Surmodics Annual Report 2018

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, 2018Commission 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 every Interac(cid:42)ve Data File required to be submi(cid:48)ed pursuant to Rule 405 of Regula(cid:42)on S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). 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” and "emerging growth company" in Rule 12b-2 of the Exchange Act:Large accelerated filer☐ Accelerated filer☒Non-accelerated filer☐ 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, 2018 was approximately $255 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 26, 2018 was 13,398,036.DOCUMENTS INCORPORATED BY REFERENCEPortions of the Registrant’s Proxy Statement for the Registrant’s 2019 Annual Meeting of Shareholders are incorporated by reference into Part III. Table of Contents Page Forward-Looking Statements3 Part I Item 1.Business4 Executive Officers of the Registrant15Item 1A.Risk Factors17Item 1B.Unresolved Staff Comments25Item 2.Properties26Item 3.Legal Proceedings26Item 4.Mine Safety Disclosures26 Part II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities27Item 6.Selected Financial Data29Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations29Item 7A.Quantitative and Qualitative Disclosures About Market Risk41Item 8.Financial Statements and Supplementary Data41Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure41Item 9A.Controls and Procedures41Item 9B.Other Information42 Part III Item 10.Directors, Executive Officers and Corporate Governance43Item 11.Executive Compensation43Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters43Item 13.Certain Relationships and Related Transactions, and Director Independence43Item 14.Principal Accountant Fees and Services43 Part IV Item 15.Exhibits and Financial Statement Schedule44Signatures 48Forward-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 and commercializa(cid:42)on of the SurVeil® drug-coated balloon (“SurVeil DCB”), including relatedlicense fee revenue and the es(cid:42)mated cost associated with the TRANSCEND clinical trial and other clinical trials, sales eﬀorts, the impact of signiﬁcant customeragreements, including its agreements with Medtronic plc (“Medtronic”) and Abbo(cid:48) Vascular, Inc. (“Abbo(cid:48)”), the impact of acquisi(cid:42)ons, the Company’s whole-products solu(cid:42)ons strategy, and our expecta(cid:42)ons related to expenses and regulatory approvals. You should carefully consider forward-looking statements andunderstand that such statements involve a variety of risks and uncertain(cid:42)es, known and unknown, and may be aﬀected by inaccurate assump(cid:42)ons.Consequently, no forward-looking statement can be guaranteed and actual results may vary materially. The Company undertakes no obliga(cid:42)on to update anyforward-looking statement. Investors are advised not to place undue reliance upon the Company’s forward-looking statements and to consult any furtherdisclosures by the Company on such topics in this and other ﬁlings with the Securi(cid:42)es and Exchange Commission (“SEC”). Factors that could cause our actualresults to differ from those discussed in the forward-looking statements include, but are not limited to, those described in Item 1A “Risk Factors” below. 3PART IITEM 1. BUSINESS.OVERVIEWSurmodics, 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. We aim to develop highly diﬀeren(cid:42)ated products designed to improve pa(cid:42)entoutcomes through enhanced treatment of vascular disease. Additionally, both our Medical Device and In Vitro Diagnostics operating segments partner with manyof the world’s leading and emerging medical device, diagnos(cid:42)c and life sciences companies to commercialize our proprietary medical device, surfacemodification and diagnostics technologies.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:80)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 SEC maintains a website that contains reports, proxy and informa(cid:42)on statements, and other informa(cid:42)on regarding issuers, including the Company,that ﬁle electronically with the SEC. The public may obtain any documents that we ﬁle with the SEC at http://www.sec.gov. We ﬁle annual reports, quarterlyreports, proxy statements, and other documents with the SEC under the Exchange Act.The informa(cid:42)on below provides an overview of the principal products, services and markets for each of our two business units. The discussion of otheraspects 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:80)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, neurology,ophthalmology, orthopedic and other large interventional 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 coa(cid:42)ng technologies as product diﬀeren(cid:42)ators or device enablers. The con(cid:42)nuing trend toward minimally invasive surgical procedures,which o(cid:80)en employ catheter-based delivery technologies, has increased the demand for hydrophilic (i.e., lubricious or slippery) coa(cid:42)ngs and other coa(cid:42)ngtechnologies, including drug-delivery coa(cid:42)ngs. For example, stents, par(cid:42)cularly drug-elu(cid:42)ng stents, have signiﬁcantly reduced the need for repeat intravascularprocedures or more invasive cardiac bypass surgery. Drug-coated balloons have further transformed intravascular therapies by enhancing pa(cid:42)ent outcomeswhile not leaving stents in the vascular system. Transcatheter heart valve repair or replacement via a minimally invasive catheter-based system has enabled thetreatment of pa(cid:42)ents suﬀering from heart valve disease who are too ill to undergo open-heart surgery. Posi(cid:42)ve clinical outcomes and acceptance by pa(cid:42)ents,physicians and insurance companies of such innova(cid:42)ons has helped certain segments of the United States (“U.S.”) medical device industry grow at a faster pacethan the economy as a whole. The attractiveness of the industry has drawn intense competition among the companies participating in this area.For many years, we have provided surface modiﬁca(cid:42)on coa(cid:42)ng technologies that impart lubricity, prohealing or biocompa(cid:42)bility characteris(cid:42)cs, as wellas drug delivery capabili(cid:42)es to enhance our customers’ medical devices and delivery systems. Since ﬁscal 2013, with our investment in our drug-coated balloon(“DCB”) pla(cid:83)orm, we have been focused on a strategy to develop and manufacture proprietary medical device products that combine our surface modiﬁca(cid:42)oncoa(cid:42)ngs with medical devices or delivery systems (“whole-product solu(cid:42)ons”). This strategy does not change our focus on the development andcommercialization4of our core surface modiﬁca(cid:42)on coa(cid:42)ng technologies. However, we believe it will greatly increase our relevance in the industry and is key to our future growthand profitability, given the prospect of capturing more revenue and operating margin with whole-product solutions.Over the past three years, we have enhanced our medical device design, development and manufacturing capabili(cid:42)es through internal growth andacquisi(cid:42)on, with the goal of developing and commercializing 12-15 medical device products by the end of ﬁscal 2023. To that end, we have invested in state-of-the-art R&D and manufacturing facili(cid:42)es in Ireland and the U.S. and have begun integra(cid:42)ng our balloon catheter, ultra-thin-walled catheter and surfacemodiﬁca(cid:42)on coa(cid:42)ng technologies into several new products and product pla(cid:83)orms. Our aim is to provide customers earlier access to highly diﬀeren(cid:42)atedwhole-product solutions that address unmet clinical needs through development and commercialization of novel vascular devices.During ﬁscal 2018, we con(cid:42)nued inves(cid:42)ng in our whole-product solu(cid:42)ons strategy and achieved several meaningful strategic milestones. On February26, 2018, we entered into an agreement with Abbo(cid:48) whereby Abbo(cid:48) will have exclusive worldwide commercializa(cid:42)on rights for Surmodics’ SurVeil® DCB totreat the superﬁcial femoral artery (“SurVeil DCB”) (the “Abbo(cid:48) Agreement”), which is currently being evaluated in a U.S. pivotal clinical trial. Separately, Abbo(cid:48)also received op(cid:42)ons to nego(cid:42)ate agreements for Surmodics' below-the-knee and arteriovenous (“AV”) ﬁstula DCB products, which are currently in pre-clinicaldevelopment. We will collaborate with Abbo(cid:48) on product development, clinical trials and regulatory ac(cid:42)vi(cid:42)es to obtain marke(cid:42)ng clearances in the U.S. and theEuropean Union for the SurVeil DCB. Expenses related to these ac(cid:42)vi(cid:42)es will primarily be paid by Surmodics. We received an upfront payment of $25 million andmay earn up to an addi(cid:42)onal $67 million upon achievement of certain milestones related to regulatory approval and clinical trial ac(cid:42)vi(cid:42)es. Upon the regulatoryapproval of the SurVeil DCB, Surmodics will be responsible for manufacturing clinical and commercial quan(cid:42)(cid:42)es of the product and will realize revenue fromproduct sales to Abbo(cid:48), as well as a share of proﬁts resul(cid:42)ng from sales to third par(cid:42)es. The agreement with Abbo(cid:48) represents a signiﬁcant step forward in ourwhole-product solu(cid:42)ons strategy. We recognized revenue of $4.4 million in ﬁscal 2018 related to the Abbo(cid:48) Agreement, which is included in royal(cid:42)es andlicense fees in our medical device segment. Revenue from the upfront fee is recognized as regulatory and clinical ac(cid:42)vi(cid:42)es are performed. Revenue from thecontingent milestones will begin to be recognized if and when the contingencies are resolved.In May 2018, we entered into an agreement with Embolitech, LLC (“Embolitech”) to acquire an innova(cid:42)ve thrombectomy pla(cid:83)orm technology and relatedintellectual property with broad poten(cid:42)al peripheral vascular applica(cid:42)ons. Under the agreement, Surmodics paid $5.0 million in ﬁscal 2018 and will payaddi(cid:42)onal amounts in future years related to achievement of various regulatory milestones. The Embolitech technology pla(cid:83)orm is designed to remove diﬃcult,organized (hard) blood clots. Surmodics plans to leverage its design, development and manufacturing capabili(cid:42)es to advance the technology pla(cid:83)orm for avariety of peripheral and vascular applica(cid:42)ons as part of our whole-product solu(cid:42)ons pipeline. As a result of this agreement, we recognized acquired in-processresearch and development expense totaling $7.9 million in ﬁscal 2018, represen(cid:42)ng the present value of probable payments to be made