal 2016 Acquisi(cid:42)ons and previous acquisi(cid:42)ons whichare being amor(cid:42)zed over periods ranging from four to 14 years. Amor(cid:42)za(cid:42)on expense on acquired intangible assets was $2.4 million in both ﬁscal 2017 andﬁscal 2016. The increase in amor(cid:42)za(cid:42)on expense of $1.8 million from ﬁscal 2015 to 2016 was the result of the intangible assets acquired with our Fiscal 2016Acquisitions.Con(cid:41)ngent considera(cid:41)on (gain) accre(cid:41)on expense. In ﬁscal 2017 and 2016, we recorded $(0.1) million and $1.5 million, respec(cid:42)vely, of net con(cid:42)ngentconsideration (gains) expense from changes in the es(cid:42)mated fair value of our con(cid:42)ngent considera(cid:42)on obliga(cid:42)ons stemming from the Fiscal 2016 Acquisi(cid:42)ons.In ﬁscal 2017 and 2016, (gains) losses on con(cid:42)ngent considera(cid:42)on fair value adjustments totaling $(2.3) million and $0.1 million, respec(cid:42)vely, resulted fromchanges in the amount and expected (cid:42)ming of revenue milestones as well as the probability and (cid:42)ming of achieving non-revenue milestones. Oﬀse(cid:86)ng thesegains was expense for the passage of (cid:42)me (i.e. accre(cid:42)on), which aggregated $2.2 million and $1.4 million, respec(cid:42)vely, for ﬁscal 2017 and 2016. In ﬁscal 2018and 2019, if there are changes in the amount, probability or (cid:42)ming of achievement of con(cid:42)ngent considera(cid:42)on milestones, there may be material adjustments inthe consolidated statements of income to reflect changes in the fair value of contingent consideration liabilities.Other (loss) income. Major classifications of other (loss) income are as follows: Year Ended September 30, (dollars in thousands) 2017 2016 2015 Investment income, net $390 $63 $156 Gains on sales of strategic investments, contingent consideration milestone payments and other 44 507 496 Foreign exchange loss (504) (481) — Impairment loss on strategic investment — — (1,500)Other (loss) income $(70) $89 $(848) Other (loss) income has ﬂuctuated between the ﬁscal years as a result of gains from available-for-sale securi(cid:42)es and strategic investments as well as other-than-temporary impairment losses from strategic investments. The increase in investment income in ﬁscal 2017 as compared with ﬁscal 2016 is primarily theresult of higher interest rates realized on debt investments. In addi(cid:42)on, investment income in ﬁscal 2016 and 2015 was impacted by lower investment balancesas we adjusted our investment por(cid:77)olio toward a liquid, short-term por(cid:77)olio as we contemplated strategic acquisi(cid:42)ons. We recognized and realized investmentlosses of less than $0.1 million in ﬁscal 2017 and 2016, while we recognized investment gains of $0.1 million in ﬁscal 2015. Fiscal 2016 included considera(cid:42)onreceived from the sale of our ownership interest in a strategic investment of $0.5 million. Fiscal 2015 included an other-than-temporary impairment loss of $1.5million related to our investment in CeloNova, par(cid:42)ally oﬀset by a gain of $0.5 million associated with the sale of our investment in Intersect ENT. Fiscal 2017 and2016 both included $0.5 million of foreign currency losses related to Euro-denominated con(cid:42)ngent considera(cid:42)on liabili(cid:42)es arising from the Creagh Medicalacquisition. These losses reflect the strengthening of the Euro as compared with the U.S. dollar in each respective period. 33Income tax provision. The reconciliation of the statutory U.S. federal tax rate of 35% and our effective tax rate from continuing operations is as follows: Year Ended September 30, 2017 2016 2015 Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%State income taxes, net of federal benefit 0.3 0.8 0.6 Subsidiary capital gain — 15.5 — Foreign rate differential 13.5 3.7 — Valuation allowance change 7.2 (14.8) (1.6)Federal and foreign research and development tax credits (10.0) (3.4) (0.4)Stock based compensation 4.7 (3.6) — Manufacturing deduction (4.4) (1.6) — Transaction costs — 4.5 — Contingent consideration (gain) expense (0.6) 3.1 — Other (1.5) 1.9 0.3 Effective tax rate 44.2% 41.1% 33.9% The diﬀerence between the 35.0% U.S. federal statutory tax rate and our eﬀec(cid:42)ve tax rate reﬂects the impact of various diﬀerences between amountsrecorded in our consolidated ﬁnancial statements and our tax return. The income tax provision was $3.1 million, $7.0 million and $6.3 million, respec(cid:42)vely, forﬁscal 2017, 2016 and 2015 resul(cid:42)ng in eﬀec(cid:42)ve tax rates of 44.2%, 41.1% and 34.5%, respec(cid:42)vely. The variability in our ﬁscal 2017 eﬀec(cid:42)ve tax rate from theU.S. federal statutory rate is primarily the result of opera(cid:42)ng losses in Ireland, where the 12.5% statutory rate tax beneﬁts are oﬀset by a full valua(cid:42)onallowance, non-deduc(cid:42)ble amor(cid:42)za(cid:42)on expense, con(cid:42)ngent considera(cid:42)on gains and accre(cid:42)on expense associated with the Fiscal 2016 Acquisi(cid:42)ons, and foreigncurrency losses associated with our Creagh Medical Euro-denominated con(cid:42)ngent considera(cid:42)on obliga(cid:42)ons. Also, in ﬁscal 2017, U.S. federal income taxexpense was reduced by an increase in the U.S. federal research and development tax credit resul(cid:42)ng from our increased R&D ac(cid:42)vi(cid:42)es. Addi(cid:42)onally, werecognized $0.2 million and $(0.6) million of net excess tax expense (beneﬁt) realized from share op(cid:42)ons expired, forfeited, vested or exercised during ﬁscal2017 and 2016, respec(cid:42)vely. Prior to ﬁscal 2016, under accoun(cid:42)ng guidance then in eﬀect, excess tax expense (beneﬁts) were recorded within addi(cid:42)onal paid-in capital on the consolidated balance sheets.In ﬁscal 2016, the eﬀec(cid:42)ve tax rate was nega(cid:42)vely aﬀected by non-deduc(cid:42)ble transac(cid:42)on costs, con(cid:42)ngent considera(cid:42)on accre(cid:42)on expense andacquisi(cid:42)on-related amor(cid:42)za(cid:42)on expense associated with our Fiscal 2016 Acquisi(cid:42)ons. We have historically recorded other-than-temporary impairment losseswith no income tax eﬀect as it has not been more likely than not that we would generate suﬃcient capital gains to realize these beneﬁts. Consequently, other-than-temporary impairments and capital gains, which are both discussed in detail under the cap(cid:42)on Other (loss) income, are recorded without any income taxexpense or beneﬁt. During the fourth quarter of ﬁscal 2016, we u(cid:42)lized $7.5 million of previously generated capital losses by accelera(cid:42)ng built-in gains in ourIVD subsidiary. This resulted in an increase in our tax basis in IVD and a $2.6 million reduc(cid:42)on in both deferred tax assets and the valua(cid:42)on allowance duringfiscal 2016.We recorded $0.2 million of retroac(cid:42)ve 2015 U.S. research and development tax credit discrete beneﬁts for the period from January 1, 2015 toSeptember 30, 2015 in ﬁscal 2016 resul(cid:42)ng from the December 2015 signing of the Protec(cid:42)ng Americans from Tax Hikes Act (“PATH Act”) of 2015. Thisreduced our ﬁscal 2016 eﬀec(cid:42)ve rate by 1.3% in ﬁscal 2016. The PATH Act made the research and development tax credit permanent. Accordingly, the taxbeneﬁts associated with the credit for ﬁscal 2017 and 2016 have also been included as a beneﬁt and have reduced the eﬀec(cid:42)ve rate by 8.2% and 2.1% in therespective fiscal years.We recorded $0.2 million of retroac(cid:42)ve 2014 U.S. research and development tax credit discrete beneﬁts for the period from January 1, 2014 toSeptember 30, 2014 in ﬁscal 2015 resul(cid:42)ng from the December 2014 signing of the Tax Increase Protec(cid:42)on Act of 2014. This reduced our ﬁscal 2015 eﬀec(cid:42)verate by 1.0% in ﬁscal 2015. We also recorded a federal research and development credit in ﬁscal 2015 generated for the period from October 1, 2014 toDecember 31, 2014 prior to the expiration of the benefit on December 31, 2014.34Segment Operating ResultsOperating income for each of our reportable segments was as follows: For the Year Ended September 30, Increase/(Decrease) Increase/(Decrease) (dollars in thousands) 2017 2016 2015 2017 vs. 2016 2016 vs. 2015 Operating income (loss) Medical Device $6,902 $16,975 $21,192 $(10,073) (59)% $(4,217) (20)%In Vitro Diagnostics 8,293 7,115 4,484 1,178 17% 2,631 59%Total segment operating income 15,195 24,090 25,676 (8,895) (37)% (1,586) (6)%Corporate (8,092) (7,231) (6,587) (861) 12% (644) 10%Total operating income $7,103 $16,859 $19,089 $(9,756) (58)% $(2,230) (12)%Medical Device. The 59% decrease in Medical Device opera(cid:42)ng income in ﬁscal 2017, as compared with ﬁscal 2016, was primarily the result of $13.2million in higher R&D expenses and a $1.4 million decrease in royalty and license fee revenue, par(cid:42)ally oﬀset by incremental product gross margin of $0.4million from increased segment product sales and $1.4 million from increased research, development and other revenue. As previously discussed, ﬁscal 2016revenue was posi(cid:42)vely impacted by two ﬁscal 2016 royalty revenue items, which resulted in $1.5 million of incremental net revenue. Fiscal 2017 beneﬁted froma $1.1 million license fee arising from a customer’s acquisi(cid:42)on and our sale of related jointly-owned intellectual property to the acquirer. Opera(cid:42)ng expenses,excluding product costs, increased as R&D expense increased by $13.2 million in ﬁscal 2017 as we accelerated investment in our whole-product solu(cid:42)onsproduct development, including our DCB program. Further, SG&A expenses increased $2.5 million due to investment in infrastructure necessary to support ourwhole-products solu(cid:42)ons strategy, as well as $1.2 million of incremental professional fees related to accoun(cid:42)ng, audit and legal services. The net decrease incurrent-year opera(cid:42)ng income resul(cid:42)ng from these items was par(cid:42)ally oﬀset by a net gain on the con(cid:42)ngent considera(cid:42)on obliga(cid:42)ons of $0.1 million in ﬁscal2017, as compared with a net expense of $1.5 million in fiscal 2016.Opera(cid:42)ng income decreased by 20% in ﬁscal 2016 from ﬁscal 2015. The decrease was primarily the result of $10.0 million in higher non-productopera(cid:42)ng expenses, par(cid:42)ally oﬀset by $2.2 million of incremental product gross margin stemming from a $7.3 million increase in revenue. Revenue for ﬁscal2016 includes increased royalty and licensing revenue of $1.4 million. This increase included the two previously discussed royalty revenue items. Royaltyrevenue also reﬂected a decline of $2.1 million as the result of expira(cid:42)on patents protec(cid:42)ng the third genera(cid:42)on of our Photolink hydrophilic technology. Theremaining increase in revenue in ﬁscal 2016 was generated by increased product sales of $3.9 million and research, development and other revenue of $1.9million. Our Fiscal 2016 Acquisi(cid:42)ons accounted for $4.1 million of the increases in these two revenue categories. Opera(cid:42)ng expenses, excluding product costs,increased as a result of transac(cid:42)on, integra(cid:42)on, amor(cid:42)za(cid:42)on, and con(cid:42)ngent considera(cid:42)on accre(cid:42)on expenses totaling $6.5 million in ﬁscal 2016 associatedwith the Fiscal 2016 Acquisi(cid:42)ons. Addi(cid:42)onally, the Medical Device segment incurred $3.5 million in higher SG&A and R&D expenses as a result of our Fiscal2016 Acquisitions.In Vitro Diagnos(cid:41)cs. Opera(cid:42)ng income in our IVD segment increased by 17% in ﬁscal 2017 as compared with ﬁscal 2016 resul(cid:42)ng from higher productgross margins as product sales increased by $1.0 million, par(cid:42)ally oﬀset by a related product cost increase of $0.1 million, as well as lower SG&A costs andacquired intangible amor(cid:42)za(cid:42)on expense. Fiscal 2017 opera(cid:42)ng income beneﬁted from increased demand in most product categories, oﬀse(cid:86)ng a revenuedecline from a signiﬁcant microarray customer that was acquired by one of its compe(cid:42)tors. Product gross margins increased from 64.3% in ﬁscal 2016 to 65.4%in 2017 due to favorable product mix. Operating income benefited from increased operating leverage from higher revenue.Opera(cid:42)ng income increased by 59% in ﬁscal 2016 compared with ﬁscal 2015 resul(cid:42)ng from higher product gross margins as product sales increased by$2.2 million, par(cid:42)ally oﬀset by a related product cost increase of $0.7 million, as well as lower SG&A costs. Fiscal 2016 opera(cid:42)ng income beneﬁted fromincreased demand across all product categories. Product gross margins were 64.3% and 63.7% in ﬁscal 2016 and 2015, respec(cid:42)vely. Direct SG&A expensesdecreased by $0.7 million in ﬁscal 2016 compared with ﬁscal 2015 as a result of lower legal expenses from the se(cid:48)lement of a legal ma(cid:48)er in the fourth quarterof fiscal 2015.Corporate. The Corporate category includes expenses for administra(cid:42)ve corporate func(cid:42)ons, such as execu(cid:42)ve, corporate accoun(cid:42)ng, legal, humanresources and Board of Directors related fees and expenses that have not been fully allocated to the Medical Device and In Vitro Diagnostics segments. Corporatealso includes expenses, such as li(cid:42)ga(cid:42)on, which if not speciﬁc to a segment are not allocated to our opera(cid:42)ng segments. The unallocated Corporate expenseopera(cid:42)ng loss was $8.1 million, $7.2 million and $6.6 million in ﬁscal 2017, 2016 and 2015, respec(cid:42)vely. The $0.9 million, or 12% increase in corporateexpenses in fiscal 2017 as compared with fiscal 2016 was due to increased professional services related to accounting, audit and legal services.35The $0.6 million, or 10% increase in corporate expenses in ﬁscal 2016 as compared with ﬁscal 2015 was due to a $0.9 million increase in stock-basedcompensation expense, offset by reductions in other corporate expenses.Liquidity and Capital ResourcesAs of September 30, 2017, we had working capital of $51.1 million, a $2.7 million increase from $48.4 million as of September 30, 2016. Working capitalis deﬁned by us as current assets minus current liabili(cid:42)es. The increase from the prior-year end is a result of a reduc(cid:42)on in accrued compensa(cid:42)on and amountsdue to customers, as well as strong fourth quarter revenue, resul(cid:42)ng in an increase in accounts receivable. Our cash and cash equivalents and available-for-saleinvestments totaled $48.3 million as of September 30, 2017, an increase of $1.6 million from $46.9 million as of September 30, 2016, principally associated withcash ﬂow from opera(cid:42)ng ac(cid:42)vi(cid:42)es of $14.1 million oﬀset by $6.4 million of plant and equipment expenditures, $4.7 million paid to repurchase our commonstock and $2.2 million of cash payments for taxes related to net share settlement of equity awards.The Company’s investment policy prohibits ownership of collateralized mortgage obliga(cid:42)ons, mortgage-backed deriva(cid:42)ves and other deriva(cid:42)ve securi(cid:42)eswithout prior wri(cid:48)en approval of the Board of Directors. Throughout 2017 and 2016, the Company made investments in short-term available for sale securi(cid:42)es,resul(cid:42)ng in an ending balance as of September 30, 2017 and 2016 of $31.8 million and $22.0 million, respec(cid:42)vely. Our investment policy requires that forinvestments with a dura(cid:42)on of greater than one year, no more than 5% of investments be held in any one credit or issue, excluding U.S. government andgovernment agency obliga(cid:42)ons. The primary investment objec(cid:42)ve of the por(cid:77)olio is to provide for the safety of principal and appropriate liquidity. Managementplans to con(cid:42)nue to direct its investment advisors to manage the Company’s securi(cid:42)es investments primarily for the safety of principal for the foreseeable futureas it continues to assess other investment opportunities and uses of its cash and securities investments, including those described below.On November 2, 2016, we entered into an Amended and Restated Credit Agreement (the "Credit Agreement") with Wells Fargo Bank, National Association(the "Bank"). The Credit Agreement increases availability under the secured revolving line of credit from $20.0 million to $30.0 million and extends the previousfacility by three years. The Company's obliga(cid:42)ons under the Credit Agreement are secured by substan(cid:42)ally all of its and its subsidiaries' assets, other thanintellectual property and real estate. The Company has also pledged the majority of the stock of its subsidiaries to secure such obligations. Interest expense underthe Credit Agreement accrues at a benchmark rate, plus an applicable margin ranging from 1.00% to 1.75% based on the Company's ra(cid:42)o of total funded debt toEBITDA (as defined in the Credit Agreement). A facility fee is payable quarterly on unused commitments at a rate of 0.15% per annum.The Credit Agreement contains aﬃrma(cid:42)ve and nega(cid:42)ve covenants customary for a transac(cid:42)on of this type which, among other things, require theCompany to meet certain ﬁnancial tests. The Credit Agreement also contains covenants which, among other things, limit the Company's ability to: incurunﬁnanced capital expenditures in an amount greater than $10.0 million in the aggregate during any ﬁscal year; incur addi(cid:42)onal debt; make certain investments;create or permit certain liens; create or permit restric(cid:42)ons on the ability of subsidiaries to pay dividends or make other distribu(cid:42)ons; consolidate or merge; andengage in other ac(cid:42)vi(cid:42)es customarily restricted in such agreements, in each case subject to excep(cid:42)ons permi(cid:48)ed by the Credit Agreement. The CreditAgreement also contains customary events of default, the occurrence of which would permit the Bank to terminate its commitment and accelerate the loans.While we have been in compliance with the Credit Agreement’s covenants since incep(cid:42)on, there is no assurance that we will con(cid:42)nue to be in compliance andour future ability to access funds under our credit facility may be limited. As of September 30, 2017, we had no borrowings outstanding under the line of credit.We also have entered into a three-year $5.0 million multicurrency overdraft facility in Ireland.We believe that our exis(cid:42)ng cash, cash equivalents and investments, will provide liquidity suﬃcient to fund our opera(cid:42)ons and planned capitalexpenditures in the next twelve months. There can be no assurance, however, that our business will con(cid:42)nue to generate cash ﬂows at current levels.Addi(cid:42)onally, disrup(cid:42)ons in ﬁnancial markets or an increase in interest rates may nega(cid:42)vely impact our ability to access capital in a (cid:42)mely manner and ona(cid:48)rac(cid:42)ve terms. In the event Creagh Medical begins to generate taxable income in future years, repatria(cid:42)on of its earnings may result in substan(cid:42)al U.S. tax cost.Our current plans do not foresee a need to repatriate funds as we have designated these funds as permanently reinvested in order to fund our opera(cid:42)ons ormeet currently anticipated liquidity and capital investment needs.36The following table depicts our cash flows provided by operating activities from continuing operations for fiscal 2017, 2016 and 2015: For the Years Ended September 30, 2017 2016 2015 (dollars in thousands) Net income $3,926 $9,985 $11,947 Depreciation and amortization 5,555 4,873 2,805 Stock-based compensation 3,472 3,844 2,381 Contingent consideration (gain) expense (127) 1,492 — Unrealized foreign exchange loss 474 444 — Deferred taxes 1,000 261 93 Impairment losses on intangible assets 427 — — Impairment loss on strategic investment — — 1,500 Net other operating activities 171 (567) (963)Net change in other operating assets and liabilities (845) 4,834 (2,697)Net cash provided by operating activities from continuing operations $14,053 $25,166 $15,066 Operating Activities. We generated cash ﬂows from opera(cid:42)ng ac(cid:42)vi(cid:42)es from con(cid:42)nuing opera(cid:42)ons of $14.1 million, $25.2 million and $15.1 million infiscal 2017, 2016 and 2015, respectively. Opera(cid:42)ng cash ﬂow is primarily generated by net income as adjusted for non-cash expenses (beneﬁts) for deprecia(cid:42)onand amor(cid:42)za(cid:42)on, con(cid:42)ngent considera(cid:42)on gain, unrealized foreign exchange loss, stock-based compensa(cid:42)on and deferred taxes. Deferred tax asset reduc(cid:42)onsduring ﬁscal 2017 were primarily related to changes in tax deprecia(cid:42)on methods for certain long-lived assets and posi(cid:42)vely impacted cash ﬂows by $1.0 million,as compared with $0.3 million in the prior-year period. Net expense from changes in the fair value of our con(cid:42)ngent considera(cid:42)on obliga(cid:42)ons, includingaccre(cid:42)on expense, gains on fair value adjustments, and the eﬀects of foreign currency exchange rate losses, declined by $1.6 million from ﬁscal 2016 to ﬁscal2017 as a result of previously discussed gains from reductions in the estimated fair value of these liabilities.Net changes in opera(cid:42)ng assets and liabili(cid:42)es in ﬁscal 2017 had a nega(cid:42)ve impact on cash ﬂows of ($0.8) million as compared with a posi(cid:42)ve impact of$4.8 million in fiscal 2016. Significant changes in operating assets and liabilities during these periods included: •Cash (used) provided by accounts receivable was ($0.5) million in ﬁscal 2017, compared with $0.9 million in ﬁscal 2016, which beneﬁted from a$2.4 million customer payment due in the fourth quarter of ﬁscal 2015 and paid in the ﬁrst quarter of ﬁscal 2016. Fiscal 2017 cash ﬂows werenega(cid:42)vely impacted by increased accounts receivable balances as product sales increased during the ﬁscal 2017 fourth quarter as compared withsame fiscal 2016 period. •Cash used for prepaids and other current assets totaled ($0.6) million in ﬁscal 2017 as compared with cash provided of $0.4 million in ﬁscal 2016.The change was primarily driven by $0.7 million of increased research and development tax credit assets and other reimbursable R&D expensesincluded in prepaids and other current assets as of September 30, 2017 as compared with the prior year-end. •Cash provided by overpaid customer royal(cid:42)es and license fees totaled $0.1 million during ﬁscal 2017, as compared with $1.7 million in ﬁscal 2016.These overpayments primarily relate to the previously disclosed patent expira(cid:42)ons. The reduc(cid:42)on in these amounts reﬂects improved customerroyalty reporting and settlements of customer overpayments. •Cash used for payments of accrued incen(cid:42)ve compensa(cid:42)on increased by ($0.5) million from ﬁscal 2016 to ($1.3) million during ﬁscal 2017 as theresult of incen(cid:42)ve compensa(cid:42)on payments related to the improved achievement of performance objec(cid:42)ves in ﬁscal 2016 versus ﬁscal 2015.Reduc(cid:42)ons in accrued compensa(cid:42)on from ﬁscal 2016 to ﬁscal 2017 were oﬀset by increased accrued professional fees, including clinical trialexpenses, in fiscal 2017 as compared with the prior year.Inves(cid:41)ng Ac(cid:41)vi(cid:41)es. We used cash in inves(cid:42)ng ac(cid:42)vi(cid:42)es from con(cid:42)nuing opera(cid:42)ons of ($16.2) million and ($55.5) million in ﬁscal 2017 and 2016,respec(cid:42)vely, and we generated cash ﬂows from inves(cid:42)ng ac(cid:42)vi(cid:42)es from con(cid:42)nuing opera(cid:42)ons of $16.7 million in ﬁscal 2015. We invested $6.4 million, $8.2million and $1.9 million in property and equipment in ﬁscal 2017, 2016 and 2015, respec(cid:42)vely. Fiscal 2017 capital expenditures were primarily related toinvestments in property and equipment to facilitate our whole-products strategy, including the expansion of R&D and manufacturing clean