under the agreement.Addi(cid:42)onally, Surmodics is obligated to pay $3.5 million in several installments beginning December 2019 and ending December 2023. These payments may beaccelerated upon the occurrence of certain sales and regulatory milestones. An addi(cid:42)onal $2.0 million payment is con(cid:42)ngent upon the achievement of certainregulatory milestones within a contingency period ending in 2033.Overview of Interventional Peripheral Market and Whole-Product 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:80)en due to plaque buildupin the arterial walls. Le(cid:80) 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. The numberof 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 asdiabetes 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 delivered through anumber of access points into the vascular system including femoral (leg), radial (wrist or arm) and pedal (foot).Our business model for our whole-product solutions strategy is to design, develop and manufacture highly differentiated products for our customers thatincorporate our proprietary catheter, balloon and surface modiﬁca(cid:42)on coa(cid:42)ng technologies to improve pa(cid:42)ent outcomes and reduce procedure costs, whilemaintaining pa(cid:42)ent safety. Addi(cid:42)onally, we are focused on developing devices that consider the needs of various care se(cid:86)ngs ranging from hospitals toalternate care facili(cid:42)es, in order to provide improved care. The strategy has been built on our investment in proprietary device technologies, as well as state-of-the-art medical5device design, development and manufacturing capabili(cid:42)es. Combined with our leadership in surface modiﬁca(cid:42)on coa(cid:42)ng technologies, we will develop whole-product solutions to address unmet needs in the treatment of PAD and other vascular diseases.Our development eﬀorts to date have yielded several device technology pla(cid:83)orms that serve the interven(cid:42)onal vascular market, with a primary focus ontreatment of PAD.Drug-coated balloonsDrug-coated balloons are currently used in a variety of vascular interven(cid:42)ons and may be helpful in preven(cid:42)ng restenosis, or the narrowing of vesselsa(cid:80)er treatment. Surmodics is focused on the development of DCB’s to treat PAD and the development of the SurVeil DCB over the past several years has been amajor component of our whole-product solu(cid:42)ons strategy. During ﬁscal 2016, we ini(cid:42)ated PREVEIL, an early feasibility clinical trial of the SurVeil DCB, which isintended to treat PAD in the leg above the knee. Enrollment in PREVEIL was completed in the second quarter of ﬁscal 2017 and the study met its primaryendpoint by demonstra(cid:42)ng peak paclitaxel plasma concentra(cid:42)ons post-index procedure. Consistent with pre-clinical data, systemic levels were low and clearedrapidly. Data from the PREVEIL study con(cid:42)nues to demonstrate posi(cid:42)ve results and showed no clinically driven target lesion revasculariza(cid:42)on a(cid:80)er 12 months.We began enrollment in the TRANSCEND SurVeil DCB pivotal clinical study in the ﬁrst quarter of ﬁscal 2018, with the objec(cid:42)ve of obtaining data necessary tosupport regulatory approvals and reimbursement for this device in the U.S. We also plan to collect the data necessary to support Conformité Européenne (“CE”)Mark approval using a subset of pa(cid:42)ents from the TRANSCEND clinical trial. Un(cid:42)l regulatory approvals have been obtained, our SurVeil DCB is not approved forcommercial sale.Our DCB product pla(cid:83)orm also includes two other products currently in development stage. The ﬁrst is our paclitaxel-based Avess™ DCB for thetreatment of AV ﬁstulae. Secondly, we are developing our sirolimus-based Sundance™ DCB for the treatment of below-the-knee PAD. In ﬁscal 2018, wesubmitted an application for a first in-human study of our Avess DCB.Specialty cathetersO(cid:80)en, interven(cid:42)onal vascular procedures require one or more devices to provide appropriate access and necessary support for the physician. Ourintegra(cid:42)on of proprietary low-proﬁle balloon catheter, ultra-thin-walled catheter, and surface modiﬁca(cid:42)on coa(cid:42)ng technologies is genera(cid:42)ng a pipeline ofhighly diﬀeren(cid:42)ated medical devices that improve on currently available minimally-invasive PAD treatments, or in some cases oﬀer an op(cid:42)on for complex cases.Our specialty catheters are designed for high performance in challenging vascular anatomy, providing clinicians enhanced ability to access, cross and treatincreasingly complex vascular lesions.During ﬁscal 2018, we received U.S. Food and Drug Administra(cid:42)on (“FDA”) clearances for our Telemark™ coronary/peripheral support microcatheterand our .018” low-proﬁle percutaneous transluminal angioplasty (“PTA”) balloon dila(cid:42)on catheter. Addi(cid:42)onally, in ﬁscal 2017 we received FDA and CE Markclearances for our .014” low-proﬁle PTA balloon catheter, designed for peripheral angioplasty procedures. We are currently in discussions with poten(cid:42)alpartners to distribute these products and expect to begin to generate revenue in fiscal 2019.ThrombectomyAcute vascular occlusion, or the blocking of arteries by clots or plaque is another peripheral vascular condi(cid:42)on commonly associated with PAD. O(cid:80)en,these clots require surgical interven(cid:42)on and have proven diﬃcult to remove with currently available medical device technologies. A similar condi(cid:42)on in thevenous system, known as Venous Thromboembolism (“VTE”), includes both pulmonary embolism and deep vein thrombosis. VTE has a high prevalence in the USand high overall and in-hospital mortality rates which causes strain on the U.S. healthcare system.We plan to leverage the Embolitech thrombectomy pla(cid:83)orm technology that we acquired in ﬁscal 2018 to develop products to treat these condi(cid:42)onsmore effectively as compared with existing treatment methods and devices. The Embolitech technology pla(cid:83)orm is designed to remove diﬃcult, organized (hard)blood clots that are o(cid:80)en diﬃcult for exis(cid:42)ng devices, and has poten(cid:42)al applica(cid:42)ons in the peripheral vascular market, as well as the neurology and coronarymarkets. The technology oﬀers an innova(cid:42)ve design that eliminates the need for the use of thromboly(cid:42)cs, reducing the likelihood of ICU (cid:42)me and bleedingcomplica(cid:42)ons that aﬀect pa(cid:42)ent recovery and outcomes. Our goal with this technology is to reduce procedure (cid:42)me and eliminate the need for addi(cid:42)onalexternal capital equipment, thereby providing an easy-to-use, on-the-table solution for clinicians and patients.6Overview of Surmodics’ Surface Modification Coating 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 coa(cid:42)ng technologies, par(cid:42)cularly inthe area of device drug-delivery, into the design of more eﬃcient and eﬀec(cid:42)ve combina(cid:42)on products, as well as new product applica(cid:42)ons. We have a growingproprietary technology por(cid:83)olio that incorporates our market exper(cid:42)se and insight, as well as unique collabora(cid:42)ve research, development and manufacturingcapabilities — key ingredients to bring innovation together to benefit patients and the healthcare industry.Coatings 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:83)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 coating technologies also can be combined to deliver multiple surface-enhancing characteristics on the same device.Our proprietary PhotoLink® coa(cid:42)ng technology (“PhotoLink Technology”) is a versa(cid:42)le, easily applied, coa(cid:42)ng technology that modiﬁes medical devicesurfaces by crea(cid:42)ng covalent bonds between device surfaces and a variety of chemical agents. PhotoLink Technology can impart many performance enhancingcharacteris(cid:42)cs, such as advanced lubricity (slippery) and hemocompa(cid:42)bility (preven(cid:42)ng blood clot forma(cid:42)on), when bound onto surfaces of medical devices orother biological materials without materially changing the dimensions or other physical properties of devices.PhotoLink Technology 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 ofmethods including, 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:83)olio for use by ourcustomers. These reagents enable our customers to develop novel surface features for their devices, sa(cid:42)sfying the expanding healthcare industry requirements.We are also continually working to expand the list of materials that are compatible with our surface modification and device drug-delivery reagents. Additionally,we develop coating processes and coating equipment to meet the device quality, manufacturing throughput and cost requirements of our customers.The PhotoLink Technology coa(cid:42)ng process is rela(cid:42)vely simple to use and is easily integrated into the customer’s manufacturing opera(cid:42)ons. In addi(cid:42)on,the process does not subject the coated products to harsh chemical or temperature condi(cid:42)ons, produces no hazardous byproducts, and does not requirelengthy processing or curing (cid:42)me. Further, coa(cid:42)ngs incorpora(cid:42)ng the PhotoLink Technology are generally compa(cid:42)ble with accepted steriliza(cid:42)on processes, sothe surface attributes are not lost when the medical device is sterilized.Our Serene® hydrophilic coa(cid:42)ng pla(cid:83)orm op(cid:42)mizes lubricity and durability while signiﬁcantly reducing par(cid:42)culates genera(cid:42)on. This next-genera(cid:42)onPhotoLink Technology-enabled 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.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 DCB’s and examples of longer-term drug-delivery devices would include drug elu(cid:42)ng stents. We work with companies in the medicaldevice and biotechnology industries to develop specialized coa(cid:42)ngs that allow for the controlled release of drugs from device surfaces. We see at least threeprimary 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) enabling site-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)on over along period of time.Licensing ArrangementsWe commercialize our surface modiﬁca(cid:42)on coa(cid:42)ng technologies primarily through licensing arrangements with medical device manufacturers. Webelieve this approach allows us to focus our resources on further developing new technologies and expanding our licensing ac(cid:42)vi(cid:42)es. Many of our technologieshave been designed to allow manufacturers to implement them easily into their own manufacturing processes so customers can control produc(cid:42)on and qualityinternally without the need to send their products to a contract manufacturer.7We generate the largest por(cid:42)on of our revenue through licensing arrangements. Royal(cid:42)es and license fees represented 43.6%, 43.5% and 46.5% of ourtotal revenue in ﬁscal 2018, 2017 and 2016, respec(cid:42)vely. Greater than 91% 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, androyal(cid:42)es based on a percentage of licensees’ product sales. We also generate revenue from reagent chemical sales to licensees for use in their coa(cid:42)ng processes.Addi(cid:42)onally, under the Abbo(cid:48) Agreement, we have provided worldwide commercializa(cid:42)on rights, including a license under certain of our intellectual property,for the SurVeil DCB. During ﬁscal 2018, we recognized revenue of $4.4 million related to the Abbo(cid:48) Agreement, which represents a por(cid:42)on of the up-frontlicense fee received under that agreement.The licensing process for our coa(cid:42)ng technology licenses begins with the customer specifying a desired product feature to be created such as lubricity ordrug delivery. Because each device and 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:80)en genera(cid:42)ng commercial development revenue. Feasibility studies can range in dura(cid:42)on from several months to a year. A(cid:80)er we complete a feasibility study,our customers cannot market their product un(cid:42)l they receive regulatory approval. As further described under the cap(cid:42)on “Government Regula(cid:42)on,” theregulatory approval process varies 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 be executed gran(cid:42)ng the licensee rights to use our technology. We o(cid:80)en support our customers by providing coa(cid:42)ng assistance forparts required in animal tests and human clinical trials. Typically, we complete a technology transfer to most customers which enables those customers to applythe coating at their own facilities.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 tied to 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 coa(cid:42)ngs technology applica(cid:42)ons arenonexclusive, allowing us to license each technology to mul(cid:42)ple customers. Moreover, even exclusive coa(cid:42)ngs technology licenses generally are limited to aspeciﬁc “ﬁeld of use,” allowing us the opportunity to further license technology to other customers. The royalty rate on a substan(cid:42)al number of the coa(cid:42)ngsagreements has tradi(cid:42)onally been in the 2% to 3% range, but there are certain contracts with lower or higher rates. In certain agreements, our royalty is basedon an agreed-upon amount per unit. License fees, milestone payments, and the royalty rates are based on various factors, including the licensed product’s ortechnology’s stage of development, the perceived value of our technology to the customer’s product, the size of the poten(cid:42)al market, and whether thearrangement is exclusive or nonexclusive. Our agreements generally incorporate a minimum royalty to be paid by the licensee. Royalty payments generallycommence one quarter a(cid:80)er the customer’s actual product sales occur because of the delay in repor(cid:42)ng sales by our licensees. As such, we have historicallyrecognized royalty revenue in the quarter that customer royalty payments are due to us. Commencing in ﬁscal 2019 we will adopt a new revenue recogni(cid:42)onaccoun(cid:42)ng standard that will require us to recognize and accrue sales-based royalty revenue under our coa(cid:42)ng technology licenses in the same quarter that theunderlying 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 13, 17 and 18 new licenses in ﬁscal2018, 2017 and 2016, respectively.Under our coa(cid:42)ngs technology license agreements, the responsibility for securing regulatory approval for and ul(cid:42)mately commercializing these productsrests with our 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 “RiskFactors” of this Form 10-K. Moreover, we are o(cid:80)en contractually obligated to keep the details concerning our customers’ R&D eﬀorts (including the (cid:42)ming ofexpected regulatory filings, approvals and market introductions) confidential. Our SurVeil DCB license requires us to complete certain activities in order to obtainregulatory approval for the device. Given the signiﬁcant uncertainty inherent in product development and regulatory approval processes, the expected (cid:42)mingfor regulatory approval and commercialization for the products 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 customersthat allow the use of their name include: Abbo(cid:48) Laboratories and Abbo(cid:48) Vascular, Inc. (together, “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.), 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 Spectrane(cid:42)cs Corpora(cid:42)on (a subsidiary of KoninklijkePhilips N.V.).8IN 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 and 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:44)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 to diagnose the presence, absence or severity ofdisease. Analytes can range from large molecules such as proteins to small molecules such as hormones. Immunoassays are developed and produced usingmul(cid:42)ple components. The component’s selec(cid:42)on and op(cid:42)miza(cid:42)on confer the assay quality and performance of the assay in terms of sensi(cid:42)vity andspeciﬁcity. 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:44)cs - DNA and Protein Immobiliza(cid:44)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:80)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 U.S., Canada and Puerto Rico (and non-exclusive distributor in Japan) of DIARECT AG’s line of an(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 using recombinanttechnology.Surface Coa(cid:44)ngs for Molecular Diagnos(cid:44)c Applica(cid:44)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.9OTHER FACTORS IMPACTING OUR OPERATIONSResearch 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, and providing technical assistance toexis(cid:42)ng and poten(cid:42)al customers. These services, which generate our research, development and other revenue, include op(cid:42)mizing the relevant technologies forspeciﬁc customer applica(cid:42)ons, suppor(cid:42)ng clinical trials, training customers, and integra(cid:42)ng our technologies and know-how into customer manufacturingopera(cid:42)ons and developing whole-product solu(cid:42)ons that meet customers’ needs by integra(cid:42)ng our coa(cid:42)ng, medical device and medical device deliverytechnologies.In ﬁscal 2018, 2017 and 2016, our R&D expenses were $41.0 million, $31.8 million and $18.5 million, respec(cid:42)vely. R&D expenses are primarilycomprised of research, development, clinical and regulatory ac(cid:42)vi(cid:42)es necessary to design, develop and commercialize our products, as well as costs associatedwith our research, development and other revenue. We intend to con(cid:42)nue inves(cid:42)ng signiﬁcantly in R&D to advance our whole-product solu(cid:42)ons, surfacemodiﬁca(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:83)orms. We an(cid:42)cipate an increase inR&D expenses in ﬁscal 2019 primarily related to whole-product solu(cid:42)ons product development, including our DCB development and clinical study ac(cid:42)vi(cid:42)es. Inaddition, we continue to pursue access to products and technologies developed outside the Company to complement our internal R&D efforts.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-product 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, thrombectomy and ultra-thin-walled catheter technologies willresult in unique devices capable of producing be(cid:48)er pa(cid:42)ent outcomes in complex, diﬃcult-to-treat arterial disease cases. Our product pipeline con(cid:42)nues to bebolstered through developing and acquiring medical device technologies and funding development activities, which has included pre-clinical and clinical studies.With our ﬁscal 2018 acquisi(cid:42)on of the Embolitech thrombectomy technology and signiﬁcant investments in our R&D infrastructure, facili(cid:42)es andpersonnel over the past several years, we have strengthened our capabili(cid:42)es and broadened our capacity for R&D ac(cid:42)vi(cid:42)es. In ﬁscal 2018, we completed thebuild-out of an R&D-focused facility which we lease in Eden Prairie, Minnesota. This accomplishment brings together the development teams focused on ourDCB, catheter, and thrombectomy pla(cid:83)orm technologies, as well as our internal regulatory team in a state-of-the-art R&D facility in order to provide synergiesand development eﬃciencies. Our facility in Ballinasloe, Ireland is focused on the design and manufacture of peripheral vascular devices. This facility’scapabili(cid:42)es include balloon forming, extrusion, coa(cid:42)ng, braiding and assembly of ﬁnished products, with suﬃcient space for future growth. In ﬁscal 2017, wecompleted an expansion of R&D and manufacturing clean rooms as well as an analytical lab to support our whole-product solutions strategy. We have continuedto develop surface modiﬁca(cid:42)on coa(cid:42)ng and DCB chemistry technologies in our Eden Prairie, Minnesota facili(cid:42)es. Our proprietary, whole-product solu(cid:42)onsintegrate our surface modiﬁca(cid:42)on coa(cid:42)ngs, catheter and 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:83)orm products, we are execu(cid:42)ng on our plan to develop and commercialize 12-15 medical device products by the end of ﬁscal 2023.Addi(cid:42)onal planned ac(cid:42)vi(cid:42)es include ini(cid:42)a(cid:42)on of surface modiﬁca(cid:42)on experiments that improve medical device performance, as well as incorpora(cid:42)on of ourcatheter and thrombectomy technology pla(cid:83)orms into various other devices intended for the emerging peripheral vascular treatment market. In addi(cid:42)on toproprietary medical device product development, we work with our customers to integrate the best possible surface modiﬁca(cid:42)on and device drug-deliverytechnologies with their products, not only to meet their performance requirements, but also to perform services quickly so that the product may reach themarket 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 have developed extensivecapabili(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 and extensive experienceallow 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 and smoothness, and to map thedistribution of chemicals throughout coatings. We believe our capabilities in this area exceed those of our competitors.10In 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 2018 we launched MatrixGuard™ Diluent, an advanced signal blocker for matrix interferences.Clinical TrialsOur PREVEIL ﬁrst in-human early feasibility study using the SurVeil DCB completed enrollment in the second quarter of ﬁscal 2017. In PREVEIL, twelve-month results indicated that acute success measures of safety were achieved in all pa(cid:42)ents, as well as 100 percent freedom from clinically-driven target lesionrevasculariza(cid:42)on. 