rooms as well as ananalytical lab in our Irish37facility. Fiscal 2016 capital expenditures included our purchase of the Irish facility for $2.8 million and our acquisi(cid:42)ons of Creagh Medical and NorMedix for$25.9 million of net cash. We purchased available-for-sale securi(cid:42)es totaling $9.8 million and $22.0 million, net of sales proceeds, in ﬁscal 2017 and 2016,respec(cid:42)vely. In ﬁscal 2016 we received $0.5 million upon the sale of a strategic investment. In ﬁscal 2015, we received cash proceeds aggrega(cid:42)ng $18.3 millionnet, from sales of available-for-sale securi(cid:42)es as we adjusted our investment por(cid:77)olio toward a liquid, short-term por(cid:77)olio as we contemplated strategicacquisitions. In addition, we received cash proceeds of $0.5 million from our sale of Intersect ENT shares in fiscal 2015.Financing Activities. We used cash ﬂows from ﬁnancing ac(cid:42)vi(cid:42)es from con(cid:42)nuing opera(cid:42)ons of ($6.5) million, ($0.2) million and ($19.7) million in ﬁscal2017, 2016 and 2015, respec(cid:42)vely. The primary ﬁnancing ac(cid:42)vi(cid:42)es in ﬁscal 2017 were the repurchase of common stock under our stock repurchaseauthoriza(cid:42)on for $4.7 million and $2.2 million to purchase common stock to pay employee taxes resul(cid:42)ng from both stock op(cid:42)on exercise and issuance ofcommon shares associated with our 2014-2016 performance share program. The primary ﬁnancing ac(cid:42)vi(cid:42)es in ﬁscal 2016 related to the payment of con(cid:42)ngentconsidera(cid:42)on required by the terms of a prior-year acquisi(cid:42)on in our IVD segment and payments of $0.4 million to purchase common stock to pay employeetaxes resul(cid:42)ng primarily from the issuance of common shares associated with our ﬁscal 2013-2015 performance share program. The primary ﬁnancing ac(cid:42)vityin ﬁscal 2015 was related to the repurchase of common stock of $20.0 million and payments of $0.8 million to purchase common stock to pay employee taxesresul(cid:42)ng primarily from the issuance of common shares associated with our ﬁscal 2012-2014 performance share program. We also generated $0.4 million, $0.5million and $0.7 million in fiscal 2017, 2016 and 2015, respectively, from the sale of common stock pursuant to our stock-based compensation arrangements.On November 6, 2015, the Company’s Board of Directors authorized it to repurchase up to an addi(cid:42)onal $20.0 million (“ﬁscal 2016 authoriza(cid:42)on”) ofthe Company’s outstanding common stock in open-market purchases, privately nego(cid:42)ated transac(cid:42)ons, block trades, accelerated share repurchase (“ASR”)transactions, tender offers or by any combination of such methods. This share repurchase program does not have a fixed expiration date.On November 5, 2014, the Company’s Board of Directors authorized it to repurchase up to $30.0 million (“ﬁscal 2015 authoriza(cid:42)on”) of the Company’soutstanding common stock in open-market purchases, privately nego(cid:42)ated transac(cid:42)ons, block trades, accelerated share repurchase transac(cid:42)ons, tender oﬀersor by any combina(cid:42)on of such methods. An aggregate of $5.3 million remains outstanding under this authoriza(cid:42)on. This share repurchase program does nothave a fixed expiration date.During ﬁscal 2017, we paid $4.7 million to repurchase 196,190 common shares in open market purchases at an average price of $23.97 per share.During ﬁscal 2015, the Company entered into an accelerated share repurchase program (“ASR”) with Wells Fargo Bank, Na(cid:42)onal Associa(cid:42)on. In the aggregate,the Company purchased 847,864 shares under the ASR program for an average price of $23.59 per share. Based on the facts associated with the agreement, theforward contract was indexed to the Company’s common stock and met the U.S. GAAP requirements to be classiﬁed as permanent equity. The contract wascompleted July 8, 2015.As of December 2, 2017, the Company has an aggregate of $25.3 million available for future common stock purchases under the current authorization.Customer Concentrations. Our licensed technologies provide royalty revenue, which represents the largest revenue stream to us. We have licenses with adiverse base of customers and certain customers have mul(cid:42)ple products using our technology. Medtronic is our largest customer at approximately 18% of totalconsolidated revenue for ﬁscal 2017. Medtronic has several separately licensed products that generate royalty revenue for Surmodics, none of whichrepresented more than 4% of our total revenue. No other individual customer using licensed technology constitutes more than 10% of our total revenue.Our licensing agreements with many of our customers, including most of our signiﬁcant customers, cover many licensed products that each separatelygenerates royalty revenue. This structure reduces the poten(cid:42)al risk to our opera(cid:42)ons that may result from reduced sales (or the termina(cid:42)on of a license) of asingle product for any specific customer.Off-Balance Sheet Arrangements and Contractual Obligations. As of September 30, 2017, we did not have any off-balance sheet arrangements.Presented below is a summary of contractual obliga(cid:42)ons as of September 30, 2017 and payments due under these arrangements by period (inthousands). See Note 11 to the consolidated ﬁnancial statements in “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-Kfor additional information regarding the below obligations.38 (dollars in thousands) Total Less than1 Year 1-3 Years 4-5 Years More than5 Years Operating leases (1) $273 $114 $147 $12 $— Contingent consideration (2) 18,870 1,750 17,120 — — Minimum annual royalty obligation (3) 2,360 236 472 472 1,180 Clinical trial CRO obligations (4) 23,208 4,218 12,344 3,883 2,763 Total $44,711 $6,319 $30,082 $4,367 $3,943 (1)Opera(cid:42)ng lease obliga(cid:42)ons do not reﬂect contractual obliga(cid:42)ons for the lease of an R&D facility in Eden Prairie, Minnesota, which we executed inNovember 2018. This lease requires escalating annual payments of approximately $0.4 million over a ten-year term. (2)In connec(cid:42)on with the acquisi(cid:42)on of Creagh Medical, we are con(cid:42)ngently liable for milestone payments aggrega(cid:42)ng up to €12.0 million (approximately$14.2 million as of September 30, 2017) to be paid in the quarter ending December 31, 2018. The con(cid:42)ngent considera(cid:42)on related to the Creagh Medicalacquisi(cid:42)on is denominated in Euros and not hedged. In connec(cid:42)on with the acquisi(cid:42)on of NorMedix, we are con(cid:42)ngently liable for milestone paymentsaggrega(cid:42)ng up to $7.0 million, which are payable as earned. While it is not certain if and/or when these payments will be made, the maturity dates includedin this table reﬂect our best es(cid:42)mates. See Note 3 to the consolidated ﬁnancial statements in “Item 8. Financial Statements and Supplementary Data” in thisAnnual Report on Form 10-K for additional information regarding the Fiscal 2016 Acquisitions and the related contingent consideration liabilities.(3) Minimum annual royalty obliga(cid:42)on relates to payments associated with an in-bound license agreement whereby we pay, at a minimum, €200,000 euros(equivalent to approximately $236,000 as of September 30, 2017) to gain access to polymer technology which is u(cid:42)lized in a drug delivery customerlicense. The agreement includes an early termina(cid:42)on clause. However, the future obliga(cid:42)ons above are presented through September 2027, the remainingterm of the agreement, as it is not currently more likely than not that the agreement will be terminated early.(4)Clinical trial clinical research organiza(cid:42)on (“CRO”) obliga(cid:42)ons represent contractual periodic payments for services performed and milestone payments tothird-party CROs for clinical trials. The (cid:42)ming of payments and recogni(cid:42)on of expenses under these contracts is dependent on enrollment in our ongoingclinical trials and may be diﬀerent from the amounts presented, which are es(cid:42)mated based on projected enrollment rates. The aggregate future contractualobligation under this arrangement is $23.2 million as of September 30, 2017.As of September 30, 2017, our gross liability, including interest and penal(cid:42)es, for uncertain tax posi(cid:42)ons was $1.5 million. We are not able to reasonablyes(cid:42)mate the amount by which the liability will increase or decrease over an extended period of (cid:42)me or whether a cash se(cid:48)lement of the liability will be required.Therefore, these amounts have been excluded from the schedule of contractual obligations above.In addi(cid:42)on, we may be required to pay stock considera(cid:42)on of up to 480,059 of our common shares related to another business acquisi(cid:42)on, con(cid:42)ngenton future achievement of certain development objec(cid:42)ves of the acquired business. The (cid:42)ming and amount is uncertain, thus we are not able to reasonablyes(cid:42)mate whether se(cid:48)lement of the con(cid:42)ngent liability will be required. Therefore, this amount has been excluded from the schedule of contractual obliga(cid:42)onsabove.New Accounting PronouncementsAccounting Standards to be AdoptedIn May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts withCustomers (ASC Topic 606). Principles of this guidance require en(cid:42)(cid:42)es to recognize revenue in a manner that depicts the transfer of goods or services tocustomers in amounts that reﬂect the considera(cid:42)on an en(cid:42)ty expects to be en(cid:42)tled to in exchange for those goods or services. The guidance also requiresexpanded disclosures rela(cid:42)ng to the nature, amount, (cid:42)ming, and uncertainty of revenue and cash ﬂows arising from contracts with customers. Addi(cid:42)onally,qualita(cid:42)ve and quan(cid:42)ta(cid:42)ve disclosures are required about customer contracts, signiﬁcant judgments and changes in judgments, and assets recognized from thecosts to obtain or fulﬁll a contract. This accoun(cid:42)ng standard will be eﬀec(cid:42)ve for us beginning in the ﬁrst quarter of ﬁscal year 2019 (October 1, 2018) using oneof two prescribed retrospec(cid:42)ve methods. We are currently evalua(cid:42)ng the impact that the adop(cid:42)on of this standard will have on our business model andconsolidated results of operations, cash flows and financial position. We currently39plan to adopt the standard using the modiﬁed retrospec(cid:42)ve approach and expect the impact will be material to the consolidated ﬁnancial statements due to ananticipated one-quarter accelera(cid:42)on of minimum license fees and royalty revenue earned under its hydrophilic license agreements, as well as several addi(cid:42)onalrequired ﬁnancial statement footnote disclosures. Under the modiﬁed retrospec(cid:42)ve approach, we will apply the new revenue standard to all new revenuecontracts ini(cid:42)ated on or a(cid:79)er the eﬀec(cid:42)ve date, and, for contracts which have remaining obliga(cid:42)ons as of the eﬀec(cid:42)ve date, we will enter an adjustment to theopening balance of retained earnings.In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC Topic 842). The new guidance primarily aﬀects lessee accoun(cid:42)ng, while accoun(cid:42)ng bylessors will not be signiﬁcantly impacted by the update. The update maintains two classiﬁca(cid:42)ons of leases: ﬁnance leases, which replace capital leases, andopera(cid:42)ng leases. Lessees will need to recognize a right-of-use asset and a lease liability on the statement of ﬁnancial posi(cid:42)on for those leases previously classiﬁedas opera(cid:42)ng leases under the old guidance. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject toadjustment, such as for direct costs. The accoun(cid:42)ng standard will be eﬀec(cid:42)ve for us beginning the ﬁrst quarter of ﬁscal year 2020 (October 1, 2019) using amodiﬁed retrospec(cid:42)ve approach. Based on lease contracts in place as of December 1, 2017, we believe the impact will be material due to the right-of-use assetsand lease liabilities that will be recorded on our consolidated balance sheets upon adoption of the standard.In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (ASU Topic 326), Measurement of Credit Losses on FinancialStatements. This accoun(cid:42)ng standard requires a ﬁnancial asset (or a group of ﬁnancial assets) measured at an amor(cid:42)zed cost basis to be presented at the netamount expected to be collected. The allowance for credit losses is a valua(cid:42)on account that is deducted from the amor(cid:42)zed cost basis of the ﬁnancial asset(s) topresent the net carrying value at the amount expected to be collected on the ﬁnancial asset. The accoun(cid:42)ng standard will be eﬀec(cid:42)ve for us beginning in the ﬁrstquarter of ﬁscal 2020 (October 1, 2019), and early adop(cid:42)on is permi(cid:48)ed. We currently are evalua(cid:42)ng the impact that the adop(cid:42)on of this standard will have onthe Company’s results of opera(cid:42)ons, cash ﬂows and ﬁnancial posi(cid:42)on. Based on a preliminary assessment, we currently es(cid:42)mate the impact will not be materialas we historically have not had significant collectability concerns with our customers.Accounting Standards AdoptedIn August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classiﬁca(cid:41)on of Certain Cash Receipts and Cash Payments. Thenew guidance clariﬁes requirements for presenta(cid:42)on and classiﬁca(cid:42)on of the following items within the statement of cash ﬂows: debt prepayments, se(cid:48)lementof zero coupon debt instruments, con(cid:42)ngent considera(cid:42)on payments, insurance proceeds, securi(cid:42)za(cid:42)on transac(cid:42)ons and distribu(cid:42)ons from equity methodinvestees. The update also addresses classiﬁca(cid:42)on of transac(cid:42)ons that have characteris(cid:42)cs of more than one class of cash ﬂows. We early-adopted thisaccoun(cid:42)ng standard in the fourth quarter of ﬁscal 2017 with no material impact on our consolidated statement of cash ﬂows. Under the guidance, if and whenour con(cid:42)ngent considera(cid:42)on liabili(cid:42)es are paid, a por(cid:42)on of the payment will be classiﬁed as cash ﬂows from opera(cid:42)ons, with the remainder classiﬁed as cashflows from financing activities.In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The newguidance removes Step 2 of the goodwill impairment test, which required a hypothe(cid:42)cal purchase price alloca(cid:42)on. A goodwill impairment will now be deﬁned asthe amount by which a repor(cid:42)ng unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. We early-adopted this accoun(cid:42)ngstandard in the fourth quarter of ﬁscal 2017 with no impact on our consolidated ﬁnancial statements, as we have not been required to complete Step 2 of thegoodwill impairment test.No other new accounting pronouncement issued or effective has had, or is expected to have, a material impact on our consolidated financial statements.ITEM 7A. 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 investmentsconsist principally of commercial paper instruments and corporate bonds with varying maturity dates, all of which are less than one year. Because of the creditcriteria of our investment policies, the primary market risk associated with these investments is interest rate risk. Surmodics does not use deriva(cid:42)ve ﬁnancialinstruments to manage interest rate risk or to speculate on future changes in interest rates. As of September 30, 2017, the Company did not have anyoutstanding borrowings on its credit facility and owned no interest-bearing securi(cid:42)es with more than ten months remaining (cid:42)ll maturity, and therefore a onepercentage point increase in interest rates would not have a material impact on the results of opera(cid:42)ons or cash ﬂows. Our policy also allows the Company tohold a substantial portion of funds in cash and cash equivalents, which are defined as financial40instruments with original maturi(cid:42)es of three months or less and may include money market instruments, cer(cid:42)ﬁcates of deposit, repurchase agreements,corporate bonds and commercial paper instruments.Management believes that a change in raw material prices would not have a material impact on future earnings or cash ﬂows because our inventoryexposure is not material.With the Creagh Medical acquisition in November 2015, we are exposed to increasing Euro currency risk with respect to our manufacturing operations inIreland. In a period where the U.S. dollar is strengthening or weakening as compared with the Euro, our revenue and expenses denominated in Euro’s aretranslated into U.S. dollars at a lower or higher value than they would be in an otherwise constant currency exchange rate environment. During ﬁscal 2017 andﬁscal 2016, we recognized $0.5 million and $0.4 million, respec(cid:42)vely, in foreign currency losses which were primarily related to this Euro-denominatedobliga(cid:42)on. Prior to this acquisi(cid:42)on, our interna(cid:42)onal opera(cid:42)ons consisted primarily of sales of reagent and stabiliza(cid:42)on chemicals and changes in foreigncurrencies rela(cid:42)ve to the U.S. Dollar did not have a signiﬁcant eﬀect on our opera(cid:42)ons. All sales transac(cid:42)ons are denominated in U.S. dollars or Euros. Wegenerate royalty revenue from customers’ product sales in foreign jurisdic(cid:42)ons. Royal(cid:42)es generated in foreign jurisdic(cid:42)ons by customers are converted and paidin U.S. dollars per contractual terms. Substan(cid:42)ally all of our purchasing transac(cid:42)ons are denominated in U.S. Dollars or Euros. To date, we have not entered intoany foreign currency forward exchange contracts or other deriva(cid:42)ve ﬁnancial instruments to hedge the eﬀects of adverse ﬂuctua(cid:42)ons in foreign currencyexchange.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.The consolidated balance sheets as of September 30, 2017 and 2016 and the consolidated statements of income, comprehensive income, stockholders’equity and cash ﬂows for each of the three years in the period ended September 30, 2017, together with Report of Independent Registered Public Accoun(cid:42)ngFirm and related notes (including selected unaudited quarterly financial data) begin on page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.None.ITEM 9A. CONTROLS AND PROCEDURES.1.Disclosure Controls and Procedures.The Company maintains disclosure controls and procedures as deﬁned in Rules 13a-15(e) and 15d-15(e) of the Securi(cid:42)es Exchange Act of 1934, asamended (the “Exchange Act”) that are designed to ensure that informa(cid:42)on required to be disclosed in our reports ﬁled under the Exchange Act, is recorded,processed, summarized and reported within the (cid:42)me periods speciﬁed in the SEC’s rules and forms, and that such informa(cid:42)on is accumulated andcommunicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.In designing and evalua(cid:42)ng the disclosure controls and procedures, management recognizes that any controls and procedures, no ma(cid:48)er how welldesigned and operated, can provide only reasonable assurance of achieving the desired control objec(cid:42)ves, and no evalua(cid:42)on can provide absolute assurancethat all control issues and instances of fraud, if any, within the company have been detected.The Company’s management, under the supervision and with the par(cid:42)cipa(cid:42)on of the Company’s Chief Execu(cid:42)ve Oﬃcer and Chief Financial Oﬃcer,referred to collec(cid:42)vely herein as the Cer(cid:42)fying Oﬃcers, carried out an evalua(cid:42)on of the eﬀec(cid:42)veness of the design and opera(cid:42)on of the Company’s disclosurecontrols and procedures as of September 30, 2017, the end of the period covered by this Annual Report on Form 10-K. Based on that evalua(cid:42)on, the Cer(cid:42)fyingOﬃcers concluded that the Company’s disclosure controls and procedures (as deﬁned in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were eﬀec(cid:42)ve asof September 30, 2017, as designed and implemented to ensure that informa(cid:42)on required to be disclosed by the Company in reports that it ﬁles under theExchange Act is recorded, processed, summarized and reported within the (cid:42)me period speciﬁed in the Securi(cid:42)es Exchange Commission rules and forms, and toensure that informa(cid:42)on required to be disclosed by the Company in the reports the Company ﬁles or submits under the Exchange Act is accumulated andcommunicated to the Company’s management, including its Certifying Officers, as appropriate, to allow timely decisions regarding required disclosures.412.Internal Control over Financial Reporting.a. Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internalcontrol over ﬁnancial repor(cid:42)ng, as deﬁned in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control over ﬁnancial repor(cid:42)ng is a processdesigned to provide reasonable assurance regarding the reliability of ﬁnancial repor(cid:42)ng and the prepara(cid:42)on of ﬁnancial statements for external purposes inaccordance with U.S. generally accepted accoun(cid:42)ng principles (“U.S. GAAP”). Our internal control over ﬁnancial repor(cid:42)ng includes those policies andprocedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reﬂect the transac(cid:42)ons and disposi(cid:42)ons of our assets;(ii) provide reasonable assurance that transac(cid:42)ons are recorded as necessary to permit prepara(cid:42)on of ﬁnancial statements in accordance with U.S. GAAP, andthat our receipts and expenditures are being made only in accordance with authoriza(cid:42)on of our management and directors; and (iii) provide reasonableassurance regarding preven(cid:42)on or (cid:42)mely detec(cid:42)on of unauthorized acquisi(cid:42)on, use or disposi(cid:42)on of assets that could have a material eﬀect on ourconsolidated financial statements.Management evaluated the design and opera(cid:42)ng eﬀec(cid:42)veness of the Company’s internal control over ﬁnancial repor(cid:42)ng based on the criteria establishedin Internal Control — Integrated Framework (2013) issued by the Commi(cid:48)ee of Sponsoring Organiza(cid:42)ons of the Treadway Commission. Based on the evalua(cid:42)on,management concluded that internal control over financial reporting was effective as of September 30, 2017.A material weakness (as deﬁned in Rule 12b-2 under the Exchange Act) is a deﬁciency, or combina(cid:42)on of deﬁciencies, in internal control over ﬁnancialrepor(cid:42)ng such that there is reasonable possibility that a material misstatement of the Company’s annual or interim ﬁnancial statements will not be prevented ordetected on a timely basis.A material weakness in the Company’s internal control over ﬁnancial repor(cid:42)ng was reported in “Item 9A. Controls and Procedures” of the Company’sAnnual Report on Form 10-K for the ﬁscal year ended September 30, 2016 because the Company did not have eﬀec(cid:42)ve transac(cid:42)onal and review controlsrelated to royalty revenue recogni(cid:42)on. The ineﬀec(cid:42)veness of these internal controls did not result in a restatement of previously issued interim or annualconsolidated ﬁnancial statements. This material weakness has been remediated as of September 30, 2017. Accordingly, management concluded that theCompany’s internal control over financial reporting and our internal control over financial reporting was effective as of September 30, 2017.The Company’s independent registered public accoun(cid:42)ng ﬁrm, Deloi(cid:48)e & Touche LLP, who audited the consolidated ﬁnancial statements included in thisAnnual Report on Form 10-K, has issued an a(cid:48)esta(cid:42)on report on the eﬀec(cid:42)veness of management’s internal control over ﬁnancial repor(cid:42)ng as of September 30,2017. This report states that internal control over financial reporting was effective and appears on page F-1 of this Annual Report on Form 10-K.42b. Changes in Internal Controls Over Financial Reporting.Except for the changes described below, that existed as of September 30, 2016, there were no changes in our internal control over ﬁnancial repor(cid:42)ngiden(cid:42)ﬁed in management’s evalua(cid:42)on pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended September 30, 2017 thatmaterially affected, or are reasonable likely to materially affect, our internal control over financial reporting.During ﬁscal 2016 and in the ﬁrst quarter of ﬁscal 2017, the Company’s management designed and implemented certain changes in processes andcontrols for the purpose of remedia(cid:42)ng the material weakness described above that existed as of September 30, 2016, and enhancing the Company’s internalcontrol over financial reporting as follows: •Enhanced the evalua(cid:42)on and analysis of royal(cid:42)es reported and/or paid by customers to determine the proper amount of revenue to be recognizedbased on terms of the relevant license agreement, including comparison of amounts reported by customers to management’s expectations. •Established quarterly mee(cid:42)ngs of a cross-func(cid:42)onal team from our Medical Device business development, accoun(cid:42)ng and legal departments toreview and evaluate license agreements and royalty revenue in order to identify circumstances that could impact royalty revenue recognition with anemphasis on the review of the analysis generated from the preceding control, new or amended licenses, licenses impacted by expired or expiringpatents, non-routine royalty revenue as well as the status of current customer inquiries related to reported and unpaid royalty revenue. •Augmented proactive communications with customers and internal departments related to patent expirations, license terms and license utilization. •Established a process for ongoing monitoring, review and conclusion of customer inves(cid:42)ga(cid:42)ons or inquiries. These ma(cid:48)ers are iden(cid:42)ﬁed from areview of customer license agreements, customer u(cid:42)liza(cid:42)on of the Company’s technology, royalty revenue repor(cid:42)ng and discussions withcustomers, among other things.Based on the observed opera(cid:42)ng eﬀec(cid:42)veness of the above controls, management has concluded that, as of September 30, 2017, the material weaknesshas been remediated.The foregoing has been approved by our management, including our Chief Execu(cid:42)ve Oﬃcer and Chief Financial Oﬃcer, who have been involved with thereassessment and analysis of our internal control over financial reporting.ITEM 9B. OTHER INFORMATION.None. 43PART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.The informa(cid:42)on required by Item 10 rela(cid:42)ng to directors, our audit commi(cid:48)ee, the nature of changes, if any, to procedures by which our shareholdersmay recommend nominees for directors, our code of ethics and compliance with Sec(cid:42)on 16(a) of the Exchange Act is incorporated herein by reference to thesec(cid:42)ons en(cid:42)tled “Elec(cid:42)on of Directors,” “Sec(cid:42)on 16(a) Beneﬁcial Ownership Repor(cid:42)ng Compliance,” “Corporate Governance — Code of Ethics and BusinessConduct,” “Corporate Governance — Corporate Governance and Nomina(cid:42)ng Commi(cid:48)ee; Procedures and Policy” and “Audit Commi(cid:48)ee Report,” which willappear in the Company’s Proxy Statement for its 2018 Annual Mee(cid:42)ng of Shareholders. The informa(cid:42)on required by Item 10 rela(cid:42)ng to execu(cid:42)ve oﬃcersappears in Part I of this Form 10-K.ITEM 11. EXECUTIVE COMPENSATION.The informa(cid:42)on required by Item 11 is incorporated herein by reference to the sec(cid:42)ons en(cid:42)tled “Execu(cid:42)ve Compensa(cid:42)on and Other Informa(cid:42)on,”“Compensa(cid:42)on Discussion and Analysis,” “Director Compensa(cid:42)on During Fiscal 2017” and “Organiza(cid:42)on and Compensa(cid:42)on Commi(cid:48)ee Report,” which willappear in the Company’s Proxy Statement for its 2018 Annual Meeting of Shareholders.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.The informa(cid:42)on required by Item 12 is incorporated herein by reference to the sec(cid:42)ons en(cid:42)tled “Principal Shareholders,” and “ManagementShareholdings” which will appear in the Company’s Proxy Statement for its 2018 Annual Meeting of Shareholders.Equity Compensation Plan InformationThe following table provides information related to the Company’s equity compensation plans in effect as of September 30, 2017:Plan Category (a)Number of Securities tobe Issued Upon Exerciseof Outstanding Options,Warrants and Rights (b)Weighted-AverageExercise Price ofOutstanding Options,Warrants and Rights (c)Number of SecuritiesRemaining Available forFuture Issuance UnderEquity CompensationPlans (Excluding SecuritiesReflected in Column (a)) Equity compensation plans approved by shareholders 1,302,465 (1) $16.57 (1) 888,546 (2)Equity compensation plans not approved by shareholders — N/A — Total 1,302,465 $16.57 888,546 (1)Excludes shares that may be issued under the Company’s amended and restated 1999 Employee Stock Purchase Plan, but includes amounts reserved forpreviously-granted restricted stock and performance share awards under the 2009 Equity Incentive Plan.(2)Includes 888,546 shares available for future issuance under the 2009 Equity Incen(cid:42)ve Plan. Excludes 205,734 shares available under the amended andrestated 1999 Employee Stock Purchase Plan.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.The informa(cid:42)on required by Item 13 is incorporated herein by reference to the sec(cid:42)ons en(cid:42)tled “Corporate Governance — Related Person Transac(cid:42)onApproval Policy” and “Corporate Governance — Majority of Independent Directors; Commi(cid:48)ees of Independent Directors,” which will appear in the Company’sProxy Statement for its 2018 Annual Meeting of Shareholders.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.The informa(cid:42)on required by Item 14 is incorporated herein by reference to the sec(cid:42)on en(cid:42)tled “Audit Commi(cid:48)ee Report,” which will appear in theCompany’s Proxy Statement for its 2018 Annual Meeting of Shareholders. 44PART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.(a) 1. Financial Statements The following statements are included in this report on the pages indicated: Page (s)Report of Independent Registered Public Accounting FirmF-2Consolidated Balance SheetsF-3Consolidated Statements of IncomeF-4Consolidated Statements of Comprehensive IncomeF-5Consolidated Statements of Stockholders’ EquityF-6Consolidated Statements of Cash FlowsF-7 to F-8Notes to Consolidated Financial StatementsF-9 to F-35 2. Financial Statement Schedule. See Schedule II — “Valua(cid:42)on and Qualifying Accounts” in this sec(cid:42)on of this Form 10-K. All other schedules are omi(cid:48)edbecause they are inapplicable, not required, or the information is in the consolidated financial statements or related notes.3. Lis(cid:41)ng of Exhibits. The exhibits which are ﬁled with this report or which are incorporated herein by reference are set forth in the Exhibit Indexfollowing the signature page. Surmodics, Inc.Valuation and Qualifying Accounts(In thousands) Description Balance atBeginning ofPeriod AdditionsCharged(Credited)to Expenses DeductionsFromReserves Balance atEnd ofPeriod Year Ended September 30, 2015: Allowance for doubtful accounts $42 $— $32 (a) $10 Year Ended September 30, 2016: Allowance for doubtful accounts $10 $9 $— (a) $19 Year Ended September 30, 2017: Allowance for doubtful accounts $19 $222 $11 (a) $230 (a)Uncollectible accounts written off and adjustments to the allowance.45UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549EXHIBIT INDEX TO FORM 10-KFor the Fiscal Year Ended September 30, 2017SURMODICS, INC. Exhibit 2.1 Agreement of Merger, dated January 18, 2005, with InnoRx, Inc. — incorporated by reference to Exhibit 2.1 to the Company’s on Form 8-Kfiled on January 24, 2005, SEC File No. 0-23837. 2.2 Share Purchase Agreement by and among Surmodics, Inc. and the shareholders of Creagh Medical Ltd. dated as of November 20, 2015 —incorporated by reference to Exhibit 2.1 to the Company’s 8-K dated November 27, 2015, SEC File No. 0-23837.2.3 Put and Call Op(cid:42)on Agreement by and among Surmodics, Inc. and the shareholders of Creagh Medical Ltd. dated as of November 20, 2015 —incorporated by reference to Exhibit 2.2 to the Company’s 8-K filed on, SEC File No. 0-23837.2.4 Stock Purchase Agreement, dated January 8, 2016, among Surmodics, Inc. and the shareholders of NorMedix, Inc. and Gregg Su(cid:48)on as Seller’sAgent — incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on January 13, 2016, SEC File No. 0-23837.3.1 Restated Ar(cid:42)cles of Incorpora(cid:42)on, as amended — incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Qfiled on July 29, 2016, SEC File No. 0-23837. 3.2 Restated Bylaws of Surmodics, Inc., as amended December 18, 2015 — incorporated by reference to Exhibit 3.2 of the Company’s CurrentReport on Form 8-K filed on December 23, 2015. 10.1* 2003 Equity Incen(cid:42)ve Plan (as amended and restated December 13, 2005) (adopted December 13, 2005 by the board of directors andapproved by the shareholders on January 30, 2006) — incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K ﬁled onFebruary 3, 2006, SEC File No. 0-23837. 10.2* Form of Surmodics, Inc. 2003 Equity Incen(cid:42)ve Plan Non-qualiﬁed Stock Op(cid:42)on Agreement — incorporated by reference to Exhibit 99.1 to theCompany’s Form 8-K/A filed on March 20, 2006, SEC File No. 0-23837. 10.3* Form of Surmodics, Inc. 2003 Equity Incen(cid:42)ve Plan Incen(cid:42)ve Stock Op(cid:42)on Agreement — incorporated by reference to Exhibit 99.2 to theCompany’s 8-K filed on March 20, 2006, SEC File No. 0-23837. 10.4* Form of Surmodics, Inc. 2003 Equity Incen(cid:42)ve Plan Restricted Stock Agreement — incorporated by reference to Exhibit 99.3 to the Company’sForm 8-K filed on March 20, 2006, SEC File No. 0-23837. 10.5* Form of Surmodics, Inc. 2003 Equity Incen(cid:42)ve Plan Performance Share Award Agreement — incorporated by reference to Exhibit 99.4 to theCompany’s Form 8-K filed on March 20, 2006, SEC File No. 0-23837. 10.6* Form of Surmodics, Inc. 2003 Equity Incen(cid:42)ve Plan Performance Unit Award (cash se(cid:48)led) Agreement — incorporated by reference toExhibit 99.5 to the Company’s Form 8-K filed on March 20, 2006, SEC File No. 0-23837. 10.7* Form of Surmodics, Inc. 2003 Equity Incen(cid:42)ve Plan Restricted Stock Unit Agreement — incorporated by reference to Exhibit 99.6 to theCompany’s Form 8-K filed on March 20, 2006, SEC File No. 0-23837. 10.8* Form of Surmodics, Inc. 2003 Equity Incen(cid:42)ve Plan Stock Apprecia(cid:42)on Rights (cash se(cid:48)led) Agreement — incorporated by reference toExhibit 99.7 to the Company’s Form 8-K filed on March 20, 2006, SEC File No. 0-23837. 10.9* Form of Surmodics, Inc. 2003 Equity Incen(cid:42)ve Plan Stock Apprecia(cid:42)on Rights (stock se(cid:48)led) Agreement — incorporated by reference toExhibit 99.8 to the Company’s Form 8-K filed on March 20, 2006, SEC File No. 0-23837. 10.10* Form of Incen(cid:42)ve Stock Op(cid:42)on Agreement for the Surmodics, Inc. 2009 Equity Incen(cid:42)ve Plan — incorporated by reference to Exhibit 10.2 tothe Company’s Form 8-K filed on February 12, 2010, SEC File No. 0- 23837. 10.11* Form of Non-Statutory Stock Op(cid:42)on Agreement for the Surmodics, Inc. 2009 Equity Incen(cid:42)ve Plan — incorporated by reference toExhibit 10.3 to the Company’s Form 8-K filed on February 12, 2010, SEC File No. 0-23837. 10.12* Form of Performance Share Agreement for the Surmodics, Inc. 2009 Equity Incen(cid:42)ve Plan — incorporated by reference to Exhibit 10.4 to theCompany’s Form 8-K filed on February 12, 2010, SEC File No. 0-23837. 10.13* Form of Restricted Stock Agreement for the Surmodics, Inc. 2009 Equity Incen(cid:42)ve Plan — incorporated by reference to Exhibit 10.5 to theCompany’s Form 8-K filed on February 12, 2010, SEC File No. 0-23837. 10.14* Form of Restricted Stock Agreement for the Surmodics, Inc. 2009 Equity Incen(cid:42)ve Plan — incorporated by reference to Exhibit 10.5 to theCompany’s Quarterly Report on Form 10-Q filed on February 4, 2015, SEC File No. 0-23837. 10.15* Surmodics, Inc. 2009 Equity Incen(cid:42)ve Plan (as amended and restated on February 17, 2016) — incorporated by reference to Appendix B tothe Company’s Deﬁni(cid:42)ve Proxy Statement for the annual mee(cid:42)ng of shareholders held on February 17, 2016 ﬁled on January 8, 2016, SEC FileNo. 0-23837. 10.16* Surmodics, Inc. 1999 Employee Stock Purchase Plan (as amended and restated on February 17, 2016) — incorporated by reference toAppendix D to the Company’s Deﬁni(cid:42)ve Proxy Statement for the annual mee(cid:42)ng of shareholders held on February 17, 2016 ﬁled on January 8,2016, SEC File No. 0-23837. 10.17** The Company’s Board Compensation Policy, Amended and Restated as of July 18, 2017. 10.18* Severance Agreement by and between Gary R. Maharaj and Surmodics, Inc. dated as of December 14, 2010 – incorporated by reference toExhibit 10.2 to the Company’s Form 10-Q filed on February 4, 2011, SEC File No. 0-23837. 10.19* Change of Control Agreement with Charles W. Olson dated February 9, 2012 — incorporated by reference to Exhibit 10.2 to the Company’sForm 8‑K filed on February 10, 2012, SEC File No. 0‑23837. 10.20* Amendment to Change of Control Agreement with Charles W. Olson dated February 9, 2012 — incorporated by reference to Exhibit 10.1 tothe Company’s Form 8‑K filed on February 13, 2015, SEC File No. 0‑23837. 10.21* Change of Control Agreement with Bryan K. Phillips dated February 9, 2012 — incorporated by reference to Exhibit 10.3 to the Company’sForm 8‑K filed on February 10, 2012, SEC File No. 0‑23837. 10.22* Amendment to Change of Control Agreement with Bryan K. Phillips dated February 9, 2015 — incorporated by reference to Exhibit 10.3 to theCompany’s Form 8‑K filed on February 13, 2015, SEC File No. 0‑23837. 10.23* Change of Control Agreement with Joseph J. S(cid:42)ch dated February 9, 2012 — incorporated by reference to Exhibit 10.4 to the Company’sForm 8‑K filed on February 10, 2012, SEC File No. 0‑23837. 10.24* Amendment to Change of Control Agreement with Joseph J. S(cid:42)ch dated February 9, 2015 — incorporated by reference to Exhibit 10.4 to theCompany’s Form 8‑K filed on February 13, 2015, SEC File No. 0‑23837. 10.25* Change of Control Agreement by and between Andrew D.C. LaFrence and Surmodics, Inc. dated as of December 17, 2012 — incorporated byreference to Exhibit 10.2 to the Company’s Form 8‑K filed on December 21, 2012, SEC File No. 0‑23837.46 10.26* Amendment to Change of Control Agreement by and between Andrew D.C. LaFrence and Surmodics, Inc. dated as of February 9, 2015 —incorporated by reference to Exhibit 10.2 to the Company’s Form 8‑K filed on February 13, 2015,SEC File No. 0‑23837. 10.27* 10.28* Form of Restricted Stock Unit Award Agreement (Non-Employee Director) for the Surmodics, Inc. 2009 Equity Incen(cid:42)ve Plan — incorporatedby reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed on May 8, 2014, SEC File No. 0‑23837. Form of Restricted Stock Unit Award Agreement (Non-Employee Director) for the Surmodics, Inc. 2009 Equity Incen(cid:42)ve Plan — incorporatedby reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on February 4, 2015, SEC File No. 0‑23837. 10.29* 10.30* Form of Deferred Stock Unit Master Agreement (Quarterly Awards) for the Surmodics, Inc. 2009 Equity Incen(cid:42)ve Plan — incorporated byreference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on February 8, 2013, SEC File No. 0‑23837. Form of Deferred Stock Unit Master Agreement (Quarterly Awards) for the Surmodics, Inc. 2009 Equity Incen(cid:42)ve Plan — incorporated byreference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on February 4, 2015, SEC File No. 0‑23837. 10.31* Form of Restricted Stock Unit Award Agreement (Employee) for the Surmodics, Inc. 2009 Equity Incen(cid:42)ve Plan — incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 22, 2016, SEC File No. 0‑23837. 10.32 Amended and Restated Credit Agreement dated November 2, 2016, by and between Surmodics, Inc., and Wells Fargo Bank, Na(cid:42)onalAssocia(cid:42)on — incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K ﬁled on November 7, 2016, SEC FileNo. 0‑23837. 10.33 Amended and Restated Revolving Line of Credit Note dated November 2, 2016 — incorporated by reference to Exhibit 10.2 to the Company’sForm 8-K filed on November 7, 2016, SEC File No. 0‑23837. 10.34 Le(cid:48)er Amendment to Amended and Restated Credit Agreement dated November 2, 2016 by and between Surmodics, Inc. and Wells FargoBank, Na(cid:42)onal Associa(cid:42)on – incorporated by reference into the Company’s Quarterly Report on Form 10-Q ﬁled on August 3, 2017. SEC FileNo. 0-23837. 10.35* Omnibus Amendment to Certain Equity Agreements with Non-Employee Directors under the Surmodics, Inc. 2009 Equity Incen(cid:42)ve Plan— incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on May 8, 2014, SEC File No. 0‑23837. 10.36* Form of Non-Statutory Stock Op(cid:42)on Agreement (Non-Employee Director) for the Surmodics, Inc. 2009 Equity Incen(cid:42)ve Plan — incorporatedby reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed on May 8, 2014, SEC File No. 0‑23837. 21 Subsidiaries of the Registrant.** 23 Consent of Deloitte & Touche LLP.** 24 Power of Attorney (included on signature page of this Form 10-K).** 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.** 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.** 32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** 32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.** 101.INS** XBRL Instance Document47 101.SCH** XBRL Taxonomy Extension Schema Document 101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF** XBRL Taxonomy Extension Definition Linkbase Document 101.LAB** XBRL Taxonomy Extension Label Linkbase Document 101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document *Management contract or compensatory plan or arrangement** Filed herewith 48SIGNATURESPursuant to the requirements of Sec(cid:42)on 13 or 15(d) of the Securi(cid:42)es Exchange Act of 1934, the Registrant has duly caused this Report to be signed on itsbehalf by the undersigned, thereunto duly authorized. SURMODICS, INC. By: /s/ Gary R. Maharaj Gary R. Maharaj President and Chief Executive Officer Dated: December 1, 2017Pursuant to the requirements of the Securi(cid:42)es Exchange Act of 1934, this Report has been signed below by the following persons on behalf of theRegistrant, in the capacities, and on the dates indicated.(Power of Attorney)Each person whose signature appears below authorizes GARY R. MAHARAJ or ANDREW D. C. LAFRENCE, and cons(cid:42)tutes and appoints said persons as hisor her true and lawful a(cid:48)orneys-in-fact and agents, with full power of subs(cid:42)tu(cid:42)on and resubs(cid:42)tu(cid:42)on, for him or her and in his or her name, place and stead, inany and all capaci(cid:42)es, to sign any or all amendments to this Annual Report on Form 10-K and to ﬁle the same, with all exhibits thereto, and other documents inconnec(cid:42)on therewith, with the Securi(cid:42)es and Exchange Commission, authorizing said persons and gran(cid:42)ng unto said a(cid:48)orneys-in-fact and agents, full powerand authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposesas he or she might or could do in person, hereby ra(cid:42)fying and conﬁrming all said a(cid:48)orneys-in-fact and agents, or his subs(cid:42)tute or subs(cid:42)tutes, may lawfully do orcause to be done by virtue thereof. Signature Title Date /s/ Gary R. MaharajGary R. Maharaj President and Chief ExecutiveOfficer (principal executive officer)and Director December 1, 2017 /s/ Andrew D.C. LaFrenceAndrew D.C. LaFrence Vice President of Finance and Information Systems andChief Financial Officer(principal financial officer and principal accountingofficer) December 1, 2017 /s/ Susan E. KnightSusan E. Knight Chairman of the Board of Directors December 1, 2017 /s/ José H. BedoyaJosé H. Bedoya Director December 1, 2017 /s/ David R. Dantzker, M.D.David R. Dantzker, M.D. Director December 1, 2017 /s/ Ronald B. KalichRonald B. Kalich Director December 1, 2017 /s/ Shawn T McCormickShawn T McCormick Director December 1, 2017/s/ Lisa Wipperman Heine Director December 1, 2017 49 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders ofSurmodics, Inc.Eden Prairie, MinnesotaWe have audited the internal control over financial reporting of Surmodics, Inc. and subsidiaries (the "Company") as of September 30, 2017, based oncriteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. TheCompany's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is toexpress an opinion on the Company's internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained inall material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive andprincipal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of thecompany's assets that could have a material effect on the financial statements.Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management overrideof controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies or procedures may deteriorate.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2017, basedon the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the TreadwayCommission.