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 of the SurVeil DCB. Therandomized clinical trial, TRANSCEND, is now underway and is focused on evalua(cid:42)ng the SurVeil DCB for treatment for PAD in the upper leg compared with theMedtronic IN.PACT® Admiral® DCB. The objec(cid:42)ve of the TRANSCEND clinical trial is to evaluate the safety and eﬀec(cid:42)veness of the SurVeil DCB device fortreatment of subjects with symptoma(cid:42)c PAD due to stenosis of the femoral and/or popliteal arteries. If successful, the TRANSCEND clinical trial will be used tosupport regulatory approvals and reimbursement (U.S. and Europe). The trial will enroll up to 446 subjects at up to 60 sites in the U.S. and 18 outside the U.S.The trial’s primary eﬃcacy endpoint is primary patency, deﬁned as a composite of freedom from restenosis and clinically-driven target lesion revasculariza(cid:42)onthrough 12 months post-index procedure. All randomized subjects will be followed through 60 months post-index procedure. We ini(cid:42)ated enrollment in theTRANSCEND clinical trial in October 2017 and we an(cid:42)cipate full enrollment in the study in ﬁscal 2019. There is no assurance that the TRANSCEND clinical trialwill support regulatory approval, or that any an(cid:42)cipated (cid:42)me frame will be met. We es(cid:42)mate that the total cost of the TRANSCEND clinical trial will rangebetween $32 million to $40 million from inception to completion.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 exis(cid:42)ng and emerging products. In September 2018, we submi(cid:48)ed an applica(cid:42)on for a ﬁrst in-human study of ourAvess™ DCB for treatment of AV fistulae.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:83)olio so as to ensure that wehave valid and enforceable patent rights protecting our technological innovations.We protect our extensive por(cid:83)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. As of September 30, 2018, Surmodics owned or had exclusive rights to 54 pendingU.S. patent applica(cid:42)ons and 145 foreign patent applica(cid:42)ons. Likewise, as of the same date, Surmodics owned or had exclusive rights to 139 issued U.S. patentsand 167 international patents.We have licensed our PhotoLink Technology on a non-exclusive basis to a number of our customers for use in a variety of medical device surfaceapplica(cid:42)ons, including those described above. In par(cid:42)cular, we have 31 issued U.S. patents, 10 pending U.S. patent applica(cid:42)ons, 41 issued interna(cid:42)onal patents,and 31 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 conditions of the applicable customer agreement,11generally (cid:42)ed to the date on which the customer’s product was ﬁrst sold. In recent years, we have successfully converted a number of our customers’ productsutilizing this early generation technology to our advanced generation technologies or extended the royalty-bearing term of their existing technology licenses.In ﬁscal 2018, royalty revenue associated with our third and fourth-genera(cid:42)on PhotoLink Technologies was approximately 8% and 21%, respec(cid:42)vely ofour consolidated ﬁscal 2018 revenue. In most license agreements covering these early-genera(cid:42)on technologies, the royalty obliga(cid:42)ons will extend, at a reducedrate, beyond expiration of the applicable patent(s) as a result of know-how and other proprietary rights licensed under the agreements.We also rely upon trade secrets, trademarks and other un-patented 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 suchinforma(cid:42)on. There can be no assurance, however, that these measures will prevent the unauthorized disclosure or use of this informa(cid:42)on, or that others will notbe able to independently develop such informa(cid:42)on. Addi(cid:42)onally, there can be no assurance that any agreements regarding conﬁden(cid:42)ality and non-disclosurewill not be breached, or, in the event of any breach, that adequate remedies would be available to us.Marketing and SalesThrough our whole-product solu(cid:42)ons strategy, we u(cid:42)lize our design, development, manufacturing and regulatory capabili(cid:42)es to provide our customersearlier access to highly diﬀeren(cid:42)ated products that address important unmet clinical needs, and partner with them on successful commercializa(cid:42)on of theseproducts. While whole-product solu(cid:42)ons development and manufacturing capability and capacity scale-up have been a signiﬁcant focus, it does not change ourbusiness model to provide 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 commercializa(cid:42)on ac(cid:42)vi(cid:42)es. Oursales professionals’ specializa(cid:42)on fosters an in-depth knowledge of the issues faced by our customers, such as industry trends, technology changes, biomaterialchanges and the regulatory environment. As we complete development of our proprietary medical device products, we have begun working with third-par(cid:42)es tobring these products to the market.With respect to our diagnos(cid:42)cs products, our sales professionals sell directly to IVD kit manufacturers and we enter into supply agreements with thirdparties to distribute those products around the world. We also offer diagnostics products for sale through our website.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.Significant CustomersRevenue from Medtronic and Abbo(cid:48) represented approximately 16% and 11%, respec(cid:42)vely, of our consolidated revenue for the year endedSeptember 30, 2018. Revenue from these customers was generated from mul(cid:42)ple products and ﬁelds of use, including revenue from the Abbo(cid:48) Agreement,substan(cid:42)ally all of which were recognized in our Medical Device segment. No other customer provided more than 6% of our consolidated revenue in ﬁscal 2018.Three customers in our IVD business accounted for 17%, 10% and 10%, respectively, of our IVD operating segment revenue.12CompetitionMedical 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. Our PTA ballooncatheter and microcatheter products compete with larger original equipment manufacturer (“OEM”) suppliers, as well as some of our largest medical devicecustomers. We provide diﬀeren(cid:42)ated whole-product solu(cid:42)ons that integrate our surface modiﬁca(cid:42)on, catheter, balloon and other proprietary technologies. Webelieve our whole-product solu(cid:42)ons will be compe(cid:42)(cid:42)ve on the basis of their safety and eﬃcacy as a result of the innova(cid:42)ve design and diﬀeren(cid:42)ated coa(cid:42)ngand device design technology, which will lead to demonstrated improvements in pa(cid:42)ent outcomes through reduced invasiveness compared to other devicesused for comparable procedures.Because 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 product categorieshas 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 in lubricious orhemocompatible coating technology. Some of these companies target cardiovascular, peripheral or other medical device applications. In addition, because of themany product possibili(cid:42)es aﬀorded by surface modiﬁca(cid:42)on coa(cid:42)ng technologies, many of the large medical device manufacturers have developed, or areengaged in efforts to develop, internal competency in the area of surface modification, including drug-delivery technologies.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 device, drug-delivery andsurface modiﬁca(cid:42)on coa(cid:42)ng technologies. We believe that the primary factors customers consider in choosing a par(cid:42)cular technology include performance(e.g., ﬂexibility, ability to 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 toproduce mul(cid:42)ple products from a single process, compliance with manufacturing regula(cid:42)ons, ability to manufacture clinical and commercial products,customer service and total cost of goods (including manufacturing process labor). We believe our technologies deliver excep(cid:42)onal performance in these areas,allowing us to compete favorably with respect to these factors. With respect to our licensed surface modiﬁca(cid:42)on coa(cid:42)ng technologies, we believe that the costand (cid:42)me required to obtain the necessary regulatory approvals signiﬁcantly reduces the likelihood of a customer changing the manufacturing process it usesonce a device or drug has been approved for sale.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, an(cid:42)gensand surface chemistry technologies), we face an array of compe(cid:42)tors ranging from large manufacturers with mul(cid:42)ple business lines to small manufacturers thatoﬀer 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)ng experience, R&D resources and produc(cid:42)onfacili(cid:42)es than we do. We believe that our products compete on performance, stability (shelf life), sensi(cid:42)vity (lower levels detected, faster results), consistencyand 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, to develop or acquire new proprietary products,obtain patent or other protection for our products and successfully market our products directly or through partners.ManufacturingWe manufacture our surface modiﬁca(cid:42)on and drug-delivery reagents, and our IVD products in one of our Eden Prairie, Minnesota facili(cid:42)es. In certainlimited circumstances, we also provide contract manufacturing services for our customers, including, for example, coa(cid:42)ng their medical devices that areintended for pre-clinical and clinical development (including human clinical trials), and products that are sold for commercial use by our customers. Wemanufacture PTA balloon catheters and microcatheters13in 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 ﬁnished products.We plan to manufacture substan(cid:42)ally all of our whole-product solu(cid:42)ons devices in our Ireland facility as the products are launched. Our SurVeil DCB is currentlymanufactured in one of our Eden Prairie, Minnesota facili(cid:42)es as we scale up our Irish facility for DCB manufacturing. We will maintain secondary, redundantmanufacturing capacity in our U.S. facilities once full scale-up has been achieved in our Ireland facility.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 order to meet our customers’ needs in this area, ourmanufacturing facility in Eden Prairie, Minnesota is cer(cid:42)ﬁed to ISO 13485 and ISO 9001. Our manufacturing facility in Ballinasloe, Ireland is cer(cid:42)ﬁed to ISO13485. Each of these facilities is registered with the U.S. FDA as a “Contract Manufacturer.”Government RegulationThe medical devices, IVD and biotechnology products incorpora(cid:42)ng our technologies are o(cid:80)en required to undergo long, expensive and uncertainregulatory review processes that are governed by the U.S. FDA and other interna(cid:42)onal regulatory authori(cid:42)es. New medical devices u(cid:42)lizing our device and/orsurface modiﬁca(cid:42)on coa(cid:42)ng technologies can only be marketed in the U.S. a(cid:80)er a pre-market no(cid:42)ﬁca(cid:42)on for 510(k) clearance or a pre-market approval(“PMA”) by the FDA. These processes can take anywhere from several months (e.g., for medical device products seeking regulatory approval under the 510(k)clearance process) to several years (e.g., for medical device products seeking regulatory approval under the PMA applica(cid:42)on process). With respect to ourcustomers’ products that incorporate our surface modiﬁca(cid:42)on coa(cid:42)ng and IVD technologies, the burden of securing regulatory approval typically rests with ourcustomers as the medical device manufacturers. With respect to our whole-product solu(cid:42)ons, including the SurVeil DCB and any addi(cid:42)onal medical deviceproducts that we develop, the burden of securing regulatory approval will rest on us unless we partner with other organizations to pursue such approval.In support of our customers’ and our own regulatory ﬁlings, we maintain various conﬁden(cid:42)al Device Master Files with the FDA and provide technicalinforma(cid:42)on to other regulatory agencies outside the U.S. regarding the nature, chemical structure and biocompa(cid:42)bility of our reagents. Our licensees generallydo not have direct access to these ﬁles. However, they may, with our permission, reference these ﬁles in their various regulatory submissions to these agencies.This approach allows regulatory agencies to understand the details of our technologies without our 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, and may result in opportuni(cid:42)es to marketour whole-product solu(cid:42)ons in other countries. However, sales of medical products outside the U.S. are subject to interna(cid:42)onal requirements that vary fromcountry to country. The time required to obtain approval for sale internationally may be longer or shorter than that required by the FDA.EmployeesAs of November 30, 2018, we had 338 employees. Of these employees we employ 145 outside the U.S., primarily in R&D and manufacturing opera(cid:42)onsfunctions. We are not a party to any collective bargaining agreements.14EXECUTIVE OFFICERS OF THE REGISTRANTAs of November 30, 2018, the names, ages and positions of the Company’s executive officers are as follows: Name Age PositionGary R. Maharaj 55 President and Chief Executive OfficerTimothy J. Arens 51 Vice President, Corporate Development and Strategy; Interim VicePresident, Finance and Chief Financial OfficerThomas A. Greaney 52 Chief Operating Officer, Medical DevicesCharles W. Olson 54 Senior Vice President of Commercial and Business Development,Medical DevicesBryan K. Phillips 47 Senior Vice President, Legal, Human Resources and Information Systems,General Counsel and SecretaryTeryl L.W. Sides 49 Senior Vice President and Chief Marketing OfficerJoseph J. Stich 53 Vice President and General Manager, In Vitro DiagnosticsGregg S. Sutton 59 Vice President, 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 rehabilitation divisions of Smith & Nephew, PLC.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. In May 2018, Mr. Arens was named interim Vice President of Finance andChief Financial Oﬃcer for a second (cid:42)me. Prior to joining Surmodics, Mr. Arens was employed at St. Jude Medical, Inc., a medical technology company, from2003 to 2007, in positions of increasing responsibility related to business development and strategic planning functions.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:80)er we acquired it.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.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, in October 2010, he was named Senior Vice President and General Manager, Medical Device, andin August 2016 he was named Senior Vice President of Commercial and Business Development, Medical Devices. Prior to joining Surmodics, Mr. Olson wasemployed as General Manager at Minnesota Extrusion from 1998 to 2001 and at Lake Region Manufacturing in project management and technical sales from1993 to 1998.15Bryan 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 function. He also practiced law at the Minneapolis-based law firm of Merchant & Gould P.C.Teryl L.W. Sides joined the Company in November 2018 as Senior Vice President and Chief Marke(cid:42)ng Oﬃcer. Before joining Surmodics, Ms. Sides servedas Founder and Chief Execu(cid:42)ve Oﬃcer of Projectory, a consul(cid:42)ng ﬁrm that provides strategic marke(cid:42)ng services to med tech clients, ranging from start-ups toglobal businesses, from 2011 to 2018. Prior to joining Projectory, Teri was the Vice President of Marke(cid:42)ng and Product Development for Arizant, Inc. from 1998to 2011.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 positions of increasing responsibility in sales and marketing at Sanofi-Aventis Pharmaceuticals.Gregg S. Su(cid:51)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.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.16ITEM 1A. RISK FACTORS.RISKS RELATING TO OUR BUSINESS, STRATEGY AND INDUSTRYThe loss of, or signiﬁcant reduc(cid:30)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. Two of our customers provided more than 10% of ourrevenue in ﬁscal 2018. Revenue from Medtronic and Abbo(cid:48) represented approximately 16% and 11%, respec(cid:42)vely of our total revenue for the ﬁscal year endedSeptember 30, 2018 and was generated from mul(cid:42)ple products and ﬁelds of use. The loss of Medtronic, Abbo(cid:48) or any of our largest customers, or reduc(cid:42)ons inbusiness from them, could have a material adverse eﬀect on our business, ﬁnancial condi(cid:42)on, results of opera(cid:42)ons, and cash ﬂow. There can be no assurancethat revenue from any customer will con(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 numberof customers for a significant portion of 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 of medical device companies, thereby expanding thecommercializa(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:30)on, device drug-delivery and medical device products are compe(cid:30)(cid:30)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 coa(cid:42)ng technologies compete with technologies developed by a number of other companies. In addi(cid:42)on, many medical devicemanufacturers have developed, or are engaged in eﬀorts to develop surface modiﬁca(cid:42)on coa(cid:42)ng technologies for use on their own products, par(cid:42)cularly in thearea of drug delivery. 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 OEMsuppliers, as well as some of 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)alcompe(cid:42)tors (especially medical device manufacturers pursuing coa(cid:42)ng solu(cid:42)ons through their own R&D eﬀorts) have greater ﬁnancial and technical resourcesas well as produc(cid:42)on and 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 productsover the next ﬁve years, we will be compe(cid:42)ng with companies that may be be(cid:48)er able to leverage exis(cid:42)ng sales forces. Compe(cid:42)tors may succeed in developingcompe(cid:42)ng technologies or obtaining governmental approval for products before us. Products incorpora(cid:42)ng our compe(cid:42)tors’ technologies may gain marketacceptance more rapidly than products using our technologies. 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 orobsolete. Furthermore, there can be no assurance that new products or technologies developed by others, or the emergence of new industry standards, will notrender our products or technologies or licensees’ products incorpora(cid:42)ng our technologies uncompe(cid:42)(cid:42)ve or obsolete. Any new technologies that make oursurface modiﬁca(cid:42)on coa(cid:42)ng or In Vitro Diagnos(cid:42)cs technologies less compe(cid:42)(cid:42)ve or obsolete would have a material adverse eﬀect on our business, ﬁnancialcondition and results of operations.We may not be successful in implementing our whole-product solutions strategy and related important strategic initiativesSince ﬁscal 2013, with our investment in our DCB pla(cid:83)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 the commercialization of our products, we may seek to market and sell these products through third-party distributors or via direct sales.17Successfully implemen(cid:42)ng our whole-product 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 andrequire, 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 U.S. 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-product 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 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.Our failure to expand our management systems and controls to support an(cid:30)cipated growth or integrate acquisi(cid:30)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.18Goodwill 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, 2018, wehad $27.0 million of goodwill and indeﬁnite-lived intangible assets on our consolidated balance sheet related to our Medical Device and IVD segments, of which$19.0 million related to our Medical Device repor(cid:42)ng unit. As required by the accoun(cid:42)ng guidance for non-amor(cid:42)zing intangible assets, we evaluate at leastannually 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 involves the determina(cid:42)on of thefair 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)ons used. We also evaluateother assets on our balance sheet, including strategic investments and intangible assets, whenever events or changes in circumstances indicate that their carryingvalue 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 cash ﬂow models using variousinputs. 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 our acquisi(cid:42)on of Creagh Medical. Future impairment of the goodwill or other assets on our balancesheet could materially adversely affect our results of operations.Research and development costs may adversely aﬀect our opera(cid:30)ng results and our agreement with Abbo(cid:47) provides that we are responsible forcertain of these costs related to the SurVeil DCB.