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financialstatements and financial statement schedule as of and for the year ended September 30, 2017 of the Company and our report dated December 1, 2017 whichexpressed an unqualified opinion on those consolidated financial statements and financial statement schedules./s/ DELOITTE & TOUCHE LLPMinneapolis, MinnesotaDecember 1, 2017 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders ofSurmodics, Inc.Eden Prairie, MinnesotaWe have audited the accompanying consolidated balance sheets of Surmodics, Inc. and subsidiaries (the "Company") as of September 30, 2017 and2016, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the three years in the periodended September 30, 2017. Our audits also included the financial statement schedule listed in the Index at Item 15. The consolidated financial statements andfinancial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financialstatements and financial statement schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Surmodics, Inc. and subsidiariesas of September 30, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2017,in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internalcontrol over financial reporting as of September 30, 2017, based on the criteria established in Internal Control — Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our report dated December 1, 2017 expressed an unqualified opinion on theCompany's internal control over financial reporting. /s/ DELOITTE & TOUCHE LLP Minneapolis, MinnesotaDecember 1, 2017 F-2 Surmodics, Inc. and SubsidiariesConsolidated Balance SheetsAs of September 30 2017 2016 (In thousands, except share andper share data) ASSETS Current Assets: Cash and cash equivalents $16,534 $24,987 Available-for-sale securities 31,802 21,954 Accounts receivable, net of allowance for doubtful accounts of $230 and $19 as of September 30, 2017 and 2016, respectively 7,211 6,869 Inventories 3,516 3,579 Income tax receivable 599 697 Prepaids and other 1,221 472 Total Current Assets 60,883 58,558 Property and equipment, net 22,942 19,601 Deferred income taxes 4,027 5,027 Intangible assets, net 20,562 22,525 Goodwill 27,282 26,555 Other assets 897 628 Total Assets $136,593 $132,894 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable $2,396 $1,622 Accrued liabilities: Compensation 3,822 5,418 Accrued other 1,835 2,170 Contingent consideration 1,750 925 Total Current Liabilities 9,803 10,135 Contingent consideration, less current portion 13,114 13,592 Other long-term liabilities 2,119 2,334 Total Liabilities 25,036 26,061 Commitments and Contingencies (Note 11) Stockholders’ Equity: Series A preferred stock — $.05 par value, 450,000 shares authorized; no shares issued and outstanding — — Common stock — $.05 par value, 45,000,000 shares authorized; 13,094,988 and 13,208,443 shares issued and outstanding, as of September 30, 2017 and 2016, respectively 655 660 Additional paid-in capital 5,413 6,754 Accumulated other comprehensive income 3,417 1,273 Retained earnings 102,072 98,146 Total Stockholders’ Equity 111,557 106,833 Total Liabilities and Stockholders’ Equity $136,593 $132,894 The accompanying notes are an integral part of these consolidated financial statements. F-3 Surmodics, Inc. and SubsidiariesConsolidated Statements of IncomeFor the Years Ended September 30 2017 2016 2015 (In thousands, exceptper share data) Revenue: Product sales $32,790 $30,999 $24,925 Royalties and license fees 31,787 33,203 31,763 Research, development and other 8,535 7,164 5,210 Total revenue 73,112 71,366 61,898 Operating costs and expenses: Product costs 11,422 10,908 8,619 Research and development 31,817 18,498 16,165 Selling, general and administrative 20,478 18,000 14,906 Acquisition transaction, integration and other costs — 3,187 — Acquired intangible asset amortization 2,419 2,422 619 Contingent consideration accretion (gain) expense (127) 1,492 — Claim settlement — — 2,500 Total operating costs and expenses 66,009 54,507 42,809 Operating income 7,103 16,859 19,089 Other (loss) income: Investment income, net 390 63 156 Foreign exchange loss (504) (481) — Impairment loss on strategic investment — — (1,500)Gains on strategic investments and other 44 507 496 Other (loss) income (70) 89 (848)Income before income taxes 7,033 16,948 18,241 Income tax provision (3,107) (6,963) (6,294)Net income $3,926 $9,985 $11,947 Basic net income per share: $0.30 $0.77 $0.92 Diluted net income per share: $0.29 $0.76 $0.90 Weighted average number of shares outstanding: Basic 13,153 12,998 13,029 Diluted 13,389 13,219 13,289 The accompanying notes are an integral part of these consolidated financial statements. F-4 Surmodics, Inc. and SubsidiariesConsolidated Statements of Comprehensive IncomeFor the Years Ended September 30 2017 2016 2015 (In thousands) Net income $3,926 $9,985 $11,947 Other comprehensive income (loss): Unrealized holding gains (losses) on available-for-sale securities, net of tax 49 (68) (1,208)Reclassification adjustment for realized gain included in net income, net of tax — — (315)Foreign currency translation adjustments 2,095 1,336 — Other comprehensive income (loss) 2,144 1,268 (1,523)Comprehensive income $6,070 $11,253 $10,424The accompanying notes are an integral part of these consolidated financial statements. F-5 Surmodics, Inc. and SubsidiariesConsolidated Statements of Stockholders’ EquityFor the Years Ended September 30 Accumulated Additional Other Total Common Stock Paid-In Comprehensive Retained Stockholders’ Shares Amount Capital Income Earnings Equity (In thousands) Balance at September 30, 2014 13,607 $680 $2,662 $1,528 $93,881 $98,751 Net income — — — — 11,947 11,947 Other comprehensive loss, net of tax — — — (1,523) — (1,523)Issuance of common stock 139 7 272 — — 279 Common stock repurchased (848) (42) (2,485) — (17,473) (20,000)Common stock options exercised, net 47 2 429 — — 431 Purchase of common stock to pay employee taxes — — (631) — (194) (825)Excess tax benefit from stock-based compensation plans — — 432 — — 432 Stock-based compensation — — 2,381 — — 2,381 Balance at September 30, 2015 12,945 647 3,060 5 88,161 91,873 Net income — — — — 9,985 9,985 Other comprehensive income, net of tax — — — 1,268 — 1,268 Issuance of common stock 74 4 266 — — 270 Common stock options exercised, net 196 10 1,536 — — 1,546 Purchase of common stock to pay employee taxes (7) (1) (1,952) — — (1,953)Stock-based compensation — — 3,844 — — 3,844 Balance at September 30, 2016 13,208 660 6,754 1,273 98,146 106,833 Net income — — — — 3,926 3,926 Other comprehensive income, net of tax — — — 2,144 — 2,144 Issuance of common stock 99 5 343 — — 348 Common stock options exercised, net 7 1 95 — — 96 Common stock repurchased (196) (10) (4,692) — — (4,702)Purchase of common stock to pay employee taxes (23) (1) (559) — — (560)Stock-based compensation — — 3,472 — — 3,472 Balance at September 30, 2017 13,095 $655 $5,413 $3,417 $102,072 $111,557 The accompanying notes are an integral part of these consolidated financial statements. F-6 Surmodics, Inc. and SubsidiariesConsolidated Statements of Cash FlowsFor the Years Ended September 30 2017 2016 2015 (In thousands) Operating Activities: Net income $3,926 $9,985 $11,947 Adjustments to reconcile net income to net cash provided by operating activities fromcontinuing operations: Depreciation and amortization 5,555 4,873 2,805 Stock-based compensation 3,472 3,844 2,381 Contingent consideration (gain) expense (127) 1,492 — Unrealized foreign exchange loss 474 444 — Impairment losses on intangible assets 427 — — Gains on sales of available-for-sale securities, net and strategic investments (43) (514) (492)Impairment loss on strategic investment — — 1,500 Deferred taxes 1,000 261 93 Excess tax benefit from stock-based compensation plans — — (432)Property and equipment disposal loss (gain) 6 (66) (39)Provision for bad debts 208 — — Other, net — 13 — Change in operating assets and liabilities, net of acquisitions and excluding the impact of discontinuedoperations: Accounts receivable (528) 911 (2,727)Inventories 97 (143) (162)Prepaids and other (599) 409 141 Accounts payable and accrued liabilities 368 3,710 373 Income taxes (59) 76 (309)Deferred revenue (124) (129) (13)Net cash provided by operating activities from continuing operations 14,053 25,166 15,066 Investing Activities: Purchases of property and equipment (6,432) (8,192) (1,877)Cash proceeds from sale of property and equipment — 89 42 Purchases of available-for-sale securities (73,671) (24,517) (3,376)Sales and maturities of available-for-sale securities 63,871 2,498 22,199 Payments for acquisition, net of cash acquired — (25,859) (270)Cash received from strategic investments 43 513 21 Cash transferred to discontinued operations — — (45)Net cash (used in) provided by investing activities from continuing operations (16,189) (55,468) 16,694 Financing Activities: Issuance of common stock 444 494 710 Repurchase of common stock (4,702) — (20,000)Purchases of common stock to pay employee taxes (2,156) (388) (825)Payment of deferred financing costs (96) — — Excess tax benefit from stock-based compensation plans — — 432 Payment of contingent consideration — (305) — Net cash used in financing activities from continuing operations (6,510) (199) (19,683)Effect of exchange rate changes on cash 193 (100) — Net cash (used in) provided by continuing operations (8,453) (30,601) 12,077 Discontinued Operations: Net cash used in operating activities — — (45)Net cash provided by financing activities — — 45 Net cash provided by discontinued operations — — — Net change in cash and cash equivalents (8,453) (30,601) 12,077 Cash and Cash Equivalents: Beginning of year 24,987 55,588 43,511 End of year $16,534 $24,987 $55,588The accompanying notes are an integral part of these consolidated financial statements.F-7 Surmodics, Inc. and SubsidiariesConsolidated Statements of Cash Flows - ContinuedFor the Years Ended September 30 2017 2016 2015 (In thousands) Supplemental Information: Cash paid for income taxes $2,114 $6,710 $6,510 Noncash financing and investing activities: Acquisition of property and equipment on account $109 $50 $22 Contingent consideration and debt assumed in acquisitions — 12,584 — Issuance of performance shares, restricted and deferred stock units 2,022 1,472 2,250 Accrual of employee taxes on common stock exercises — 1,585 — Accrual of business combination contingent consideration — — 305The accompanying notes are an integral part of these consolidated financial statements.F-8 Surmodics, Inc. and SubsidiariesNotes to Consolidated Financial Statements1. DescriptionSurmodics, Inc. and subsidiaries (“Surmodics” or the “Company”) is a leading provider of medical device and in vitro diagnos(cid:42)c technologies to thehealthcare industry. The Company derives its revenue from three primary sources: (1) royal(cid:42)es and license fees from licensing our proprietary surfacemodiﬁca(cid:42)on and device drug delivery technologies to customers; the vast majority (typically in excess of 90%) of revenue in the “royal(cid:42)es and license fees”category is in the form of royal(cid:42)es; (2) product revenue generated from reagent chemical sales to licensees; stabiliza(cid:42)on chemical, an(cid:42)gen, substrate and surfacecoa(cid:42)ng chemical sales to the diagnos(cid:42)c and biomedical research markets as well as medical device and related products (such as balloons and catheters) sales tooriginal equipment manufacturer (OEM) suppliers and distributors; and (3) research and commercial development fees generated on customer projects.Basis of PresentationThe consolidated ﬁnancial statements include all accounts and wholly-owned subsidiaries, and have been prepared in accordance with accoun(cid:42)ngprinciples generally accepted in the United States of America (“U.S.”) (“GAAP”). All inter-company transactions have been eliminated. 2. Summary of Significant Accounting Policies and Select Balance Sheet InformationCash and Cash EquivalentsCash and cash equivalents consist of ﬁnancial instruments with maturi(cid:42)es of three months or less at the Company’s acquisi(cid:42)on date of the security andare stated at cost which approximates fair value and may include money market instruments, cer(cid:42)ﬁcates of deposit, repurchase agreements and commercialpaper instruments.InvestmentsInvestments consisted principally of commercial paper and corporate bond securi(cid:42)es and are classiﬁed as available-for-sale as of September 30, 2017.Available-for-sale securi(cid:42)es are reported at fair value with unrealized gains and losses, net of tax, excluded from the consolidated statements of income andreported in the consolidated statements of comprehensive income as well as a separate component of stockholders’ equity in the 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 ofaccumulated other comprehensive income with a corresponding adjustment to other income (loss). This adjustment would result in a new cost basis for theinvestment. No such adjustments occurred during the ﬁscal years ended September 30, 2017, 2016 or 2015. Interest earned on debt securi(cid:42)es, includingamor(cid:42)za(cid:42)on of premiums and accre(cid:42)on of discounts, is included in other income (loss). Realized gains and losses from the sales of available-for-sale debtsecurities, which are included in other income (loss), are determined using the specific identification method.The amor(cid:42)zed cost, unrealized holding gains and losses, and fair value of available-for-sale securi(cid:42)es as of September 30, 2017 and 2016 were as follows(in thousands): September 30, 2017 (Dollars in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value Commercial paper and corporate bonds $31,817 $— $(15) $31,802 Total $31,817 $— $(15) $31,802 September 30, 2016 (Dollars in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value Commercial paper and corporate bonds $22,019 $— $(65) $21,954 Total $22,019 $— $(65) $21,954F-9 There were no held-to-maturity debt securi(cid:42)es as of September 30, 2017 or 2016 and no realized gains or losses on sales of available-for-sale securi(cid:42)esfor the ﬁscal years then ended. Realized gains and losses on sales of available-for-sale securi(cid:42)es totaled $0.5 million and $(0.1) million, respec(cid:42)vely, for the ﬁscalyear ended September 30, 2015.InventoriesInventories are principally stated at the lower of cost or market using the speciﬁc iden(cid:42)ﬁca(cid:42)on method and include direct labor, materials and overhead.Inventories consisted of the following components as of September 30 (in thousands): 2017 2016 Raw materials $1,603 $1,766 Work in-process 659 492 Finished products 1,254 1,321 Total $3,516 $3,579 Property and EquipmentProperty and equipment are stated at cost, less any impairment, and are depreciated using the straight-line method over the es(cid:42)mated useful lives of theassets. The Company recorded deprecia(cid:42)on expense of $3.0 million, $2.3 million and $2.0 million for the ﬁscal years ended September 30, 2017, 2016 and2015, respectively.The September 30, 2017 and 2016 balances in construc(cid:42)on-in-progress include the cost of enhancing the capabili(cid:42)es of the Company’s Ballinasloe,Ireland and Eden Prairie, Minnesota facili(cid:42)es. As assets are placed in service, construc(cid:42)on-in-progress is transferred to the speciﬁc property and equipmentcategories and depreciated over the estimated useful lives of the assets.Property and equipment consisted of the following components as of September 30 (in thousands): Useful Life 2017 2016 (In years) Land N/A $4,420 $4,359 Laboratory fixtures and equipment 3 to 10 19,491 15,243 Buildings and improvements 3 to 20 21,924 19,589 Office furniture and equipment 3 to 10 4,541 3,948 Construction-in-progress 2,493 3,441 Less accumulated depreciation (29,927) (26,979)Property and equipment, net $22,942 $19,601 Other AssetsOther assets consist principally of the following as of September 30 (in thousands): 2017 2016 ViaCyte, Inc. $479 $479 Other noncurrent assets 418 149 Other assets, net $897 $628 In February 2011, the stent technology of Nexeon MedSystems, Inc. (“Nexeon”) was acquired by CeloNova BioSciences, Inc. (“CeloNova”). Prior to theacquisi(cid:42)on by CeloNova, Nexeon created a wholly-owned subsidiary, Nexeon Stent, to hold the company’s stent-related assets. Nexeon distributed to itsstockholders the Nexeon Stent stock which was exchanged for Series B-1 preferred shares of CeloNova. CeloNova is a privately-held Texas-based medicaltechnology company that is marke(cid:42)ng a variety of medical products. The Company’s investment in CeloNova, which was accounted for under the cost method,represented less than a 2% ownership interest. The Company does not exert significant influence over CeloNova’s operating or financial activities. F-10 On November 10, 2015 Boston Scien(cid:42)ﬁc Corpora(cid:42)on announced its intent to acquire CeloNova’s interven(cid:42)onal radiology por(cid:77)olio for $70 million, pluspoten(cid:42)al milestone payments. The Company recognized an other-than-temporary impairment loss of $1.5 million related to its investment in CeloNova in thefourth quarter fiscal 2015 based on the indicated value of this transaction. As of September 30, 2017 and 2016, the carrying value of this investment is $0.The Company has invested a total of $5.3 million in ViaCyte, Inc. (“ViaCyte”), a privately-held California-based biotechnology ﬁrm that is developing aunique treatment for diabetes using coated islet cells, the cells that produce insulin in the human body. In ﬁscal 2006, the Company determined that itsinvestment 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 addi(cid:42)onal other-than-temporary impairment loss on this investment totaling $0.1 million basedon a ﬁnancing round and market valua(cid:42)ons. The balance of the investment of $0.5 million, which is accounted for under the cost method, represents less than a1% ownership interest. The Company does not exert significant influence over ViaCyte’s operating or financial activities.The Company transferred its original investment of $2,000 in Intersect ENT, Inc. (“Intersect ENT”) out of other assets to short-term available-for-saleinvestments upon comple(cid:42)on of Intersect ENT’s ini(cid:42)al public oﬀering (“IPO”) in July 2014. The Company recognized a gain on this investment in other income of$0.5 million during the year ended September 30, 2015 as the investment was sold. The total carrying value of cost method investments is reviewed quarterly for changes in circumstances or the occurrence of events that suggest theCompany’s investment may not be recoverable. The carrying value of cost method investments is not adjusted if there are no iden(cid:42)ﬁed events or changes incircumstances that may have a material adverse effect on the fair value of the investment.In the ﬁscal years ended September 30, 2017, 2016 and 2015, the Company recognized revenue of less than $0.1 million in each period from ac(cid:42)vitywith companies in which it had a strategic investment.Intangible AssetsIntangible assets consist principally of acquired patents and technology, customer lists and relationships, licenses and trademarks. The Company recordedamor(cid:42)za(cid:42)on expense of $2.6 million, $2.4 million and $0.8 million for the years ended September 30, 2017, 2016 and 2015, respec(cid:42)vely. During the year endedSeptember 30, 2016, the Company acquired 100% of the shares of both Creagh Medical Ltd. (“Creagh Medical”) and NorMedix, Inc. (“NorMedix”). Theseacquisi(cid:42)ons (collec(cid:42)vely, “Fiscal 2016 Acquisi(cid:42)ons”) resulted in an increase in customer lists and rela(cid:42)onships, developed technology and in-process researchand development (“IPR&D”) of $12.6 million, $8.7 million and $1.0 million, respec(cid:42)vely. During the year ended September 30, 2015, the Company acquiredcertain assets from ImmunO4, LLC resul(cid:42)ng in an increase in customer lists, non-compete and other intangible assets of $0.3 million, $0.2 million and $0.1million, respectively.Intangible assets consisted of the following as of September 30 (in thousands): 2017 Weighted AverageOriginal Life (Years) Gross CarryingAmount AccumulatedAmortization Net Definite-lived intangible assets: Customer lists and relationships 8.9 $18,293 $(7,834) $10,459 Developed technology 11.7 9,297 (1,478) 7,819 Non-compete 5.0 230 (103) 127 Patents and other 16.5 2,321 (1,423) 898 Subtotal 30,141 (10,838) 19,303 Unamortized intangible assets: In-process research and development 679 — 679 Trademarks and trade names 580 — 580 Total $31,400 $(10,838) $20,562 F-11 2016 Weighted AverageOriginal Life (Years) Gross CarryingAmount AccumulatedAmortization Net Definite-lived intangible assets: Customer lists and relationships 8.9 $17,692 $(6,123) $11,569 Core technology 8.0 530 (530) — Developed technology 11.8 8,724 (618) 8,106 Non-compete 5.0 230 (58) 172 Patents and other 16.5 2,321 (1,275) 1,046 Subtotal 29,497 (8,604) 20,893 Unamortized intangible assets: In-process research and development 987 — 987 Trademarks and trade names 645 — 645 Total $31,129 $(8,604) $22,525 Based on the intangible assets in service, excluding any possible future amor(cid:42)za(cid:42)on associated with acquired IPR&D, which has not met technologicalfeasibility as of September 30, 2017, estimated amortization expense for each of the next five fiscal years is as follows (in thousands): 2018 $2,661 2019 2,661 2020 2,486 2021 2,347 2022 2,307 Future amor(cid:42)za(cid:42)on amounts presented above are es(cid:42)mates. Actual future amor(cid:42)za(cid:42)on expense may be diﬀerent as a result of future acquisi(cid:42)ons,impairments, completion or abandonment of IPR&D intangible assets, changes in amortization periods, foreign currency exchange rates or other factors.The Company deﬁnes IPR&D as the value of technology acquired for which the related projects have substance and are incomplete. IPR&D acquired in abusiness acquisi(cid:42)on is recognized at fair value and is capitalized as an indeﬁnite-lived intangible asset un(cid:42)l comple(cid:42)on of the IPR&D project or abandonment.Upon comple(cid:42)on of the development project (generally when regulatory approval to market the product is obtained), an impairment assessment is performedprior to amor(cid:42)zing the asset over its es(cid:42)mated useful life. If the IPR&D projects are abandoned, the related IPR&D assets would be wri(cid:48)en oﬀ. The Companyassesses indeﬁnite-lived assets for impairment annually in the fourth quarter and whenever an event occurs or circumstances change that would indicate thatthe carrying amount may be impaired. Similar to the goodwill impairment test, the indeﬁnite-lived assets impairment test requires the Company to make severales(cid:42)mates about fair value, most of which are based on projected future cash ﬂows. The Company performed its annual impairment analysis as of August 31,2017 and the fair value of certain IPR&D and trade name assets were deemed to be less than their carrying value, due to decreases in es(cid:42)mated future revenueassociated with the assets. As a result, impairment losses of $0.3 million and $0.1 million were recorded in research and development and selling, general andadministra(cid:42)ve expenses, respec(cid:42)vely, in the consolidated statements of income for the year ended September 30, 2017. The Company performed its annualimpairment analysis as of August 31, 2016 and the fair value of a trade name asset was deemed to be less than its carrying value. As a result, an impairment lossof less than $0.1 million was recorded in selling, general and administra(cid:42)ve in the consolidated statements of income for the year ended September 30, 2016. Noother impairment losses were iden(cid:42)ﬁed during the annual impairment analyses. The valua(cid:42)on methodology for determining the decline in value of theseindeﬁnite-lived intangible assets was based on inputs that require management judgment and are Level 3 inputs, as discussed in Note 4 to the consolidatedfinancial statements.GoodwillGoodwill represents the excess of the cost of an acquired en(cid:42)ty over the fair value assigned to the assets purchased and liabili(cid:42)es assumed in connec(cid:42)onwith a company’s acquisi(cid:42)on. Goodwill is not amor(cid:42)zed but is subject, at a minimum, to annual tests for impairment in accordance with accoun(cid:42)ng guidance forgoodwill. The carrying amount of goodwill is evaluated annually, and between annual evalua(cid:42)ons if events occur or circumstances change indica(cid:42)ng that it ismore likely than not that the fair value of a reporting unit is less than its carrying amount.F-12 The Company’s repor(cid:42)ng units are the In Vitro Diagnos(cid:42)cs opera(cid:42)ons known as its In Vitro Diagnos(cid:42)cs unit which contains its BioFX branded productsand the Surmodics device drug delivery, hydrophilic coa(cid:42)ngs and medical device manufacturing opera(cid:42)ons known as the Medical Device unit. Inherent in thedetermina(cid:42)on of fair value of the repor(cid:42)ng units are certain es(cid:42)mates and judgments, including the interpreta(cid:42)on of current economic indicators and marketvaluations as well as the Company’s strategic plans with regard to its operations.The Company performed its annual impairment tests of goodwill as of August 31, 2017 and 2016, elected to perform the quan(cid:42)ta(cid:42)ve assessmentdescribed above for each of its repor(cid:42)ng units. The Company did not record any goodwill impairment charges as it was determined that the repor(cid:42)ng units’ fairvalues were greater than their carrying values. This impairment assessment is reliant on forecasted cash ﬂows, as well as the selected discount rate, which areinherently subjec(cid:42)ve and require signiﬁcant es(cid:42)mates. Diﬀerences in the repor(cid:42)ng units’ actual future opera(cid:42)ng results as compared with these forecastsestimates could materially affect the estimation of the fair value of the reporting units.In accordance with ASU 2017-04, which