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:83)orm. In ﬁscal 2018, research anddevelopment costs increased 29% over ﬁscal 2017 and were 50% of our total revenue, which had a signiﬁcant impact on our overall opera(cid:42)ng results. In ﬁscal2019, we expect to con(cid:42)nue the clinical evalua(cid:42)on 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 andother whole-product solu(cid:42)ons products, which will result in signiﬁcant expenses that will adversely aﬀect our opera(cid:42)ng results, including our proﬁtability, inﬁscal 2019 and future periods. The agreement that we entered into with Abbo(cid:48) provides that we are responsible for conduc(cid:42)ng all necessary clinical trials andother ac(cid:42)vi(cid:42)es required to achieve U.S. and European Union regulatory clearances for the SurVeil DCB, including comple(cid:42)on of the ongoing TRANSCEND clinicaltrial, which will involve signiﬁcant costs. In addi(cid:42)on to the costs of these research and development ac(cid:42)vi(cid:42)es, these ac(cid:42)vi(cid:42)es are subject to risks of failure thatare inherent in the development of new medical technologies or products. There can be no assurance that we will be successful in developing new technologiesor products, or that any such technology will be commercialized.We recognize revenue in accordance with various complex accoun(cid:30)ng standards, and changes in circumstances or interpreta(cid:30)ons may lead toaccoun(cid:30)ng adjustments and failure to implement these standards might impact the eﬀec(cid:30)veness of our internal control over ﬁnancial repor(cid:30)ng orimpact the reliability of our financial reporting.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:80)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. We adopted new revenue recogni(cid:42)on guidance in the ﬁrstquarter of fiscal 2019. The initial impact of the adoption of the revenue recognition guidance will be material to our fiscal 2019 consolidated financial statementsdue to an accelera(cid:42)on of minimum license fees and a one-quarter accelera(cid:42)on of royalty revenue pursuant to our hydrophilic license agreements, as well asrequiring several addi(cid:42)onal ﬁnancial statement footnote disclosures. We have also updated and enhanced our internal accoun(cid:42)ng systems, processes and ourinternal controls over ﬁnancial repor(cid:42)ng, all of which has required, and will con(cid:42)nue to require, addi(cid:42)onal investments by us, and may require incrementalresources and system conﬁgura(cid:42)ons that could increase our opera(cid:42)ng costs in future periods. If we are not able to properly implement the new revenuerecogni(cid:42)on standards in a (cid:42)mely manner, the revenue that we recognize and the related disclosures that we provide under the new standards may not becomplete or accurate, and we could fail to meet our financial reporting obligations in a timely manner, which could result in, among other things,19regulatory discipline and adversely aﬀect our stock price. In addi(cid:42)on, failure to implement these new standards, or other new or exis(cid:42)ng accoun(cid:42)ng standards,might result in material weaknesses or significant deficiencies in our internal control over financial reporting.Our business includes foreign operations which exposes us to certain risks related to fluctuations in U.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 2018,2017, and 2016, we recorded foreign currency exchange gains (losses) of $0.2 million, ($0.5) million, and ($0.4) million, respec(cid:42)vely. The gains and losses wereprimarily related to these Euro-denominated con(cid:42)ngent considera(cid:42)on liabili(cid:42)es. As our foreign opera(cid:42)ons expand, the eﬀects may become material to ourconsolidated financial statements.Changes in product mix and increased manufacturing costs could cause our product gross margin percentage to fluctuate or decline in the future.Changes in our product mix and increases in manufacturing costs caused our product gross margin percentage to decline in ﬁscal 2018 and furtherchanges to these items could cause our gross proﬁt percentage to ﬂuctuate or further decline in the future. In ﬁscal 2018, we experienced product cost growthfrom the prior year as a result of signiﬁcant increases in balloon catheter sales, as well as product mix in our IVD segment, which was skewed toward lower-margin products. These factors, together with the scale-up of our manufacturing opera(cid:42)ons, par(cid:42)cularly in Ireland, adversely aﬀected our gross marginpercentage for the last ﬁscal year and these factors will likely con(cid:42)nue to aﬀect our gross proﬁt percentage in 2019 and beyond. However, whether this adversemix impact will result in a decline of our gross proﬁt percentage in any given year will depend on the extent to which they are, or are not, oﬀset by posi(cid:42)veimpacts to product gross margin during such year.RISKS RELATING TO OUR OPERATIONS AND RELIANCE ON THIRD PARTIESWe rely on third par(cid:30)es to market, distribute and sell most products incorpora(cid:30)ng our coa(cid:30)ng and device technologies, as well as our whole-productsolutions.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 years ended September 30, 2018, 2017 and 2016, we have derived 44%, 44%, and 47%, respec(cid:42)vely, of our revenuefrom royal(cid:42)es and license fees derived from such licensing arrangements. The revenue that we derive from such arrangements is dependent on our licensees’ability to successfully develop, obtain successful regulatory approval for, manufacture (if applicable), market and sell products incorpora(cid:42)ng our technologies.In addi(cid:42)on, in ﬁscal 2018, we entered into an agreement with Abbo(cid:48) whereby Abbo(cid:48) will have exclusive worldwide commercializa(cid:42)on rights for the SurVeilDCB. Abbo(cid:48) has the right to purchase commercial units from us and we will realize revenue from product sales to Abbo(cid:48) at an agreed-upon transfer price, aswell as a share of net proﬁts resul(cid:42)ng from third-party product sales by Abbo(cid:48). Upon receipt of regulatory approval, we will rely on Abbo(cid:48) to eﬀec(cid:42)vely marketand sell the SurVeil DCB.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 andpoten(cid:42)al licensees have no obliga(cid:42)on to deal exclusively with us and may pursue parallel development or licensing of compe(cid:42)ng technologies on their own orwith third par(cid:42)es. A decision by a licensee to terminate its rela(cid:42)onship with us could materially adversely aﬀect our business, ﬁnancial condi(cid:42)on and results ofoperations.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.20A por(cid:30)on of our IVD business relies on distribu(cid:30)on agreements and rela(cid:30)onships with various third par(cid:30)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 U.S. through distributors. Some of our distributors also sell our compe(cid:42)tors’ products, and if they favorour 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)ve sales, whichwould cause our results to suﬀer. Addi(cid:42)onally, we serve as the exclusive distributor in the U.S., Canada and Puerto Rico for DIARECT AG for its recombinant andna(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 of our agreements withthem. 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, time-consuming and possibly detrimental to our ongoing business relationships with our customers.Inaccuracies in these reports have 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 currently have limited or no redundancy in our manufacturing facili(cid:30)es, and we may lose revenue and be unable to maintain our customerrelationships if we 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 atone of our Eden Prairie, Minnesota facili(cid:42)es. We also manufacture balloon catheter products at our facility in Ballinasloe, Ireland and catheter-based medicaldevices in limited quan(cid:42)(cid:42)es in one of our facili(cid:42)es in Eden Prairie, Minnesota. We plan to manufacture substan(cid:42)ally all of our whole-product solu(cid:42)ons devices inour Ireland facility. Our SurVeil DCB is currently manufactured in one of our Eden Prairie, Minnesota facili(cid:42)es as we scale up our Irish facility for DCBmanufacturing. While we plan to maintain secondary, redundant manufacturing capacity once full scale-up has been achieved in our Ireland facility, our Irelandfacility is not yet fully scaled-up. If our exis(cid:42)ng produc(cid:42)on facili(cid:42)es become incapable of manufacturing products for any reason, we may be unable to meetproduc(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 our licensees. Inaddi(cid:42)on, because most of our customers use our coa(cid:42)ng reagents to manufacture their own products that generate royalty revenue for us, failure by us tosupply these reagents could result in decreased royalty revenue, as well as decreased revenue from our surface modiﬁca(cid:42)on coa(cid:42)ng technologies product 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 the manufacturing capabilityat 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 to cover lost revenue andproﬁts 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)on insurance would notcompensate us for the loss of opportunity and poten(cid:42)al adverse impact on rela(cid:42)ons with our exis(cid:42)ng customers resul(cid:42)ng from our inability to produceproducts 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 licenses 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 incorpora(cid:42)ng our technologies because of alleged defects, whether such recall is ins(cid:42)tuted by us, by a customer, or is required by a regulatory agency. Aproduct liability claim, recall or other claim with respect to uninsured liabili(cid:42)es or for amounts in excess of insured liabili(cid:42)es could have a material adverse eﬀecton our business, financial condition and results of operations.21Our 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:30)ons could compromise our informa(cid:30)on and expose us to liability, which would cause our business and reputa(cid:30)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 and our customers expect that we will securely maintain their informa(cid:42)on. Despite our security measures, ourinforma(cid:42)on technology and infrastructure may be vulnerable to a(cid:48)acks by hackers resul(cid:42)ng from employee error, malfeasance or other disrup(cid:42)ons. Any suchbreach could compromise our networks and the informa(cid:42)on stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure orother loss of informa(cid:42)on could result in legal claims or proceedings, liability under personal privacy laws and regulatory penal(cid:42)es, disrupt our opera(cid:42)ons andthe services that we provide to our customers, damage our reputa(cid:42)on and cause a loss of conﬁdence in our products and services, any of which could adverselyaffect 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 applica(cid:42)ons pending related to our proprietary technologies. There can be no assurance that any pending patent applica(cid:42)on 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.We may become involved in expensive and unpredictable patent li(cid:30)ga(cid:30)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 litigation is difficult22to predict. If we were found to be infringing any third-party patent or other intellectual property right, we could be required to pay significant damages, alter ourproducts or processes, obtain licenses from others, which we may not be able to do on commercially reasonable terms, if at all, or cease commercializa(cid:42)on ofour products and processes. Any of these outcomes could have a material adverse effect on our business, financial condition 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 un-patentedproprietary 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 8% of our fiscal 2018 revenue.Approximately 21% of our total revenue in ﬁscal 2018 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.If 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.23RISKS RELATING TO CLINICAL AND REGULATORY MATTERSThe development of new products and enhancement of exis(cid:30)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 2018, 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, we 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 un(cid:42)l December 31, 2019, their status is unclear for subsequent years, as isthe 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 amaterial, 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, their willingness to commitcapital to development projects or their ability to commercialize their products u(cid:42)lizing our technology, any of which could have a material adverse eﬀect onour 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 whichcon(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 cannot predict what other healthcareprograms 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 or regula(cid:42)on in the U.S. or abroad mayhave on our business.Whole-product solu(cid:30)ons medical devices and other products incorpora(cid:30)ng our technologies are subject to increasing scru(cid:30)ny and regula(cid:30)ons,including extensive approval/clearance processes and manufacturing requirements. Any adverse regulatory and/ or enforcement ac(cid:30)on (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, and processes to comply with enhanced legal and regulatory requirements, which may also impact our business. Wean(cid:42)cipate that governmental authori(cid:42)es will con(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 litigation, and other adverse effects 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.24Changes 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. For instance, the market prices for securi(cid:42)es of medical technology, drug-delivery and biotechnology companies historically have been highlyvolatile, and the market has experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies.ITEM 1B. UNRESOLVED STAFF COMMENTS.None.25ITEM 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 u(cid:42)lized by our Corporate, Medical Device and IVD opera(cid:42)ng segments. We also own a 30,000 square foot building in Ballinasloe, Ireland dedicatedto our Medical Device operating segment. We lease a warehouse through November 2021 and a 36,000 square foot facility, which will primarily be used for R&Dand redundant manufacturing capacity in our Medical Device opera(cid:42)ng segment, through April 2028. Both of these proper(cid:42)es are located near our principalopera(cid:42)ons in Eden Prairie, Minnesota. We also own an undeveloped parcel of land adjacent to our principal facility, which we intend to use to accommodateour 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. 26PART 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.”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 28, 2018, there were 180 holders of record of our common stock.The declara(cid:42)on and payment by Surmodics of future dividends, if any, on its common stock will be at the sole discre(cid:42)on of the Board of Directors andwill depend on Surmodics’ continued earnings, financial condition, capital requirements 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, with an addi(cid:42)onal $4.7million utilized in fiscal 2017. The share repurchase program does not have a fixed expiration date.The Company has an aggregate of $25.3 million available for future common stock purchases under the current authorization.27Stock 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, 2013 and assume reinvestment of dividends. 28ITEM 6. SELECTED FINANCIAL DATA.The data presented below as of September 30, 2018 and 2017 and for the years ended September 30, 2018, 2017 and 2016 is derived from our auditedconsolidated ﬁnancial statements included elsewhere in this report. The data as of September 30, 2016, 2015 and 2014 and for the years ended September 30,2015 and 2014 is derived from audited consolidated ﬁnancial statements not included in this report. The informa(cid:42)on set forth below should be read inconjunc(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 this report andour consolidated financial statements and related notes beginning on page F-1 and other financial information included in this report. Fiscal Year 2018 2017 2016 2015 2014 (Dollars in thousands, except per share data) Statement of Operations Data: Total revenue $81,336 $73,112 $71,366 $61,898 $57,439 Operating (loss) income from continuing operations (8,799) 7,103 16,859 19,089 18,576 (Loss) income from continuing operations (4,457) 3,926 9,985 11,947 12,207 Loss from discontinued operations — — — — (176)Net (loss) income (4,457) 3,926 9,985 11,947 12,031 Diluted (loss) income per share: Continuing operations (0.34) 0.29 0.76 $0.90 $0.88 Discontinued operations — — — — (0.01)Net (loss) income (0.34) 0.29 0.76 0.90 0.87 Balance Sheet Data: Cash, short-term and long-term investments $65,020 $48,336 $46,941 $55,588 $63,374 Total assets 164,135 136,593 132,894 98,710 104,889 Retained earnings 97,615 102,072 98,146 88,161 93,881 Total stockholders’ equity 108,610 111,557 106,833 81,873 98,751 Statement of Cash Flows Data: Net cash provided by operating activities from continuing operations $34,052 $14,053 $25,166 $15,066 $18,537 Note: Fiscal 2018, 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. Our business performance con(cid:42)nues to be driven by growth in our Medical Device and IVD product oﬀerings. We remaincommi(cid:48)ed to developing medical device products and pla(cid:83)orms leveraging the technologies and manufacturing capabili(cid:42)es in our Medical Device business unitfor the treatment of peripheral vascular disease. These technologies include our DCB pla(cid:83)orm, specialty access delivery devices such as balloons and catheters,and the thrombectomy device platform technology acquired during fiscal 2018.We operate two reportable business or segments as follows: (1) the Medical Device unit, which designs, develops and manufactures interven(cid:42)onalmedical devices, primarily balloons and catheters, including DCB’s, for PAD treatment and other applica(cid:42)ons; surface modiﬁca(cid:42)on coa(cid:42)ng technologies toimprove access, deliverability, and predictable deployment of medical devices; as well as drug-delivery coa(cid:42)ng technologies to provide site-speciﬁc drug-deliveryfrom the surface of a medical device, with end markets that include coronary, peripheral, and neurovascular, and urology, among others, and (2) the IVD unit,which consists of29component 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 coa(cid:42)ng technologies to customers; and (3) contract coa(cid:42)ng, design, research and commercial development fees generated oncustomer projects. 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 91% of our royalty and license fee revenue in ﬁscal 2018, 2017 and 2016 is associated with our hydrophilic coa(cid:42)ng technology licenses.With the execution of the SurVeil DCB license and development agreement with Abbo(cid:48) in February 2018, a por(cid:42)on of our license fee revenue, beginning in ﬁscal2018, is associated with our proprietary medical device technology. We have an extensive por(cid:83)olio of U.S. and interna(cid:42)onal patents and patent applica(cid:42)onsprotec(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 forthese patents and the an(cid:42)cipated expira(cid:42)on dates of the patent applica(cid:42)ons range from ﬁscal 2020 to 2035. Among these, our third-genera(cid:42)on PhotoLinkhydrophilic technology is protected by a family of patents that expired in November 2015 (in the U.S.) and October 2016 (in certain other countries). The royaltyrevenue associated with our third-genera(cid:42)on hydrophilic coa(cid:42)ng technology was approximately 8% of our ﬁscal 2018 revenue. Approximately 21% of our totalrevenue in ﬁscal 2018 was royalty and license fee revenue generated from fourth-genera(cid:42)on hydrophilic coa(cid:42)ng technology, which is protected by a family ofpatents that begin to expire in ﬁscal 2020. Of the license agreements using our early genera(cid:42)on technologies, most con(cid:42)nue to generate royalty revenue, at areduced royalty rate, beyond patent expira(cid:42)on. The remainder of our royalty revenues are derived from other Surmodics coa(cid:42)ngs that are protected by anumber 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:80)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. We license technology to third par(cid:42)es and collect royal(cid:42)es based on the greater of the contractual percentage of a customer’s salesof products incorpora(cid:42)ng our licensed technologies or minimum contractual royal(cid:42)es. The ﬁnancial informa(cid:42)on included in this Form 10-K includes royaltyrevenue recognized as our licensees reported it to us, typically submi(cid:48)ed concurrently with their royalty payments. For stand-alone license agreements, up-frontlicense fees are recognized over the term of the related licensing agreement. Minimum royalty fees were recognized in the period earned. Revenue related to aperformance milestone was recognized upon the achievement of the milestone and meeting specific revenue recognition criteria.We license technology to third par(cid:42)es and, at (cid:42)mes, these arrangements include mul(cid:42)ple deliverables