was prospec(cid:42)vely adopted eﬀec(cid:42)ve July 1, 2017, an impairment charge is recorded for the amount by which thecarrying value of the repor(cid:42)ng unit exceeds the fair value of the repor(cid:42)ng unit, as calculated in the quan(cid:42)ta(cid:42)ve analysis described above. The Company did notrecord any goodwill impairment charges using the newly adopted accoun(cid:42)ng principal in the ﬁscal year ended September 30, 2017. Prior to the adop(cid:42)on ofASU 2017-04, the measurement of an impairment (Step 2 of the impairment test) would have been calculated by determining the implied fair value of a reportingunit’s goodwill by alloca(cid:42)ng the fair value of the repor(cid:42)ng unit to all other assets and liabili(cid:42)es of that unit based on their rela(cid:42)ve fair values. The excess of thefair value of a repor(cid:42)ng unit over the amount assigned to its other assets and liabili(cid:42)es would have been the implied fair value of goodwill. The Company did notrecord any goodwill impairment charges using Step 2 of the impairment test in the fiscal years ended September 30, 2016 or 2015.Goodwill as of September 30, 2017 and 2016 totaled $27.3 million and $26.6 million, respec(cid:42)vely. Goodwill related to the In Vitro Diagnos(cid:42)cs repor(cid:42)ngunit represents the gross value from the acquisi(cid:42)on of BioFX Laboratories, Inc. in 2007. As part of the Fiscal 2016 Acquisi(cid:42)ons, the Medical Device repor(cid:42)ngsegment added $17.9 million of goodwill during ﬁscal 2016, $13.4 million of which was denominated in Euros and subject to revalua(cid:42)on due to ﬂuctua(cid:42)ons inexchange rates. The change in the carrying amount of goodwill by segment for the years ended September 30, 2017 and 2016 was as follows (in thousands): (Dollars in thousands) In VitroDiagnostics MedicalDevice Total Balance as of September 30, 2015 $8,010 $— $8,010 Additions (See Note 3) — 17,892 17,892 Foreign currency translation adjustment — 653 653 Balance as of September 30, 2016 8,010 18,545 26,555 Foreign currency translation adjustment — 727 727 Balance as of September 30, 2017 $8,010 $19,272 $27,282 Valuation of Long-Lived AssetsAccoun(cid:42)ng guidance requires the Company to evaluate periodically whether events and circumstances have occurred that may aﬀect the es(cid:42)mateduseful life or the recoverability of the remaining balance of long-lived assets, such as property and equipment and intangibles with ﬁnite lives. If such events orcircumstances were to indicate that the carrying amount of these assets may not be recoverable, the Company would es(cid:42)mate the future cash ﬂows expected toresult from the use of the assets and their eventual disposi(cid:42)on. If the sum of the expected future cash ﬂows (undiscounted and without interest charges) wereless than the carrying amount of the assets, the Company would recognize an impairment charge to reduce such assets to their fair value. In ﬁscal 2017, 2016and 2015, there were no impairment charges rela(cid:42)ng to the Company’s long-lived assets as there were no events or circumstances that occurred that aﬀectedthe recoverability of such assets. F-13 Accrued LiabilitiesOther accrued liabilities consisted of the following as of September 30 (in thousands): 2017 2016 Accrued professional fees $501 $262 Accrued clinical study expense 411 283 Accrued inventory purchases 596 315 Due to customers 41 881 Deferred revenue 62 180 Other 224 249 Total $1,835 $2,170 Revenue RecognitionThe Company recognizes revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) shipment has occurredor delivery has occurred if the terms specify des(cid:42)na(cid:42)on; (3) the sales price is ﬁxed or determinable; and (4) collectability is reasonably assured. When there areaddi(cid:42)onal performance requirements, revenue is recognized when all such requirements have been sa(cid:42)sﬁed. Under revenue arrangements with mul(cid:42)pledeliverables, the Company recognizes each separable deliverable as it is earned.The Company derives its revenue from three primary sources: (1) royal(cid:42)es and license fees from licensing our proprietary surface modiﬁca(cid:42)on anddevice drug delivery technologies to customers; the vast majority (typically in excess of 90%) of revenue in the “royal(cid:42)es and license fees” category is in the formof royal(cid:42)es; (2) product revenue from the sale of reagent chemicals to licensees, the sale of stabiliza(cid:42)on products, an(cid:42)gens, substrates and surface coa(cid:42)ngs tothe diagnos(cid:42)c and biomedical research markets as well as the sale of medical devices and related products (such as balloons and catheters) to originalequipment manufacturer (OEM) suppliers and distributors; and (3) research and commercial development fees generated on customer projects.Taxes collected from customers and remi(cid:48)ed to governmental authori(cid:42)es are excluded from revenue and amounted to $0.1 million for each of the yearsended September 30, 2017, 2016 and 2015.Royal(cid:41)es and license fees. The Company licenses technology to third par(cid:42)es and collects royal(cid:42)es. Royalty revenue is generated when a customer sellsproducts incorpora(cid:42)ng the Company’s licensed technologies. Royalty revenue is recognized as licensees report it to the Company, and payment is typicallysubmi(cid:48)ed concurrently with the report. For stand-alone license agreements, up-front license fees are recognized based on the terms of the related licensingagreement, either over the term of the agreement or at the point in (cid:42)me when the earnings process is complete. Minimum royalty fees are recognized in theperiod earned.Revenue related to a performance milestone is recognized upon the achievement of the milestone, as deﬁned in the respec(cid:42)ve agreements and providedthe 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 par(cid:42)es consist of original equipment manufacturer (OEM) and distributor sales and are recognized at the (cid:42)me ofshipment. The Company’s sales terms provide no right of return outside of the standard warranty policy. Payment terms are generally set at 30-45 days.F-14 Research and development. The Company performs third-party research and development ac(cid:42)vi(cid:42)es, which are typically provided on a (cid:42)me and materialsbasis. Generally, revenue for research and development is recorded as performance progresses under the applicable contract, which corresponds with theperiod the related costs are incurred.Arrangements with multiple deliverables. Revenue arrangements with multiple deliverables require the Company to:(i) disclose whether mul(cid:42)ple deliverables exist, how the deliverables in an arrangement should be separated, and how the considera(cid:42)on should beallocated;(ii) allocate revenue in an arrangement using es(cid:42)mated selling prices (“ESP”) of deliverables if a vendor does not have vendor-speciﬁc objec(cid:42)veevidence 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 mul(cid:42)ple a(cid:48)ribu(cid:42)on model in which considera(cid:42)on allocated to research and development ac(cid:42)vi(cid:42)es isrecognized as performed, and milestone payments are recognized when the milestone events are achieved, when such ac(cid:42)vi(cid:42)es and milestones are deemedsubstan(cid:42)ve. Accordingly, in situa(cid:42)ons where a unit of accoun(cid:42)ng includes both a license and research and development ac(cid:42)vi(cid:42)es, and when a license does nothave stand-alone value, the Company applies a mul(cid:42)ple a(cid:48)ribu(cid:42)on model in which considera(cid:42)on allocated to the license is recognized ratably, considera(cid:42)onallocated to research and development ac(cid:42)vi(cid:42)es 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 mul(cid:42)ple deliverables which could include a license(s) to Surmodics’technology, research and development ac(cid:42)vi(cid:42)es, manufacturing services, and product sales based on the needs of its customers. For example, a customer mayenter into an arrangement to obtain a license to Surmodics’ intellectual property which may also include research and development ac(cid:42)vi(cid:42)es, and supply ofproducts manufactured by Surmodics. For these services provided, Surmodics could receive upfront license fees upon signing of an agreement and gran(cid:42)ng thelicense, fees for research and development ac(cid:42)vi(cid:42)es as such ac(cid:42)vi(cid:42)es are performed, milestone payments con(cid:42)ngent upon advancement of the product throughdevelopment and clinical stages to successful commercializa(cid:42)on, fees for manufacturing services and supply of product, and royalty payments based oncustomer sales of product incorpora(cid:42)ng Surmodics’ technology. The Company’s license and development arrangements generally do not have refund provisionsif the customer cancels or terminates the agreement. Typically all payments made are non-refundable.The Company is required to evaluate each deliverable in a mul(cid:42)ple element arrangement for separability. The Company is then required to allocaterevenue 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 inan arrangement with multiple elements. This may be a result of the Company infrequently selling each element separately or having a limited history with multipleelement arrangements. When VSOE cannot be established, the Company a(cid:48)empts to establish a selling price of each element based on TPE. TPE is determinedbased 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 alloca(cid:42)on of arrangement considera(cid:42)on. Theobjec(cid:42)ve 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 generallyused for highly customized offerings.The Company determines ESP for undelivered elements by considering mul(cid:42)ple factors including, but not limited to, market condi(cid:42)ons, compe(cid:42)(cid:42)velandscape and past pricing arrangements with similar features. The determina(cid:42)on of ESP is made through consulta(cid:42)on with the Company’s management, takinginto consideration the marketing strategies for each business unit.Deferred RevenueAmounts received prior to sa(cid:42)sfying the above revenue recogni(cid:42)on criteria are recorded as deferred revenue in the accompanying consolidated balancesheets, with deferred revenue to be recognized beyond one year being classiﬁed as non-current deferred revenue. The Company had current and non-currentdeferred revenue of $0.3 million and $0.4 million as of September 30, 2017 and 2016, respec(cid:42)vely included in other accrued liabili(cid:42)es (current) and other long-term liabilities (long-term).Customer overpayments are accounted for as a liability un(cid:42)l all criteria for revenue recogni(cid:42)on have been met. As of September 30, 2017, and 2016 theCompany has recorded a liability of less than $0.1 million and $0.9 million, respec(cid:42)vely, for customer royalty overpayments, which are included in otheraccrued liabilities.F-15 ConcentrationsThe Company’s licensed technologies provide royalty revenue, which represents the largest revenue stream to the Company. The Company has licenseswith a diverse base of customers and certain customers have mul(cid:42)ple products using the Company’s technology. Medtronic plc (“Medtronic”) is the Company’slargest customer at approximately 18%, 25% and 26% of total consolidated revenue for the ﬁscal years ended September 30, 2017, 2016 and 2015, respec(cid:42)vely.Medtronic has several separately-licensed products that generate royalty revenue for Surmodics, none of which represented more than 4% of Surmodics’ totalrevenue. No other individual customer using licensed technology constitutes more than 10% of the Company’s total revenue. The loss of Medtronic or any of ourlargest customers, or reduc(cid:42)ons in business from them, could have a material adverse eﬀect on the Company’s business, ﬁnancial condi(cid:42)on, results ofoperations, and cash flows from operations.The Company’s licensing agreements with many of its customers, including most of its signiﬁcant customers, cover many licensed products that eachseparately generates royalty revenue. This structure reduces the poten(cid:42)al risk to the Company’s opera(cid:42)ons that may result from reduced sales (or thetermination of a license) of a single product for any specific customer.The Company believes that the credit risk related to marketable securi(cid:42)es is limited due to the adherence to an investment policy and that credit riskrelated to accounts receivable is limited due to a large customer base.Income TaxesThe Company accounts for income taxes under the asset and liability method prescribed in accoun(cid:42)ng guidance. Deferred tax assets and liabili(cid:42)es arerecognized for the future tax consequences a(cid:48)ributable to diﬀerences between the ﬁnancial statement carrying amounts of exis(cid:42)ng assets and liabili(cid:42)es andtheir respec(cid:42)ve tax bases. A valua(cid:42)on allowance is provided when it is more likely than not that some por(cid:42)on or all of a deferred tax asset will not be realized.The ul(cid:42)mate realiza(cid:42)on of deferred tax assets depends on the genera(cid:42)on of future taxable income during the period in which related temporary diﬀerencesbecome deduc(cid:42)ble. Management considers the scheduled reversal of deferred tax liabili(cid:42)es, projected future taxable income and tax planning strategies in thisassessment. Deferred tax assets and liabili(cid:42)es are measured using the enacted tax rates expected to apply to taxable income in the years in which thosetemporary diﬀerences are expected to be recovered or se(cid:48)led. The eﬀect on deferred tax assets and liabili(cid:42)es of a change in tax rates is recognized in income inthe period that includes the enactment date of such change.Research and DevelopmentResearch and development (“R&D”) costs are expensed as incurred. Some R&D costs are related to third-party contracts, and the related revenue isrecognized as described in “Revenue Recogni(cid:42)on” above. Costs associated with customer-related R&D include speciﬁc project direct labor costs and materialexpenses as well as an allocation of overhead costs based on direct labor dollars.Clinical trial costs. The Company sponsors clinical trials intended to obtain the necessary clinical data required to obtain approval from various regulatoryagencies to market medical devices developed by the Company. Costs associated with clinical trials are included within R&D expense and include trial design,clinical site reimbursement and third party fees. The Company’s clinical trials are administered by third-party clinical research organiza(cid:42)ons (“CROs”). TheseCROs generally bill monthly for certain services performed as well as upon achievement of certain milestones. Milestone payments are amor(cid:42)zed as the relatedservices are performed, generally based upon the number of pa(cid:42)ents enrolled, “pa(cid:42)ent months” incurred and the dura(cid:42)on of the study. The Company monitorspa(cid:42)ent enrollment, the progress of clinical studies and related ac(cid:42)vi(cid:42)es through internal reviews of data reported to the Company by the CROs andcorrespondence with the CROs. The Company periodically evaluates its es(cid:42)mates to determine if adjustments are necessary or appropriate based on informa(cid:42)onit receives.Government funding. The Company is eligible to receive reimbursement for certain qualifying R&D expenditures under a grant from the IndustrialDevelopment Agency of Ireland (“IDA”). Reimbursements are recognized as a reduc(cid:42)on of R&D expense when there is reasonable assurance that the funding willbe received and condi(cid:42)ons associated with the funding are met. The Company recorded reimbursements from IDA grants of $0.8 million during ﬁscal 2017 as areduction of R&D expense. No reimbursements were recorded during fiscal 2016 or 2015.Use of EstimatesThe prepara(cid:42)on of consolidated ﬁnancial statements in conformity with U.S. GAAP requires management to make es(cid:42)mates and assump(cid:42)ons that aﬀectthe reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at theF-16 date of the consolidated ﬁnancial statements and the reported amounts of revenue and expenses during the repor(cid:42)ng period. Ul(cid:42)mate results could diﬀer fromthose estimates.Discontinued OperationsOn November 1, 2011, the Company entered into a deﬁni(cid:42)ve agreement (the “Purchase Agreement”) to sell substan(cid:42)ally all of the assets of its wholly-owned subsidiary, SurModics Pharmaceu(cid:42)cals, to Evonik Degussa Corpora(cid:42)on (“Evonik”). Pharmaceu(cid:42)cals discon(cid:42)nued opera(cid:42)ons used opera(cid:42)ng cash of lessthan $0.1 million in ﬁscal 2015. Cash generated from ﬁnancing ac(cid:42)vi(cid:42)es of less than $0.1 million in ﬁscal 2015 related to transfers of cash from con(cid:42)nuingopera(cid:42)ons of Surmodics and consisted of cash used to make payments on accrual balances. There was no discon(cid:42)nued opera(cid:42)ons ac(cid:42)vity in ﬁscal 2017 or2016.Income Per Share DataBasic income per common share is calculated based on the weighted average number of common shares outstanding during the period. Diluted incomeper common share is computed by dividing income by the weighted average number of common and common equivalent shares outstanding during the period.The Company’s only poten(cid:42)ally dilu(cid:42)ve common shares are those that result from dilu(cid:42)ve common stock op(cid:42)ons and non-vested stock rela(cid:42)ng to restrictedstock awards, restricted stock units and performance shares.The following table sets forth the denominator for the computation of basic and diluted income per share for each of the fiscal years ended September 30(in thousands): 2017 2016 2015 Net income from continuing operations available to commonshareholders $3,926 $9,985 $11,947 Basic weighted average shares outstanding 13,153 12,998 13,029 Dilutive effect of outstanding stock options, non-vested restricted stock, restricted stock units and performance shares 236 221 260 Diluted weighted average shares outstanding 13,389 13,219 13,289 The calcula(cid:42)on of weighted average diluted shares outstanding excludes outstanding common stock op(cid:42)ons associated with the right to purchase 0.2million, 0.7 million and 0.5 million shares for ﬁscal 2017, 2016 and 2015, respec(cid:42)vely, as their inclusion would have had an an(cid:42)dilu(cid:42)ve eﬀect on diluted incomeper share.Currency TranslationThe Company’s repor(cid:42)ng currency is the U.S. Dollar. Assets and liabili(cid:42)es of non-U.S. dollar func(cid:42)onal currency subsidiaries are translated into U.S. dollars at theperiod-end exchange rates, and revenue and expenses are translated at the average quarterly exchange rates during the period. The net eﬀect of thesetransla(cid:42)on adjustments on the consolidated ﬁnancial statements is recorded as a foreign currency transla(cid:42)on adjustment, a component of accumulated othercomprehensive income on the consolidated balance sheets. Realized foreign currency transac(cid:42)on gains and losses are included in other, income (loss) net in theconsolidated statements of income.New Accounting PronouncementsAccounting Standards to be AdoptedIn May 2014, the Financial Accoun(cid:42)ng Standards Board (“FASB”) issued Accoun(cid:42)ng Standards Codiﬁca(cid:42)on (“ASC”) Update No. 2014-09, Revenue fromContracts with Customers (ASC Topic 606). Principles of this guidance require en(cid:42)(cid:42)es to recognize revenue in a manner that depicts the transfer of goods orservices to customers in amounts that reﬂect the considera(cid:42)on an en(cid:42)ty expects to be en(cid:42)tled to in exchange for those goods or services. The guidance alsorequires expanded disclosures rela(cid:42)ng to the nature, amount, (cid:42)ming, and uncertainty of revenue and cash ﬂows arising from contracts with customers.Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assetsF-17 recognized from the costs to obtain or fulﬁll a contract. This accoun(cid:42)ng standard will be eﬀec(cid:42)ve for the Company beginning in the ﬁrst quarter of ﬁscal year2019 (October 1, 2018) using one of two prescribed retrospec(cid:42)ve methods. The Company is currently evalua(cid:42)ng the impact that the adop(cid:42)on of this standardwill have on the Company’s business model and consolidated results of opera(cid:42)ons, cash ﬂows and ﬁnancial posi(cid:42)on. The Company currently plans to adopt thestandard using the modiﬁed retrospec(cid:42)ve approach and expects the impact will be material to the consolidated ﬁnancial statements due to an an(cid:42)cipated one-quarter accelera(cid:42)on of minimum license fees and royalty revenue earned under its hydrophilic license agreements, as well as require several addi(cid:42)onal ﬁnancialstatement footnote disclosures. Under the modiﬁed retrospec(cid:42)ve approach, the Company will apply the new revenue standard to all new revenue contractsini(cid:42)ated on or a(cid:79)er the eﬀec(cid:42)ve date, and, for contracts which have remaining obliga(cid:42)ons as of the eﬀec(cid:42)ve date, the Company will adjust the beginningbalance of retained earnings.In February 2016, the FASB issued Accoun(cid:42)ng Standards Update ASU 2016-02, Leases (ASC Topic 842). The new guidance primarily aﬀects lesseeaccoun(cid:42)ng, while accoun(cid:42)ng by lessors will not be signiﬁcantly impacted by the update. The update maintains two classiﬁca(cid:42)ons of leases: ﬁnance leases, whichreplace capital leases, and opera(cid:42)ng leases. Lessees will need to recognize a right-of-use asset and a lease liability on the statement of ﬁnancial posi(cid:42)on for thoseleases previously classiﬁed as opera(cid:42)ng leases under the old guidance. The liability will be equal to the present value of lease payments. The asset will be basedon the liability, subject to adjustment, such as for direct costs. The accoun(cid:42)ng standard will be eﬀec(cid:42)ve for the Company beginning the ﬁrst quarter of ﬁscal year2020 (October 1, 2019) using a modiﬁed retrospec(cid:42)ve approach. The Company believes the impact will be material due to the right-of-use assets and leaseliabilities that will be recorded on the Company’s consolidated balance sheets upon adoption of the standard.In June 2016, the FASB issued ASU No 2016-13, Financial Instruments – Credit Losses (ASC Topic 326), Measurement of Credit Losses on FinancialStatements. This ASU requires a ﬁnancial asset (or a group of ﬁnancial assets) measured at an amor(cid:42)zed cost basis to be presented at the net amount expected tobe collected. The allowance for credit losses is a valua(cid:42)on account that is deducted from the amor(cid:42)zed cost basis of the ﬁnancial asset(s) to present the netcarrying value at the amount expected to be collected on the ﬁnancial asset. The accoun(cid:42)ng standard will be eﬀec(cid:42)ve for the Company beginning in the ﬁrstquarter of ﬁscal 2020 (October 1, 2019), and early adop(cid:42)on is permi(cid:48)ed. The Company is currently evalua(cid:42)ng the impact that the adop(cid:42)on of this standard willhave on the Company’s results of operations, cash flows and financial position.Accounting Standards ImplementedIn August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classiﬁca(cid:41)on of Certain Cash Receipts and Cash Payments. Thenew guidance clariﬁes requirements for presenta(cid:42)on and classiﬁca(cid:42)on of the following items within the statement of cash ﬂows: debt prepayments, se(cid:48)lementof zero coupon debt instruments, con(cid:42)ngent considera(cid:42)on payments, insurance proceeds, securi(cid:42)za(cid:42)on transac(cid:42)ons and distribu(cid:42)ons from equity methodinvestees. The update also addresses classiﬁca(cid:42)on of transac(cid:42)ons that have characteris(cid:42)cs of more than one class of cash ﬂows. The accoun(cid:42)ng standard will beeﬀec(cid:42)ve for the Company beginning in the ﬁrst quarter of ﬁscal 2018. Early adop(cid:42)on is permi(cid:48)ed, including adop(cid:42)on in an interim period. The Companyprospec(cid:42)vely adopted this accoun(cid:42)ng standard on July 1, 2017 without any material impact on the Company’s consolidated statement of cash ﬂows. Under theguidance, if and when our con(cid:42)ngent considera(cid:42)on liabili(cid:42)es are paid, a por(cid:42)on of the payment will be classiﬁed as cash ﬂows from opera(cid:42)ons, with theremainder classified as cash flows from financing activities.In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The newguidance removes Step 2 of the goodwill impairment test, which required a hypothe(cid:42)cal purchase price alloca(cid:42)on. A goodwill impairment will now be deﬁned asthe amount by which a repor(cid:42)ng unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The accoun(cid:42)ng standard is eﬀec(cid:42)vefor the Company beginning in its ﬁscal 2020, with early, prospec(cid:42)ve adop(cid:42)on permi(cid:48)ed. The Company early-adopted this accoun(cid:42)ng standard on July 1, 2017with no impact on the Company’s consolidated financial statements, as the Company has not been required to complete Step 2 of the goodwill impairment test. No other new accoun(cid:42)ng pronouncement issued or eﬀec(cid:42)ve has had, or is expected to have, a material impact on the Company’s consolidated ﬁnancialstatements. 3. Business CombinationsFor all business combinations, the Company records all assets and liabilities of the acquired business, including goodwill and other identified intangibleassets, at their respective fair values as of the acquisition date. Contingent consideration, if any, is recognized at its fair value on the acquisition date and changesin fair value are recognized in earnings until settlement. Acquisition-related transaction costs are expensed as incurred.F-18 Creagh Medical Ltd.On November 20, 2015, the Company acquired 100% of the outstanding common shares and vo(cid:42)ng shares of Creagh Medical located in Ballinasloe,Ireland. The results of Creagh Medical’s opera(cid:42)ons have been included in the Company’s consolidated ﬁnancial statements as of the Creagh Medical acquisi(cid:42)ondate. The acquisi(cid:42)on was ﬁnanced with cash on hand and con(cid:42)ngent seller ﬁnancing. The Company acquired Creagh Medical for up to €30 million(approximately $32 million as of the acquisi(cid:42)on date), including an upfront payment of €18 million (approximately $19.3 million as of the acquisi(cid:42)on date), andup to €12 million (approximately $12.8 million as of the acquisi(cid:42)on date) based on achievement of revenue and value-crea(cid:42)ng opera(cid:42)onal milestones throughSeptember 30, 2018. The payment of the milestones, if any, will occur in the quarter ending December 31, 2018. As of September 30, 2017, the Company haspaid $18.4 million in cash for this acquisi(cid:42)on. Total transac(cid:42)on, integra(cid:42)on and other costs associated with the Creagh Medical acquisi(cid:42)on aggregated $2.7million for the ﬁscal year ended September 30, 2016. Creagh Medical’s opera(cid:42)ng results have been included in the Medical Device segment since the acquisi(cid:42)ondate. The Company realized $3.3 million of revenue and a loss of $2.7 million from Creagh Medical’s opera(cid:42)ons for the period from the acquisi(cid:42)on date throughSeptember 30, 2016.Creagh Medical designs and manufactures high-quality percutaneous transluminal angioplasty (“PTA”) balloon catheters. Since 2006, Creagh Medical hasgrown its technical and product capability with PTA products approved throughout the world, including Europe, the United States, and Japan. With theseresources, the Company is uniquely posi(cid:42)oned to oﬀer a total solu(cid:42)ons approach from product design and development through in-house extrusion, balloonforming, top-assembly and packaging and regulatory capabilities to approved products for exclusive distribution.The purchase price of Creagh Medical consisted of the following (in thousands): Cash paid $18,449 Debt assumed 761 Contingent consideration 9,064 Total purchase price 28,274 Less cash and cash equivalents acquired (251)Total purchase price, net of cash acquired $28,023The purchase accoun(cid:42)ng alloca(cid:42)on of assets acquired and liabili(cid:42)es assumed was ﬁnalized during the fourth quarter of ﬁscal 2016. During themeasurement period, which ended September 30, 2016, certain insigniﬁcant adjustments were made from amounts previously reported to ﬁnalize Creagh’spreliminary fair value es(cid:42)mates related primarily to other current assets, intangible assets, goodwill, certain property value, con(cid:42)ngent liabili(cid:42)es and the relateddeferred tax impacts.The following table summarizes the ﬁnal alloca(cid:42)on of the purchase price to the fair values assigned to the assets acquired and the liabili(cid:42)es assumed atthe date of the Creagh Medical acquisition: Fair Value(Dollars in thousands) Estimated Useful Life(In years)Current assets $896 N/AProperty and equipment 634 1.0-10.0Trade name 75 N/ADeveloped technology 1,787 7.0In-process research and development 942 N/ACustomer relationships 11,119 7.0-10.0Other noncurrent assets 81 N/ACurrent liabilities (942)N/ADeferred tax liabilities (9)N/ANet assets acquired 14,583 Goodwill 13,440 N/ATotal purchase price, net of cash acquired $28,023 F-19 The Creagh Medical goodwill, which is a result of acquiring and retaining the Creagh Medical exis(cid:42)ng workforce and expected synergies from integra(cid:42)ngtheir business into the Company’s Medical Device segment, is not deductible for tax purposes.NorMedix, Inc.On January 8, 2016, the Company acquired 100% of the shares of NorMedix, a privately owned design and development company focused on ultra thin-walled, minimally invasive catheter technologies based in Plymouth, Minnesota. The acquisi(cid:42)on was ﬁnanced with cash on hand and con(cid:42)ngent seller ﬁnancing.The Company acquired NorMedix for up to $14.0 million, including an upfront payment of $7.0 million, and up to $7.0 million based on achievement of revenueand value-crea(cid:42)ng opera(cid:42)onal milestones through September 30, 2019. Con(cid:42)ngent considera(cid:42)on associated with the NorMedix transac(cid:42)on is payable asearned. This acquisi(cid:42)on strengthens the Company’s vascular device exper(cid:42)se and R&D capabili(cid:42)es. Total transac(cid:42)on, integra(cid:42)on and other costs associated withthe NorMedix acquisi(cid:42)on aggregated $0.3 million for the year ended September 30, 2016. NorMedix’s opera(cid:42)ng results have been included in the MedicalDevice segment since the acquisi(cid:42)on date. The Company realized $0.9 million of revenue and a loss of $0.4 million from the NorMedix’s opera(cid:42)ons for theperiod from the acquisition date through September 30, 2016. The purchase price of NorMedix consisted of the following (in thousands): Cash paid $6,905 Contingent consideration 3,520 Total purchase price 10,425 Less cash and cash equivalents acquired (17)Total purchase price, net of cash acquired $10,408 The purchase accoun(cid:42)ng alloca(cid:42)on of assets acquired and liabili(cid:42)es assumed was ﬁnalized during the fourth quarter of ﬁscal 2016. During themeasurement period, which ended September 30, 2016, certain insigniﬁcant adjustments were made from amounts previously reported to ﬁnalize NorMedix’spreliminary fair value es(cid:42)mates related primarily to working capital, intangible assets, goodwill, certain property value, con(cid:42)ngent liabili(cid:42)es and the relateddeferred tax impacts.The following table summarizes the alloca(cid:42)on of the purchase price to the fair values assigned to the assets acquired and the liabili(cid:42)es assumed at thedate of the NorMedix acquisition: Fair Value(Dollars in thousands) Estimated Useful Life (Inyears)Net current assets $113 N/AProperty and equipment 60 7.0Developed technology 6,850 10.0-14.0Customer relationships 900 4.0Deferred tax asset 690 N/AOther noncurrent asset 13 N/AAccounts payable (187)N/ADeferred tax liabilities (2,483)N/ANet assets acquired 5,956 Goodwill 4,452 N/ATotal purchase price, net of cash acquired $10,408 F-20 The NorMedix goodwill, which is a result of acquiring and retaining the NorMedix exis(cid:42)ng workforce and expected synergies from integra(cid:42)ng theirbusiness into the Medical Device segment, is not deductible for tax purposes. Unaudited Pro Forma Results The following unaudited pro forma ﬁnancial informa(cid:42)on presents the combined results of opera(cid:42)on of the Company as if the acquisi(cid:42)ons of CreaghMedical and NorMedix had occurred as of October 1, 2014, the beginning of fiscal 2015. The ﬁscal 2016 unaudited pro forma ﬁnancial informa(cid:42)on includes adjustments for addi(cid:42)onal amor(cid:42)za(cid:42)on expense on iden(cid:42)ﬁable intangible assets of$2.8 million and con(cid:42)ngent considera(cid:42)on accre(cid:42)on expense of $1.8 million, and to eliminate non-recurring, transac(cid:42)onal professional fees of $3.2 million, andthe related tax effect impact of $0.2 million. The ﬁscal 2015 unaudited pro forma ﬁnancial informa(cid:42)on includes adjustments for addi(cid:42)onal amor(cid:42)za(cid:42)on expense on iden(cid:42)ﬁable intangible assets of$3.2 million and contingent consideration accretion expense of $2.1 million and tax effect impact of $0.5 million. The tax impact of the adjustments in all periods reﬂects no tax beneﬁt from either the con(cid:42)ngent considera(cid:42)on accre(cid:42)on or a signiﬁcant por(cid:42)on of thetransac(cid:42)on related costs in ﬁscal 2016 as they are not deduc(cid:42)ble for tax purposes. Further, Creagh Medical amor(cid:42)za(cid:42)on expense does not reﬂect an Irish taxbeneﬁt as the Company acquired a net opera(cid:42)ng loss carryforward as of the acquisi(cid:42)on date that was oﬀset in the aggregate by deferred tax liabili(cid:42)es andvalua(cid:42)on allowance. Therefore, the amor(cid:42)za(cid:42)on of Creagh Medical intangible assets results in an increase in deferred tax liabili(cid:42)es with a correspondingincrease to a deferred tax valuation allowance. NorMedix amortization expense reflects a tax benefit based on the Company’s incremental U.S. tax rate. The unaudited pro forma ﬁnancial informa(cid:42)on is not necessarily indica(cid:42)ve of what the Company’s consolidated results of opera(cid:42)ons actually wouldhave been had the acquisi(cid:42)on occurred at the beginning of each year. Addi(cid:42)onally, the unaudited pro forma ﬁnancial informa(cid:42)on does not a(cid:48)empt to projectthe future operating results of the combined company. Years Ended September 30, 2016 2015 (In thousands, except per share data)(Unaudited) Revenue $72,416 $65,432 Net income $12,315 $6,583 Per share amounts: Basic net income per share $0.95 $0.51 Diluted net income per share $0.93 $0.50 4. Fair Value MeasurementsThe accoun(cid:42)ng guidance on fair value measurements deﬁnes fair value, establishes a framework for measuring fair value under U.S. GAAP, and expandsdisclosures about fair value measurements. The guidance is applicable for all ﬁnancial assets and ﬁnancial liabili(cid:42)es and for all nonﬁnancial assets andnonﬁnancial liabili(cid:42)es recognized or disclosed at fair value in the consolidated ﬁnancial statements on a recurring basis. Fair value is deﬁned as the exchangeprice that would be received from selling an asset or paid to transfer a liability (an exit price) in an orderly transac(cid:42)on between market par(cid:42)cipants at themeasurement date. When determining the fair value measurements for assets and liabili(cid:42)es required or permi(cid:48)ed to be recorded at fair value, the Companyconsiders the principal or most advantageous market in which it would transact and also considers assumptions that market participants would use when pricingthe asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.Fair Value HierarchyAccoun(cid:42)ng guidance on fair value measurements requires that assets and liabili(cid:42)es carried at fair value be classiﬁed and disclosed in one of the followingthree categories:Level 1 — Quoted (unadjusted) prices in active markets for identical assets or liabilities.F-21 The Company did not have any Level 1 assets as of September 30, 2017 or 2016. Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabili(cid:42)es in ac(cid:42)ve markets; quotedprices for iden(cid:42)cal or similar assets or liabili(cid:42)es in markets that are not ac(cid:42)ve; or other inputs that are observable or can be corroborated by observable marketdata for substantially the full term of the asset or liability.The Company’s Level 2 assets as of September 30, 2017 and 2016 consisted of money market funds, commercial paper instruments and corporate bondsecuri(cid:42)es. Fair market values for these assets are based on quoted vendor prices and broker pricing where all signiﬁcant inputs are observable. To ensure theaccuracy of quoted vendor prices and broker pricing, the Company performs regular reviews of investment returns to industry benchmarks and sample tests ofindividual 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 measurementof the fair value of the assets or liabili(cid:42)es. Level 3 assets and liabili(cid:42)es 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.Included in Level 3 liabili(cid:42)es as of September 30, 2017 is a $14.9 million con(cid:42)ngent considera(cid:42)on liability, of which $13.1 million is noncurrent. Includedin Level 3 liabili(cid:42)es as of September 30, 2016 is a $14.5 million con(cid:42)ngent considera(cid:42)on liability, of which $13.6 million is noncurrent. The con(cid:42)ngentconsidera(cid:42)on liabili(cid:42)es are subject to achievement of revenue and value-crea(cid:42)ng milestones in future periods. There were no Level 3 assets as of September 30,2017 or 2016.In valuing assets and liabili(cid:42)es, the Company is required to maximize the use of quoted market prices and minimize the use of unobservable inputs. TheCompany did not significantly change its valuation techniques from prior periods. The carrying value of cash, accounts receivable, accounts payable and accruedliabilities approximates fair value as of September 30, 2017 and 2016 due to the short maturity nature of these instruments.Assets and Liabilities Measured at Fair Value on a Recurring BasisIn instances where the inputs used to measure fair value fall into diﬀerent levels of the fair value hierarchy, the fair value measurement has beendetermined based on the lowest level input that is signiﬁcant to the fair value measurement in its en(cid:42)rety. The Company’s assessment of the signiﬁcance of aparticular 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 informa(cid:42)on about the Company’s assets and liabili(cid:42)es measured at fair value on a recurring basis as of September 30, 2017(in thousands): Quoted Pricesin ActiveMarkets forIdenticalInstruments(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) Total FairValue as ofSeptember 30,2017 Assets Cash equivalents $— $6,639 $— $6,639 Available-for-sale securities — 31,802 $31,802 Total assets $— $38,441 $— $38,441 Liabilities Contingent consideration $— $— $(14,864) $(14,864)Total liabilities $— $— $(14,864) $(14,864)F-22 The following table presents informa(cid:42)on about the Company’s assets and liabili(cid:42)es measured at fair value on a recurring basis as of September 30,2016 (in thousands): Quoted Pricesin ActiveMarkets forIdenticalInstruments(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) Total FairValue as ofSeptember 30,2016 Assets Cash equivalents $— $22,160 $— $22,160 Available-for-sale securities — 21,954 $21,954 Total assets $— $44,114 $— $44,114 Liabilities Contingent consideration $— $— $(14,517) $(14,517)Total liabilities $— $— $(14,517) $(14,517) The following table summarizes the changes in the contingent consideration liability for fiscal 2017 and 2016: (Dollars in thousands) Contingent consideration liability at September 30, 2015 $— Additions 12,584 Fair value adjustments 70 Settlements — Interest accretion 1,422 Foreign currency translation 441 Contingent consideration liability at September 30, 2016 14,517 Additions — Fair value adjustments (2,350)Settlements — Interest accretion 2,223 Foreign currency translation 474 Contingent consideration liability at September 30, 2017 $14,864 There were no transfers of assets or liabilities to or from amounts measured using Level 3 fair value measurements during fiscal 2017 or 2016. Valuation TechniquesThe 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 es(cid:42)mate of fair value because of therelatively short time between origination of the instrument and its expected realization.Available-for-sale securi(cid:42)es — These assets are classiﬁed as Level 2 and include commercial paper instruments and corporate bonds. These securi(cid:42)es arevalued based on quoted vendor prices in active markets underlying the securities.Con(cid:42)ngent considera(cid:42)on — The con(cid:42)ngent considera(cid:42)on liabili(cid:42)es were determined based on discounted cash ﬂow analyses that included revenuees(cid:42)mates, probability of strategic milestone achievement and a discount rate, which are considered signiﬁcant unobservable inputs as of the acquisi(cid:42)on datesand September 30, 2017. In ﬁscal 2017, for the revenue-based milestones, the Company discounted forecasted revenue by 14.0% to 23.5%, which representsthe Company’s weighted average cost of capital for each transac(cid:42)on, adjusted for the short-term nature of the cash ﬂows. The resul(cid:42)ng present value of revenuewas used as an input into an op(cid:42)on pricing approach, which also considered the Company’s risk of non-payment of the revenue-based milestones. Non-revenuemilestones were projected to have a 25% to 100% probability of achievement and related payments wereF-23 discounted using the Company’s es(cid:42)mated cost of debt for the remaining con(cid:42)ngency periods, or 2.7% to 3.0%. In ﬁscal 2016, for the revenue-based milestones,the Company discounted forecasted revenue by 14.1% to 22.8%, which represents the Company’s weighted average cost of capital for each transaction, adjustedfor the short-term nature of the cash ﬂows. The resul(cid:42)ng present value of revenue was used as an input into an op(cid:42)on pricing approach, which also consideredthe Company’s risk of non-payment of the revenue-based milestones. Non-revenue milestones were projected to have a 25% to 100% probability ofachievement and related payments were discounted using the Company’s es(cid:42)mated cost of debt for the remaining con(cid:42)ngency periods, or 5.6% to 6.7%. To theextent that actual results diﬀer from these es(cid:42)mates, the fair value of the con(cid:42)ngent considera(cid:42)on liabili(cid:42)es could change signiﬁcantly. The €12 million(approximately $14.2 million as of September 30, 2017) con(cid:42)ngent considera(cid:42)on related to the Creagh Medical acquisi(cid:42)on is denominated in Euros and is nothedged. The Company recorded foreign currency losses of $0.5 million and $0.4 million, respec(cid:42)vely, in ﬁscal 2017 and 2016 related to this con(cid:42)ngentconsideration as this obligation was marked to year-end exchange rates.Assets and Liabilities Measured at Fair Value on a Non-Recurring BasisThe Company’s investments in non-marketable securi(cid:42)es of private companies are accounted for using the cost method as the Company does not exertsigniﬁcant inﬂuence over the investees’ opera(cid:42)ng or ﬁnancial ac(cid:42)vi(cid:42)es. These investments are measured at fair value on a non-recurring basis when they aredeemed to be other-than-temporarily impaired. In determining whether a decline in value of non-marketable equity investments in private companies hasoccurred and is other-than-temporary, an assessment is made by considering available evidence, including the general market condi(cid:42)ons in the investee’sindustry, the investee’s product development status and subsequent rounds of ﬁnancing and the related valua(cid:42)on and/or the Company’s par(cid:42)cipa(cid:42)on in suchﬁnancings. The Company also assesses the investee’s ability to meet business milestones and the ﬁnancial condi(cid:42)on and near-term prospects of the individualinvestee, including the rate at which the investee is using its cash and the investee’s need for possible addi(cid:42)onal funding at a poten(cid:42)ally lower valua(cid:42)on. Thevalua(cid:42)on methodology for determining the decline in value of non-marketable equity securi(cid:42)es is based on inputs that require management judgment and areLevel 3 inputs. In the fourth quarter of ﬁscal 2015, the Company recognized an other-than-temporary impairment loss of $1.5 million on its investment in CeloNova.These impairment charges were based on Level 3 inputs further discussed in Note 2 to the consolidated ﬁnancial statements. No other-than-temporaryimpairment losses were recognized during fiscal 2017 or 2016. 5. Stockholders’ EquityRepurchase of Common StockShares are repurchased from (cid:42)me to (cid:42)me to support the Company’s stock-based compensa(cid:42)on programs and to return capital to stockholders. TheCompany accounts for repurchases of common stock using the par value method. On November 5, 2014, the Company’s Board of Directors authorized it to repurchase up to $30.0 million of the Company’s outstanding common stockin open-market purchases, privately nego(cid:42)ated transac(cid:42)ons, block trades, accelerated share repurchase transac(cid:42)ons, tender oﬀers or by any combina(cid:42)on ofsuch methods. The authoriza(cid:42)on has no ﬁxed expira(cid:42)on date. As part of the accelerated share repurchase (“ASR”) program discussed below, the Companyrepurchased 758,143 shares of common stock on November 11, 2014 and 89,721 of common stock on July 8, 2015, the date that the ASR program wascompleted. On November 11, 2014, the Company entered into an ASR program with Wells Fargo Bank, Na(cid:42)onal Associa(cid:42)on. In connec(cid:42)on with this agreement, theCompany made a $20.0 million payment to the bank and immediately received an ini(cid:42)al delivery of 758,143 shares of its common stock with a fair value of$16.0 million as of the purchase date. Eﬀec(cid:42)ve as of the date of the ini(cid:42)al share purchase, the transac(cid:42)on was accounted for as a share re(cid:42)rement, resul(cid:42)ng in areduc(cid:42)on of common stock of less than $0.1 million, addi(cid:42)onal paid-in capital of $2.5 million and retained earnings of $13.5 million. The remaining $4.0 millionof the Company’s payment was also reported as a reduc(cid:42)on in retained earnings. The speciﬁc number of shares that the Company ul(cid:42)mately purchased underthe ASR agreement was based on the volume weighted average price of the Company’s common stock during the purchase period, less an agreed upon discount.In the aggregate the Company purchased 847,864 shares under the ASR program for an average price of $23.59 per share. Based on the facts associated withthe agreement, the forward contract was indexed to the Company’s common stock and met the U.S. GAAP requirements to be classiﬁed as permanent equity asof July 8, 2015, the date the ASR was completed. On November 6, 2015, the Company’s Board of Directors authorized the repurchase of up to $20.0 million of the Company’s outstanding common stockin open-market purchases, privately negotiated transactions, block trades, accelerated share repurchaseF-24 transactions, tender offers or by any combination of such methods. The authorization has no fixed expiration date. During fiscal 2017, we paid $4.7 million torepurchase 196,190 common shares in open market purchases at an average price of $23.97 per share. As of September 30, 2017, $25.3 million remainedavailable to the Company for the purchase of its common stock under outstanding authorizations. 6. Stock-Based Compensation PlansThe Company has stock-based compensa(cid:42)on plans under which it grants stock op(cid:42)ons, restricted stock awards, performance share awards, restrictedstock units and deferred stock units. Accoun(cid:42)ng guidance requires all share-based payments to be recognized as an expense, based on their fair values, over therequisite service period. The Company also es(cid:42)mates forfeitures of awards granted, which are based on historical experience and reduce the recognizedexpense. The Company’s stock-based compensa(cid:42)on expenses for the years ended September 30 were allocated to the following expense categories(in thousands): 2017 2016 2015 Product costs $90 $22 $24 Research and development 510 324 226 Selling, general and administrative 2,872 3,498 2,131 Total stock-based compensation expense $3,472 $3,844 $2,381 As of September 30, 2017, approximately $4.7 million of total unrecognized compensa(cid:42)on costs related to non-vested awards is expected to berecognized over a weighted average period of approximately 2.1 years. Such costs include $1.5 million based on payout levels associated with performanceshare awards that are currently an(cid:42)cipated to be fully expensed because the performance condi(cid:42)ons are expected to be met above the minimum levels for eachaward period.Under the amended 2009 Equity Incen(cid:42)ve Plan (“2009 Plan”), the Company is authorized to issue up to 2,000,000, plus the number of shares that havenot yet been awarded under the 2003 Equity Incen(cid:42)ve Plan, or were awarded and subsequently returned to the pool of available shares under the 2003 EquityIncen(cid:42)ve Plan pursuant to its terms. As of September 30, 2017, there were 888,546 shares available for future equity awards, including stock op(cid:42)ons, restrictedstock awards, performance share awards, and restricted stock and deferred stock units, under the 2009 Plan.Stock Option AwardsThe Company uses the Black-Scholes option pricing model to determine the weighted average grant date fair value of stock options. Weighted average pershare fair values of stock op(cid:42)ons granted during ﬁscal 2017, 2016 and 2015 were $7.63, $6.95 and $7.26, respec(cid:42)vely. The assump(cid:42)ons used as inputs in themodel for the years ended September 30 were as follows: 2017 2016 2015 Risk-free interest rates 1.74% 1.89% 1.43%Expected life 4.6 years 4.6 years 4.5 years Expected volatility 34% 37% 43%Dividend yield 0% 0% 0% The risk-free interest rate assump(cid:42)on was based on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturi(cid:42)es similar to those of theexpected term of the award. The expected life of op(cid:42)ons granted is determined based on the Company’s experience. Expected vola(cid:42)lity is based on theCompany’s stock price movement over a period approxima(cid:42)ng the expected term. Based on management’s judgment, dividend rates are expected to be 0.0% forthe expected life of the options.Non-qualiﬁed stock op(cid:42)ons are granted at fair market value on the grant date. Non-qualiﬁed stock op(cid:42)ons expire in seven to ten years or upontermina(cid:42)on of employment or service as a Board member. With respect to members of the Board, non-qualiﬁed stock op(cid:42)ons generally become exercisable on apro-rata basis over the one-year period following the date of grant. With respect to employees, non-qualiﬁed stock op(cid:42)ons generally become exercisable withrespect to 25% of the shares on each of the ﬁrst four anniversaries following the grant date. The stock-based compensa(cid:42)on table above includes stock op(cid:42)onexpenses recognized related to these awards, which totaled $1.3 million, $1.2 million and $1.2 million during fiscal 2017, 2016 and 2015, respectively. As of September 30, 2017, the aggregate intrinsic value of the op(cid:42)on shares outstanding and op(cid:42)on shares exercisable was $10.0 million and $6.1million, respectively. As of September 30, 2017, the average remaining contractual life of options outstandingF-25 and op(cid:42)ons exercisable was 4.0 years and 2.8 years, respec(cid:42)vely. The total pre-tax intrinsic value of op(cid:42)ons exercised during ﬁscal 2017 and 2016 was $0.1million and $5.1 million, respec(cid:42)vely. The intrinsic value represents the diﬀerence between the exercise price and the fair market value of the Company’scommon stock on the last day of the respective fiscal year end.The following table summarizes all stock op(cid:42)ons ac(cid:42)vity and stock op(cid:42)ons outstanding and exercisable under the stock op(cid:42)on plans during ﬁscal 2017,2016 and 2015: Number ofShares WeightedAverageExercise Price Outstanding at September 30, 2014 1,210,619 $20.35 Granted 164,401 21.24 Exercised (166,422) 14.54 Forfeited and expired (90,590) 35.35 Outstanding at September 30, 2015 1,118,008 20.10 Granted 241,582 20.63 Exercised (437,850) 15.68 Forfeited and expired (94,415) 31.52 Outstanding at September 30, 2016 827,325 21.30 Granted 229,039 24.08 Exercised (6,819) 13.89 Forfeited and expired (47,640) 30.65 Outstanding at September 30, 2017 1,001,905 21.54 Exercisable at September 30, 2017 547,051 $20.80Restricted Stock AwardsThe Company has entered into restricted stock agreements with certain key employees, covering the issuance of common stock (“Restricted Stock”).Under accoun(cid:42)ng guidance, these shares are considered to be non-vested shares. The Restricted Stock is released to the key employees if they are employed bythe Company at the end of the ves(cid:42)ng period. Restricted stock awards generally vest at a 33% rate on each of the ﬁrst three anniversaries following the grantdate. Compensa(cid:42)on expense is recognized on a straight-line basis over the ves(cid:42)ng term based on the fair value of the common shares on the date of grant. Thestock-based compensa(cid:42)on table above includes Restricted Stock expenses recognized related to these awards, which totaled $0.5 million, $0.3 million and$0.3 million during fiscal 2017, 2016 and 2015, respectively.The following table summarizes all restricted stock awards activity during fiscal 2017, 2016 and 2015: Number ofShares WeightedAverageGrant Price Balance at September 30, 2014 18,624 $22.45 Granted 18,073 21.84 Vested (7,606) 22.28 Forfeited (1,316) 22.16 Balance at September 30, 2015 27,775 22.12 Granted 20,108 20.14 Vested (12,311) 22.19 Forfeited (2,439) 21.17 Balance at September 30, 2016 33,133 20.96 Granted 51,559 25.12 Vested (14,497) 21.10 Forfeited (2,278) 25.12 Balance at September 30, 2017 67,917 $23.98 Performance Share AwardsF-26 The Company has entered into performance share agreements with certain key employees, covering the issuance of common stock (“PerformanceShares”). The Performance Shares vest upon the achievement of all or a por(cid:42)on of certain performance objec(cid:42)ves, which must be achieved during theperformance period. The Performance Shares are not issued and outstanding un(cid:42)l the performance objec(cid:42)ves are met. The Organiza(cid:42)on and Compensa(cid:42)onCommi(cid:48)ee of the Board of Directors (the “Commi(cid:48)ee”) approves the performance objec(cid:42)ves used for execu(cid:42)ve compensa(cid:42)on programs, which objec(cid:42)ves werecumula(cid:42)ve earnings per share and cumula(cid:42)ve revenue for the three-year performance periods for ﬁscal 2013 awards (2013 – 2015), and 2014 awards (2014 –2016), and are cumula(cid:42)ve earnings before interest, income taxes, deprecia(cid:42)on and amor(cid:42)za(cid:42)on (“EBITDA”) for ﬁscal 2015 awards (2015 – 2017), ﬁscal 2016awards (2016-2018) and ﬁscal 2017 awards (2016-2018). Assuming that the minimum performance level is a(cid:48)ained, the number of shares that may actuallyvest will vary based on performance from 20% (minimum) to 200% (maximum) of the target number of shares. Shares will be issued to par(cid:42)cipants as soon asprac(cid:42)cable following the end of the performance periods, subject to Commi(cid:48)ee approval and veriﬁca(cid:42)on of results. The per-unit compensa(cid:42)on cost related tothe shares to be granted under each performance period is ﬁxed on the grant date, which is the date the performance period begins. Compensa(cid:42)on expense isrecognized in each period based on management’s best es(cid:42)mate of the achievement level of the speciﬁed performance objec(cid:42)ves for Performance Shares foreach open performance period. In ﬁscal 2017, the Company recognized expense of $1.2 million related to probable achievement of performance objec(cid:42)ves forthree-year Performance Shares granted in ﬁscal 2017, 2016 and 2015. In ﬁscal 2016, the Company recognized expense of $1.9 million related to probableachievement of performance objec(cid:42)ves for three-year Performance Shares granted in ﬁscal 2016, 2015 and 2014. In ﬁscal 2015, the Company recognizedexpense of $0.5 million related to probable achievement of performance objec(cid:42)ves for three-year Performance Shares granted in ﬁscal 2015, 2014 and 2013.The stock-based compensation table above includes the Performance Shares expenses.The fair values of the Performance Shares, at target, were $1.2 million, $1.3 million and $0.9 million for grants awarded in ﬁscal 2017, 2016 and 2015,respectively.The aggregate number of shares that could be awarded to key employees if the minimum, target and maximum performance goals are met, based uponthe fair value at the date of grant is as follows: Performance Period Minimum Shares Target Shares Maximum Shares Fiscal 2015 – 2017 8,440 42,199 84,398 Fiscal 2016 – 2018 13,268 66,338 132,676 Fiscal 2017 – 2019 10,437 52,185 104,370 The Fiscal 2015 – 2017 awards are expected to be ﬁnalized in December 2017 at an es(cid:42)mated 51,483 shares based on performance objec(cid:42)ve results.Based on the Company’s performance through September 30, 2017, it is es(cid:42)mated that approximately 57,979 shares may be earned for the Fiscal 2016 – 2018performance period and that approximately 63,561 shares may be earned for the Fiscal 2017 – 2019 performance period.1999 Employee Stock Purchase PlanUnder the amended 1999 Employee Stock Purchase Plan (“Stock Purchase Plan”), the Company is authorized to issue up to 600,000 shares of commonstock. All full-(cid:42)me and part-(cid:42)me U.S. employees can choose to have up to 10% of their annual compensa(cid:42)on withheld, with a limit of $25,000, to purchase theCompany’s common stock at purchase prices defined within the provisions of the Stock Purchase Plan. As of September 30, 2017 and 2016, there were less than$0.1 million of employee contribu(cid:42)ons in accrued liabili(cid:42)es in the consolidated balance sheets. Stock compensa(cid:42)on expense recognized related to the StockPurchase Plan for the ﬁscal years ended September 30, 2017, 2016 and 2015 totaled $0.1 million or less for each year. The stock-based compensa(cid:42)on tableabove includes the Employee Stock Purchase Plan expenses.Restricted Stock and Deferred Stock UnitsThe Company awarded 16,004 and 18,877 restricted stock units (“RSU”) in ﬁscal 2017 and 2016, respec(cid:42)vely, under the 2009 Plan to non-employeedirectors and certain key employees in foreign jurisdic(cid:42)ons with forfeitures of 495 and 1,609 in ﬁscal 2017 and 2016, respec(cid:42)vely. RSU awards are notconsidered issued or outstanding common stock of the Company un(cid:42)l they vest. The es(cid:42)mated fair value of the RSU awards was calculated based on the closingmarket price of Surmodics’ common stock on the date of grant. As of September 30, 2017 and 2016, outstanding RSU’s totaled 44,391 and 32,101, respec(cid:42)vely.Compensa(cid:42)on expense is recognized over the ves(cid:42)ng term based on the fair value of the common shares on the date of grant. The stock-based compensa(cid:42)ontable above includes RSU expenses recognized related to these awards, which totaled $0.3 million, $0.2 million and $0.4 million for ﬁscal 2017, 2016 and 2015,respectively.F-27 Directors may elect to receive their annual fees for services to the Board in deferred stock units (“DSUs”). As of September 30, 2017 and 2016,outstanding DSUs totaled 24,441 and 21,077, respec(cid:42)vely, with an es(cid:42)mated fair value of $0.8 million. These DSUs are fully vested when granted. Stock-basedcompensation expense related to DSU awards, totaled $0.1 million, $0.2 million and $0.1 million in fiscal 2017, 2016 and 2015, respectively. 7. Revolving Credit Facility The Company has a revolving credit facility with available principal totaling $30.0 million, which terminates on November 1, 2019. In addi(cid:42)on, theCompany has a $5.0 million mul(cid:42)-currency overdra(cid:79) facility in Ireland with the same bank. Borrowings under the credit facility, if any, bear interest at abenchmark rate plus a margin ranging from 1.00% to 1.75% based on the Company’s leverage ra(cid:42)o, as deﬁned in the loan agreement. A facility fee is payablequarterly on unused commitments at a rate of 0.15% per annum. The Company has the op(cid:42)on to increase the credit facility increments of $5.0 million up to anaddi(cid:42)onal $20.0 million, subject to approval of the lender. The Company’s obliga(cid:42)ons under the credit facility are secured by substan(cid:42)ally all of its assets, otherthan intellectual property and real estate, as well as the majority of its equity interest in its subsidiaries.In connec(cid:42)on with the credit facility, the Company is required to maintain certain ﬁnancial covenants related to a maximum leverage ra(cid:42)o and aminimum EBITDA amount and to comply with nonﬁnancial covenants. As of September 30, 2017, the Company had no borrowings outstanding on the line ofcredit and was in compliance with all financial covenants under the credit facility. 8. Income TaxesIncome taxes from con(cid:42)nuing opera(cid:42)ons in the accompanying consolidated statements of income for the ﬁscal years ended September 30 are as follows(in thousands): 2017 2016 2015 Current provision: U.S. Federal $2,125 $6,550 $6,065 U.S. State (72) 250 106 International 54 (98) 30 Total current provision 2,107 6,702 6,201 Deferred provision (benefit): U.S. Federal 1,085 169 58 U.S. State (85) (43) 35 International — 135 — Total deferred provision (benefit) 1,000 261 93 Total provision $3,107 $6,963 $6,294 F-28 The reconcilia(cid:42)on of the diﬀerence between amounts calculated at the statutory U.S. federal tax rate of 35% for the ﬁscal years ended September 30 andthe Company’s effective tax rate from continuing operations is as follows (in thousands): 2017 2016 2015 Amount at statutory U.S. federal income tax rate $2,461 $5,932 $6,385 Change because of the following items: State income taxes, net of federal benefit (13) 142 67 Stock-based compensation 330 (607) 16 Valuation allowance change 665 (2,500) 348 Tax reserve change (52) 258 34 Federal manufacturing deduction (313) (280) (268)U.S. Federal and foreign research and development credits (706) (571) (74)Gain on strategic investment and corporate subsidiary — 2,630 — Foreign rate differential 948 622 — Acquisition-related transaction costs — 768 — Contingent consideration (gain) expense (45) 522 — Unrealized foreign currency exchange loss on contingentconsideration obligation 170 — — Other (338) 47 (214)Income tax provision $3,107 $6,963 $6,294 The federal research and development tax credit for ﬁscal 2016 and 2015 includes the beneﬁt generated for the periods from October 1, 2015 toDecember 31, 2015, October 1, 2014 to December 31, 2014 and October 1, 2013 to December 31, 2013, respec(cid:42)vely, prior to the expira(cid:42)on of the beneﬁt ineach period. During ﬁscal 2016, the Company u(cid:42)lized $7.5 million of capital losses generated in prior years by accelera(cid:42)ng built-in gains in the Company’s IVDsubsidiary. For tax purposes, this resulted in an increase in the Company’s tax basis in the IVD subsidiary and a $2.6 million reduc(cid:42)on in both deferred tax assetsand the valuation allowance as of September 30, 2016.Excess tax beneﬁts (shor(cid:77)alls) related to stock based compensa(cid:42)on expense are recorded within income tax expenses in the consolidated statements ofincome and totaled $(0.2) million and $0.6 million for the years ended September 30, 2017 and 2016, respec(cid:42)vely. During ﬁscal 2015, under accoun(cid:42)ngguidance then in effect, excess tax benefits totaling $0.4 were recorded in additional paid-in capital.The components of deferred income taxes consisted of the following as of September 30 and result from differences in the recognition of transactions forincome tax and financial reporting purposes (in thousands): 2017 2016 Depreciable assets $(3,335) $(2,257)Accruals and reserves 1,123 1,153 Stock-based compensation 3,370 3,113 Impaired strategic investments 2,701 2,701 NOL carryforwards 3,627 3,324 U.S. Federal and state R&D credits 242 110 Other 810 730 Valuation allowance (4,511) (3,847)Total deferred tax assets $4,027 $5,027 As of September 30, 2017 and 2016, the Company recorded deferred tax asset valua(cid:42)on allowances of $4.5 million and $3.9 million, respec(cid:42)vely. Thevalua(cid:42)on allowances are primarily related to other-than-temporary impairment losses on strategic investments, state R&D credit carryforwards, and netopera(cid:42)ng loss carryforwards of Creagh Medical. As of September 30, 2017, the Company had federal and Minnesota R&D credit carryforwards of $0.3 millionthat will begin expiring in 2029 and state net opera(cid:42)ng loss carryforwards $0.2 million that will begin expiring in 2022. The Ireland and Luxembourg netoperating loss carryforward assets totaling $3.0 million, much of which was acquired as part of the Creagh Medical acquisition in fiscal 2016, haveF-29 an unlimited carryforward period. The U.S. federal and Minnesota net opera(cid:42)ng losses acquired as part of the NorMedix, Inc. acquisi(cid:42)on are subject to the IRCSection 382 limitation rules. The Company has projected that these losses will be utilized with over the ten years remaining in the carryforward period.Unrecognized tax beneﬁts are the diﬀerences between a tax posi(cid:42)on taken, or expected to be taken in a tax return, and the beneﬁt recognized foraccounting purposes pursuant to accounting guidance. A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding interest andpenalties, is as follows (in thousands): 2017 2016 2015 Beginning of fiscal year $1,508 $1,248 $1,216 Increases in tax positions for prior years 8 77 50 Decreases in tax positions for prior years (35) (21) (10)Increases in tax positions for current year 216 365 146 Lapse of the statute of limitations (216) (161) (154)End of fiscal year $1,481 $1,508 $1,248 The total amount of unrecognized tax beneﬁts excluding interest and penal(cid:42)es that, if recognized, would aﬀect the eﬀec(cid:42)ve tax rate as of September 30,2017, 2016 and 2015, respec(cid:42)vely, are $1.2 million, $1.2 million and $0.9 million. Currently, the Company does not expect the liability for unrecognized taxbeneﬁts to change signiﬁcantly in the next 12 months and has classiﬁed the above balances on the consolidated balance sheets in other long-term liabili(cid:42)es.Interest and penal(cid:42)es related to unrecognized tax beneﬁts are recorded in income tax expense. As of September 30, 2017, 2016 and 2015, a gross balance of$0.5 million, $0.6 million and $0.6 million, respectively, has been accrued related to the unrecognized tax benefits balance for interest and penalties.The Company ﬁles income tax returns, including returns for its subsidiaries, in the U.S. federal jurisdic(cid:42)on and in various state jurisdic(cid:42)ons as well asseveral non-U.S. jurisdic(cid:42)ons. Uncertain tax posi(cid:42)ons are related to tax years that remain subject to examina(cid:42)on. The Internal Revenue Service (“IRS”)commenced an examina(cid:42)on of the Company’s ﬁscal 2016 U.S. federal income tax return in the fourth quarter of ﬁscal 2017. The examina(cid:42)on has not beencompleted. U.S. federal income tax returns for years prior to ﬁscal 2013 are no longer subject to examina(cid:42)on by federal tax authori(cid:42)es. For tax returns for stateand local jurisdic(cid:42)ons, the Company is no longer subject to examina(cid:42)on for tax years generally before ﬁscal 2007. For tax returns for non-U.S. jurisdic(cid:42)ons, theCompany is no longer subject to income tax examina(cid:42)on for years prior to 2012. Addi(cid:42)onally, the Company has been indemniﬁed of liability for any taxesrela(cid:42)ng to Creagh Medical and NorMedix for periods prior to the respec(cid:42)ve acquisi(cid:42)on dates, pursuant to the terms of the related share purchase agreements.As of September 30, 2017 and 2016, there were no undistributed earnings in foreign subsidiaries. 9. Defined Contribution PlanThe Company has a 401(k) re(cid:42)rement and savings plan for the beneﬁt of qualifying U.S. employees, and a deﬁned contribu(cid:42)on PRSA plan for the beneﬁtof qualifying Ireland employees. For U.S. employees, the Company matches 50% of employee contribu(cid:42)ons on the ﬁrst 6% of eligible compensa(cid:42)on. For Irelandemployees, the Company makes contribu(cid:42)ons of up to 8% of eligible compensa(cid:42)on on employee contribu(cid:42)ons of up to 6% of eligible compensa(cid:42)on. Companycontributions totaling $0.7 million, $0.3 million and $0.3 million have been expensed in the years ended September 30, 2017, 2016 and 2015, respectively. 10. Amounts Reclassified Out of Accumulated Other Comprehensive IncomeAmounts reclassiﬁed out of Accumulated Other Comprehensive Income (“AOCI”) totaled $0.3 million on a pre-tax basis for the ﬁscal year endedSeptember 30, 2015. There were no amounts reclassiﬁed out of AOCI for ﬁscal 2017 or 2016. The amounts reclassiﬁed out of AOCI for ﬁscal 2015 wereassociated with an unrealized gain on available-for-sale securi(cid:42)es that were realized on the sale of the securi(cid:42)es and are presented in other income, net in theconsolidated statements of income. 11. Commitments and ContingenciesLitigation. From (cid:42)me to (cid:42)me, the Company has been, and may become, involved in various legal ac(cid:42)ons involving its opera(cid:42)ons, products andtechnologies, including intellectual property and employment disputes. The outcomes of these legal ac(cid:42)ons are not within the Company’s complete control andmay not be known for prolonged periods of time. In some actions, theF-30 claimants seek damages as well as other relief, including injunc(cid:42)ons barring the sale of products that are the subject of the lawsuit, which if granted, couldrequire significant expenditures or result in lost revenue. The Company records a liability in the consolidated ﬁnancial statements for these ac(cid:42)ons when a loss isknown or considered probable and the amount can be reasonably es(cid:42)mated. If the reasonable es(cid:42)mate of a known or probable loss is a range, and no amountwithin the range is a be(cid:48)er es(cid:42)mate, the minimum amount of the range is accrued. If a loss is possible but not known or probable, and can be reasonablyes(cid:42)mated, the es(cid:42)mated loss or range of loss is disclosed. In most cases, signiﬁcant judgment is required to es(cid:42)mate the amount and (cid:42)ming of a loss to berecorded.On February 22, 2017, the Company was sued by Merit Medical Systems, Inc. (“Merit”) in the U.S. District Court for the District of Utah. NorMedix wasadded as a defendant on April 3, 2017. The lawsuit alleges breach of contract and seeks declaratory relief in connec(cid:42)on with a services agreement entered intobetween Merit and NorMedix on March 3, 2015. In the lawsuit, Merit claims that certain technology and intellectual property related to thin-walled cathetertechnologies were developed by NorMedix under the services agreement and, pursuant to the terms of that agreement, should be owned by Merit. Pretrialproceedings are underway. The Company has not recorded an expense related to damages in connec(cid:42)on with this ma(cid:48)er because any poten(cid:42)al loss is notcurrently probable or reasonably es(cid:42)mable. Addi(cid:42)onally, the Company cannot reasonably es(cid:42)mate the range of loss, if any, that may result from this ma(cid:48)er.Under the stock purchase agreement, pursuant to which the Company acquired NorMedix, the Company may have certain rights of indemniﬁca(cid:42)on againstlosses (including, without limitation, damages, expenses and costs) incurred as a result of the claims asserted in the litigation.The Company believes that the claims in the lawsuit are without merit and plans to vigorously defend and prosecute this matter.In the Company’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2015, and June 30, 2015, it was disclosed a no(cid:42)ce was received froma customer alleging an overpayment of approximately $5.7 million in royal(cid:42)es covering the period January 2009 through September 2014 (the “Claim”). OnSeptember 29, 2015, the Company entered into a se(cid:48)lement and release agreement resolving the Claim. Under the agreement, among other things, (a) theCompany agreed to pay the customer $2.5 million to se(cid:48)le the Claim, (b) the customer agreed to pay the Company approximately $0.5 million for undisputedroyal(cid:42)es that were unpaid and were not previously recognized, during ﬁscal 2015, and (c) the Company and the customer agreed to a mutual release rela(cid:42)ng tothe Claim and certain other claims by the Company for royal(cid:42)es owed by the customer. In connec(cid:42)on with the se(cid:48)lement, in the fourth quarter of ﬁscal 2015,the Company recognized revenue of approximately $0.5 million and recorded a charge of approximately $2.5 million.InnoRx, Inc. In January 2005, the Company entered into a merger agreement whereby the Company acquired all of the assets of InnoRx, Inc. (“InnoRx”),an early stage company developing drug delivery devices and therapies for the ophthalmology market. The Company will be required to issue up toapproximately 480,059 addi(cid:42)onal shares of its common stock to the stockholders of InnoRx upon the successful comple(cid:42)on of the remaining development andcommercial milestones involving InnoRx technology acquired in the transac(cid:42)on. The Company has not recorded any accrual for this con(cid:42)ngency as ofSeptember 30, 2017 as the milestones have not been achieved and the probability of achievement is remote.InnoCore Technologies BV. In March 2006, the Company entered into a license agreement whereby Surmodics obtained an exclusive license to a drugdelivery coa(cid:42)ng for licensed products within the vascular ﬁeld which included peripheral, coronary and neurovascular biodurable stent product. The licenserequires an annual minimum payment of 200,000 euros (equivalent to $236,000 using a euro to US $ exchange rate of 1.1801 as of September 30, 2017) un(cid:42)lthe last patent expires which is currently es(cid:42)mated to be September 2027. The total minimum future payments associated with this license are approximately$2.4 million. The license is currently utilized with one of Surmodics’ drug delivery customers. Opera(cid:41)ng Leases. The Company leases certain facili(cid:42)es under noncancelable opera(cid:42)ng lease agreements. Rent expense for the years endedSeptember 30, 2017, 2016 and 2015 was $0.1 million for each period. In November 2017, the Company executed a lease for a 36,000 square feet of oﬃce andR&D facility in Eden Prairie, Minnesota. Contractual obliga(cid:42)ons under the lease agreement total $4.0 million over the ten-year lease term, which is expected tocommence in May 2018. Annual commitments pursuant to operating lease agreements in place as of September 30, 2017 are as follows (in thousands):F-31 Year Ended September 30, 2018 $114 2019 73 2020 74 2021 12 2022 — Thereafter — Total minimum lease payments $273 Clinical Trials. The Company has engaged a CRO to assist with its ongoing clinical trials. In connec(cid:42)on with the TRANSCEND pivotal clinical trial for theSurVeil® drug-coated balloon, the Company signed a $26 million contract with a CRO for the administra(cid:42)on of the trial, under which an es(cid:42)mated $23.2 millionremains to be paid as of September 30, 2017. The Company es(cid:42)mates that the total cost of the TRANSCEND clinical trial will be in the range of $32 million to $40million over the next several years. In the event the Company were to terminate any trial, it may incur certain ﬁnancial penal(cid:42)es which would become payable tothe CRO for costs to wind down the terminated trial. 12. Reportable Segment InformationThe accoun(cid:42)ng standards for repor(cid:42)ng informa(cid:42)on about opera(cid:42)ng segments deﬁne opera(cid:42)ng segments as components of an enterprise about whichseparate ﬁnancial informa(cid:42)on is available that is evaluated regularly by the chief opera(cid:42)ng decision maker, who is the Company’s Chief Execu(cid:42)ve Oﬃcer, indeciding how to allocate resources and in assessing performance. For ﬁnancial accoun(cid:42)ng and repor(cid:42)ng purposes, the Company reports its results for the tworeportable segments as follows: (1) the Medical Device unit, which is comprised of surface modiﬁca(cid:42)on coa(cid:42)ng technologies to improve access, deliverability,and predictable deployment of medical devices; international cardiology and peripheral balloon design, development and manufacturing; as well as drug deliverycoa(cid:42)ng technologies to provide site-speciﬁc drug delivery from the surface of a medical device, with end markets that include coronary, peripheral, neuro-vascular and urology, among others, and (2) the In Vitro Diagnos(cid:42)cs unit, which consists of component products and technologies for diagnos(cid:42)c test kits andbiomedical research applica(cid:42)ons, with products that include protein stabiliza(cid:42)on reagents, substrates, an(cid:42)gens and surface coa(cid:42)ngs. During ﬁscal 2016, theCompany acquired Creagh Medical and NorMedix, which are included in the Medical Device segment.The tables below present segment revenue, opera(cid:42)ng income from con(cid:42)nuing opera(cid:42)ons and deprecia(cid:42)on and amor(cid:42)za(cid:42)on, for the years endedSeptember 30, as follows (in thousands): 2017 2016 2015 Revenue: Medical Device $53,983 $53,202 $45,944 In Vitro Diagnostics 19,129 18,164 15,954 Total revenue $73,112 $71,366 $61,898 Operating income (loss): Medical Device $6,902 $16,975 $21,192 In Vitro Diagnostics 8,293 7,115 4,484 Total segment operating income 15,195 24,090 25,676 Corporate (8,092) (7,231) (6,587)Total operating income $7,103 $16,859 $19,089 Depreciation and amortization: Medical Device $4,453 $3,261 $1,138 In Vitro Diagnostics 412 789 873 Corporate 690 823 794 Total depreciation and amortization $5,555 $4,873 $2,805 F-32 The Corporate category includes expenses that are not fully allocated to Medical Device and In Vitro Diagnos(cid:42)cs segments. These Corporate costs arerelated to func(cid:42)ons, such as execu(cid:42)ve management, corporate accoun(cid:42)ng, legal, human resources and Board of Directors. Corporate may also includeexpenses, such as litigation, which are not specific to a segment and thus not allocated to the operating segments. Asset informa(cid:42)on by segment is not presented because the Company does not provide its chief opera(cid:42)ng decision maker assets by segment, as the data isnot readily available.Major CustomersRevenue from customers that equaled or exceeded 10% of total revenue was as follows for the years ended September 30: 2017 2016 2015 Medtronic 18% 25% 26% The revenue from the customer listed is derived from two primary sources: licensing and product sales (primarily in the Medical Device segment).Geographic Revenue and Long-lived AssetsGeographic revenue was as follows for the years ended September 30: 2017 2016 2015 Domestic 77% 79% 77%Foreign 23% 21% 23% Long-lived assets, including property and equipment and intangible assets net of accumulated deprecia(cid:42)on and amor(cid:42)za(cid:42)on, respec(cid:42)vely, by countrywere as follows as of September 30: 2017 2016 U.S. $20,949 $21,543 Ireland 22,555 20,583 13. Quarterly Financial Data (Unaudited)The following is a summary of the unaudited quarterly results for the years ended September 30, 2017 and 2016 (in thousands, except per share data). FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Fiscal 2017 Total revenue $17,761 $17,503 $17,790 $20,058 Operating income 3,268 1,677 1,743 415 Net income 2,300 506 720 400 Basic net income per share (1): 0.17 0.04 0.05 0.03 Diluted net income per share (1): 0.17 0.04 0.05 0.03 Fiscal 2016 Total revenue $16,541 $16,699 $19,972 $18,154 Operating income 3,939 2,240 6,597 4,083 Net income 2,653 821 3,934 2,577 Basic net income per share (1): 0.20 0.06 0.31 0.20 Diluted net income per share (1): 0.20 0.06 0.30 0.20 (1)The sum of the quarterly income per share amounts may not equal the annual income per share total because of changes in the weighted averagenumber of shares outstanding that occurred during the year.F-33 In the fourth quarter of ﬁscal 2017, the Company recorded a $1.1 million license fee related to a customer’s acquisi(cid:42)on and the Company’s sale of relatedjointly-owned intellectual property to the acquirer.In the ﬁrst quarter of ﬁscal 2016, the Company recorded expense related to acquisi(cid:42)on related costs, including due diligence and integra(cid:42)on expenses of$2.5 million, related to the acquisitions of Creagh Medical and NorMedix (Note 3).During the second quarter of ﬁscal 2016, the Company recorded an out-of-period adjustment of $1.1 million to correct a cumula(cid:42)ve overstatement ofroyalty revenue, of which $1.0 million related to years prior to ﬁscal 2016. The overstatement was evaluated and concluded to not be material to ﬁscal 2016, orany prior interim or annual periods.In the third quarter of ﬁscal 2016, the Company recorded a $2.9 million customer royalty catch-up payment related to periods prior to the third quarterfiscal 2016.In the fourth quarter of ﬁscal 2016, the Company recorded a $0.5 million reduc(cid:42)on of the income tax provision related to the adop(cid:42)on of ASU 2016-09 asdiscussed in Note 9. F-34BOARD COMPENSATION POLICYEXHIBIT 10.17Surmodics, Inc.(Approved: July 18, 2017)Directors of Surmodics, Inc. (the “Company”) that are not employed by the Company (“non-employee directors”) are entitledto the compensation set forth below for their service as a member of the Board of Directors (the “Board”) of the Company. The Boardreserves the right to amend this policy from time to time. Unless expressly stated otherwise, amendments to this policy shall only haveprospective effect.A.Cash Compensation. Each non-employee director of the Company will be entitled to receive annual cash retainersas follows:The cash retainers set forth above will become payable quarterly in arrears on the first trading day of each calendar quarter. The annualcash retainer shall be reduced by 25% if a non-employee director does not attend at least 75% of the total meetings of the Board andBoard committees on which such director served during the applicable fiscal year. If, for any reason, a director does not serve an entirecalendar quarter, the cash retainers will be pro-rated based on such director’s length of service during such calendar quarter.B.Equity Compensation. In addition to the cash compensation described above, each non-employee director will alsoreceive the following equity grants:1.Initial Grant: Upon his or her initial election or appointment to the Board, each non-employeedirector will be awarded an equity grant having a value of $95,000, one-half of such award shall be in the form of a nonqualified stockoption to purchase shares of the Company’s common stock (“Stock Options”) and the other half shall be in the form of restricted stockunits (“RSUs”).2.Annual Grant: On the date of the Company’s annual meeting of shareholders during eachfiscal year, each non-employee director will be awarded an equity grant having a value of $95,000, one-half of such award shall be inthe form of Stock Options and the other half shall be in the form of RSUs. The value of the first annual equity grant following adirector’s initial election or appointment to the Board will be pro-rated based on such director’s length of service on the Board duringthe preceding 12-month period.C.Stock in Lieu of Cash. A non-employee director may elect, in a form and in a manner prescribed by the Company,to receive all or a portion of their cash retainers (“Deferred Retainers”) in the form of deferred stock units (“DSUs”). Such DSU awardwill be granted on the last trading day of the calendar quarter for which the applicable Deferred Retainers would have otherwise beenpaid, and the number of DSUs covered by such award will be determined using the fair market value of the Company’s common stock(i.e., the closing price) on such date. Such DSUs will be fully vested as of the date of grant and will be paid in shares of the Company’scommon stock on a one-for-one basis upon the termination of the director’s service on the Board (or, if earlier and as permitted underapplicable tax law, upon the occurrence of a change in control event). Any such election Surmodics, Inc.Board Compensation Policy (continued)Page 2 of 2 to receive an equity award in lieu of cash retainers must be made prior to the December 31 that precedes the calendar year during whichthe Deferred Retainers are earned by the non-employee director (or such earlier date as may be prescribed by the Company). A newlyappointed or elected non-employee director may make such an election to receive an equity award in lieu of cash retainers at any timewithin 30 days after the director’s initial election or appointment to the Board, and such election will be effective for the first quarterfollowing the quarter in which the election is received by the Company.D.Expense Reimbursement. All non-employee directors will be entitled to reimbursement from the Company for theirreasonable travel and other expenses incurred in connection with attending Board or committee meetings.E.General Provisions. All equity awards provided pursuant to this policy shall be granted under the Company’s 2009Equity Incentive Plan or any successor plan designated by the Board (the “Plan”) and shall include the terms set forth below. All suchawards shall be evidenced by, and subject to the terms and conditions set forth in, a written agreement in substantially the formapproved by the Board.1.Stock Options. The number of Stock Options granted will be determined using the Company’sBlack-Scholes valuation methodology as of the date of grant. Each Stock Option grant will (a) have a seven-year term, (b) vest ratablyon a monthly basis and will become fully vested upon the earlier of (i) the 12-month anniversary of the grant date, or (ii) the date of thenext year’s annual meeting, and (c) have an exercise price equal to the fair market value of the Company’s common stock (i.e., theclosing price) on the date of grant.2.Restricted Stock Units. The number of RSUs granted will be determined using the fair marketvalue of the Company’s common stock (i.e., the closing price) on the date of grant. Each RSU grant will vest ratably on a monthlybasis and will become fully vested upon the earlier of (i) the 12-month anniversary of the grant date, or (ii) the date of the next year’sannual meeting (except for DSUs granted in lieu of cash compensation which shall be fully vested as of the date of grant).3.Stock Ownership Guidelines. RSUs and DSUs shall be considered owned, but only the extentvested, for purposes of the Company’s stock ownership guidelines applicable to non-employee directors.4.Effect of Termination of Service. In the event the director’s service on the Board terminates forany reason, (a) all outstanding and unvested Stock Options or RSUs shall expire and be canceled, (b) except as set forth below, allvested Stock Options shall remain exercisable for up to three months after the date of such termination of service, but not later than thedate the option expires, and (c) all vested RSUs and DSUs shall be settled in shares of the Company’s common stock on a one-for-onebasis. Notwithstanding the foregoing, in the event that the director’s service on the Board terminates as a result of a disability or death,the director’s guardian or legal representative may exercise the options not later than the earlier of the date the options expire or sixmonths after the date that the director’s service ceases by reason of such disability or death. Exhibit 21 SUBSIDIARIES Name State of Incorporation Surmodics IVD, Inc. Maryland NorMedix, Inc. Minnesota Creagh Medical Limited Ireland USCI Ireland Limited Ireland SurModics MD, LLC Minnesota SurModics Luxembourg S.a.r.l. Luxembourg SurModics MD Lux, S.a.r.l. Luxembourg Exhibit 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statement No. 333-123524 on Form S-3 and Registration Statement Nos. 333-104258, 333-123521, 333-165098, 333-165101 and 333-54266, on Form S-8 of our reports relating to the consolidated financial statements and financial statementschedule of Surmodics, Inc. and subsidiaries dated December 1, 2017, and the effectiveness of Surmodics, Inc.’s and subsidiaries internal control over financialreporting dated December 1, 2017, appearing in this Annual Report on Form 10-K of Surmodics, Inc. for the year ended September 30, 2017./s/ DELOITTE & TOUCHE LLPMinneapolis, MinnesotaDecember 1, 2017 EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302OF THE SARBANES-OXLEY ACT OF 2002 I, Gary R. Maharaj, certify that: 1.I have reviewed this annual report on Form 10-K of Surmodics, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the ﬁnancial statements, and other ﬁnancial informa(cid:43)on included in this report, fairly present in all material respects the ﬁnancialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over ﬁnancial repor(cid:43)ng (as deﬁned in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrantand we have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material informa(cid:43)on rela(cid:43)ng to the registrant, including its consolidated subsidiaries, is made known to us by others within those en(cid:43)(cid:43)es, par(cid:43)cularlyduring the period in which this report is being prepared;(b) Designed such internal control over ﬁnancial repor(cid:43)ng, or caused such internal control over ﬁnancial repor(cid:43)ng to be designed under our supervision, toprovide reasonable assurance regarding the reliability of ﬁnancial repor(cid:43)ng and the prepara(cid:43)on of ﬁnancial statements for external purposes in accordancewith generally accepted accounting principles;(c) Evaluated the eﬀec(cid:43)veness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the eﬀec(cid:43)veness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over ﬁnancial repor(cid:43)ng that occurred during the registrant’s most recent ﬁscalquarter (the registrant’s fourth ﬁscal quarter in the case of an annual report) that has materially aﬀected, or is reasonably likely to materially aﬀect, theregistrant’s internal control over financial reporting; and5.The registrant’s other cer(cid:43)fying oﬃcer and I have disclosed, based on our most recent evalua(cid:43)on of internal control over ﬁnancial repor(cid:43)ng, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a) All signiﬁcant deﬁciencies and material weaknesses in the design or opera(cid:43)on of internal control over ﬁnancial repor(cid:43)ng which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a signiﬁcant role in the registrant’s internal control overfinancial reporting. Dated: December 1, 2017Signature:/s/ Gary R. Maharaj Gary R. Maharaj President and Chief Executive Officer EXHIBIT 31.2CERTIFICATION PURSUANT TO SECTION 302OF THE SARBANES-OXLEY ACT OF 2002 I, Andrew D.C. LaFrence, certify that:1.I have reviewed this annual report on Form 10-K of Surmodics, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the ﬁnancial statements, and other ﬁnancial informa(cid:43)on included in this report, fairly present in all material respects the ﬁnancialcondition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) and internal control over ﬁnancial repor(cid:43)ng (as deﬁned in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrantand we have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensurethat material informa(cid:43)on rela(cid:43)ng to the registrant, including its consolidated subsidiaries, is made known to us by others within those en(cid:43)(cid:43)es, par(cid:43)cularlyduring the period in which this report is being prepared;(b) Designed such internal control over ﬁnancial repor(cid:43)ng, or caused such internal control over ﬁnancial repor(cid:43)ng to be designed under our supervision, toprovide reasonable assurance regarding the reliability of ﬁnancial repor(cid:43)ng and the prepara(cid:43)on of ﬁnancial statements for external purposes in accordancewith generally accepted accounting principles;(c) Evaluated the eﬀec(cid:43)veness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the eﬀec(cid:43)veness ofthe disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant’s internal control over ﬁnancial repor(cid:43)ng that occurred during the registrant’s most recent ﬁscalquarter (the registrant’s fourth ﬁscal quarter in the case of an annual report) that has materially aﬀected, or is reasonably likely to materially aﬀect, theregistrant’s internal control over financial reporting; and5.The registrant’s other cer(cid:43)fying oﬃcer and I have disclosed, based on our most recent evalua(cid:43)on of internal control over ﬁnancial repor(cid:43)ng, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):(a) All signiﬁcant deﬁciencies and material weaknesses in the design or opera(cid:43)on of internal control over ﬁnancial repor(cid:43)ng which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a signiﬁcant role in the registrant’s internal control overfinancial reporting. Dated: December 1, 2017Signature:/s/ Andrew D.C. LaFrence Andrew D.C. LaFrence Vice President of Finance and Information Systems andChief Financial Officer EXHIBIT 32.1 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connec(cid:7)on with the Annual Report of Surmodics, Inc. (the “Company”) on Form 10-K for the year ended September 30, 2017, as ﬁled with the Securi(cid:7)esand Exchange Commission (the “Report”), I, Gary R. Maharaj, cer(cid:7)fy, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: December 1, 2017Signature:/s/ Gary R. Maharaj Gary R. Maharaj President and Chief Executive Officer EXHIBIT 32.2 CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connec(cid:7)on with the Annual Report of Surmodics, Inc. (the “Company”) on Form 10-K for the year ended September 30, 2017, as ﬁled with the Securi(cid:7)esand Exchange Commission (the “Report”), I, Andrew D.C. LaFrence, cer(cid:7)fy, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Actof 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: December 1, 2017Signature:/s/ Andrew D.C. LaFrence Andrew D.C. LaFrence Vice President of Finance and Information Systems and Chief Financial Officer

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