that required us to determine the appropriateunit(s) of account and allocate the considera(cid:42)on received to each of the unit(s) of account iden(cid:42)ﬁed. The deliverables may include license(s) to Surmodics’technology, research, development and clinical ac(cid:42)vi(cid:42)es, and product sales. Under revenue arrangements with mul(cid:42)ple deliverables, we recognized eachseparable deliverable as it was earned. When appropriate, we accounted for revenue using a mul(cid:42)ple a(cid:48)ribu(cid:42)on model in which considera(cid:42)on allocated to R&Dand clinical ac(cid:42)vi(cid:42)es was recognized as performed, and milestone payments were recognized when the milestone events were achieved, when such ac(cid:42)vi(cid:42)es andmilestones were deemed substantive. Accordingly, in situations where a unit of accounting included both a license and R&D and30clinical ac(cid:42)vi(cid:42)es, and when a license did not have stand-alone value and R&D and clinical ac(cid:42)vi(cid:42)es had a readily determinable standalone selling price, weapplied a mul(cid:42)ple a(cid:48)ribu(cid:42)on model in which considera(cid:42)on allocated to the license was recognized ratably, considera(cid:42)on allocated to R&D and clinical ac(cid:42)vi(cid:42)eswas recognized as performed and milestone payments were recognized when the milestone events were achieved, when such ac(cid:42)vi(cid:42)es and milestones weredeemed substan(cid:42)ve. In situa(cid:42)ons where a license did not have standalone value and R&D and clinical ac(cid:42)vi(cid:42)es did not have readily determinable standaloneselling prices, considera(cid:42)on was recognized over the period the R&D and clinical ac(cid:42)vi(cid:42)es were performed, on a propor(cid:42)onal performance basis if the licensegranted a customer exclusive rights to a technology for substantially all of its estimated useful life.Revenue associated with the upfront payment received under our license and development agreement with Abbo(cid:48) is recognized as the clinical andregulatory ac(cid:42)vi(cid:42)es are performed on a propor(cid:42)onal performance basis based on actual costs incurred rela(cid:42)ve to the expected total cost of the underlyingac(cid:42)vi(cid:42)es, most notably the comple(cid:42)on of the TRANSCEND clinical trial. A signiﬁcant component of the cost of this trial is the cost of our outsourced clinical trialclinical research organiza(cid:42)on (“CRO”) consultants, which are es(cid:42)mated based on executed statements of work, project budgets, and pa(cid:42)ent enrollment (cid:42)ming,among other things. Costs related to the clinical and regulatory ac(cid:42)vi(cid:42)es are expensed in the period incurred. A signiﬁcant change to the Company’s es(cid:42)mate ofthe costs to complete the TRANSCEND clinical trial could have a material eﬀect on the Company’s results of opera(cid:42)ons. The total expected cost of the trial is asignificant management estimate and is reviewed and assessed each reporting period. The current portion of deferred revenue on the consolidated balance sheetrepresents the amount of deferred revenue that is expected to be recognized over the next year, based on es(cid:42)mated costs to be incurred. The es(cid:42)mate of futurerevenue from the Abbott agreement will continue to be monitored and adjusted based on estimates in effect each period-end.As further described in the New Accoun(cid:42)ng Pronouncements sec(cid:42)on, we adopted a new accoun(cid:42)ng standard for recognizing revenue on October 1,2018. We adopted the standard using the modified retrospective approach and expect the impact will be material to the consolidated financial statements due toan anticipated one-quarter acceleration of minimum license fees and royalty revenue earned under our hydrophilic coatings license agreements.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.On an ongoing basis, goodwill and certain indeﬁnite-lived intangible assets are not amor(cid:42)zed but are subject, at a minimum, to annual tests forimpairment at the repor(cid:42)ng unit level. A repor(cid:42)ng unit is an opera(cid:42)ng segment, or component thereof, for which discrete ﬁnancial informa(cid:42)on is available andreviewed by management on a regular basis. Management has determined that 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:80)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 quantitative impairment test would be performed.These tests require management to make signiﬁcant judgments and es(cid:42)mates, most of which are based each repor(cid:42)ng unit’s projected future cash ﬂows.Our es(cid:42)mates associated with the annual test of goodwill and indeﬁnite-lived intangible assets are considered cri(cid:42)cal due to the amount of these assets recordedon our consolidated balance sheets and the judgment required in determining fair value, including projected future cash ﬂows and, in the case of a quan(cid:42)ta(cid:42)vetest and impairment measurement, applicable discount rates.We performed our annual impairment test of goodwill and indeﬁnite-lived intangible assets annually in the fourth quarter of our ﬁscal year. Based on theresults of the assessments, no goodwill impairment charges were recorded during ﬁscal 2018, 2017 or 2016. During ﬁscal 2017 and 2016, we recordedimpairment charges on our indeﬁnite-lived intangible assets of $0.4 million and $0.1 million, respec(cid:42)vely, as a result of decreases in future revenue es(cid:42)matesassociated with these assets. No impairment charges were recorded in fiscal 2018 related to indefinite-lived intangible assets.31Income tax accruals and valua(cid:44)on allowances. Signiﬁcant judgment is required in evalua(cid:42)ng our tax posi(cid:42)ons, and in determining our provision forincome taxes, our deferred tax assets and liabili(cid:42)es and any valua(cid:42)on allowance recorded against our deferred tax assets. We had total deferred tax assets inexcess of total deferred tax liabili(cid:42)es of $6.3 million and $4.0 million, respec(cid:42)vely, as of September 30, 2018 and 2017, including valua(cid:42)on allowances of $4.5million for both ﬁscal 2018 and 2017. The valua(cid:42)on allowances principally related to three items as of September 30, 2018 and 2017. First, ﬁnancial statementother-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 of September 30, 2018 and 2017, a valua(cid:42)on allowance has been recorded for all other-than-temporary impairment losses as realized tax capitallosses from sales of the underlying strategic assets have not occurred. Second, deferred tax assets related to net opera(cid:42)ng losses of Creagh Medical, includingthose incurred prior to the acquisi(cid:42)on 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 realizedin future periods, due to Creagh Medical’s history of taxable losses. Third, deferred tax assets related to state R&D tax credit carryforwards have been oﬀset byvaluation allowances to the extent they are not expected to be utilized in 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. We regularly monitor our uncertain tax posi(cid:42)ons and adjust the related liabili(cid:42)es to reﬂect comple(cid:42)on of tax audits, expira(cid:42)on of an applicablestatute of limita(cid:42)ons, changes in tax laws or interpreta(cid:42)ons, and changes in our business that result in uncertain(cid:42)es that previously did not meet the recogni(cid:42)oncriteria. See Note 9, “Income taxes,” to the consolidated ﬁnancial statements in “Item 8. Financial Statements and Supplementary Data” in this Annual Report onForm 10-K for further information regarding income taxes and their effect on the consolidated financial statements for fiscal 2018, 2017 and 2016.Valua(cid:44)on of business combina(cid:44)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 as 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.The 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, and probabili(cid:42)es ofmilestone achievement. 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 and amount ofrevenue es(cid:42)mates or in the (cid:42)ming or likelihood of achieving strategic milestones, and changes in discount periods and rates. Projected con(cid:42)ngent paymentamounts are discounted back to the current period using a discounted cash flow model. See further discussion of contingent consideration obligations to formerCreagh Medical and NorMedix shareholders, including fair value adjustments recorded in ﬁscal 2018, 2017 and 2016 related to these liabili(cid:42)es, below under“Con(cid:42)ngent considera(cid:42)on expense (gain)” in this Item 7 and in Note 5, “Fair Value Measurements,” to the consolidated ﬁnancial statements in “Item 8. FinancialStatements and Supplementary Data” in this Annual Report on Form 10-K.32Results of OperationsYears Ended September 30, 2018, 2017 and 2016Revenue. Fiscal 2018 revenue was $81.3 million, an $8.2 million, or 11% increase from ﬁscal 2017 revenue of $73.1 million. Fiscal 2017 revenue was$73.1 million, a $1.7 million, or 2% increase from ﬁscal 2016 revenue of $71.4 million. The table below provides a summary of each opera(cid:42)ng segment’s annualrevenue for each of the three years ended September 30, 2018, 2017 and 2016. For the Year Ended September 30, Increase/(Decrease) Increase/(Decrease) (dollars in thousands) 2018 2017 2016 2018 vs. 2017 2017 vs. 2016 Revenue Medical Device $60,513 $53,983 $53,202 $6,530 12% $781 1%In Vitro Diagnostics 20,823 19,129 18,164 1,694 9% 965 5%Total Revenue $81,336 $73,112 $71,366 $8,224 11% $1,746 2% Medical Device. Revenue in Medical Device was $60.5 million in ﬁscal 2018, a 12% increase from $53.9 million in ﬁscal 2017. The increase in ﬁscal 2018revenue was a result of growth in product sales and royalty and license fee revenue, par(cid:42)ally oﬀset by a reduc(cid:42)on in research, development and other revenue.Product revenue increased by $3.4 million, largely driven by increased sales of balloon catheters, as well as growth in demand for our chemical reagents. Royaltyand license fee revenue increased $3.7 million in ﬁscal 2018, as compared with the prior-year, despite facing headwinds from the one-(cid:42)me $1.1 million licensefee recognized in ﬁscal 2017, along with the eﬀects of the prior-year expira(cid:42)on of patents covering our third-genera(cid:42)on PhotoLink technology which reducedroyalty revenue by $2.2 million in ﬁscal 2018. Driving the increase in royalty and license fee revenue from the prior year was $4.4 million of license fee revenuefrom our SurVeil DCB license and development agreement with Abbo(cid:48), as well as increases in royal(cid:42)es from licenses of our advanced-genera(cid:42)on coa(cid:42)ngs. Theserevenue increases were partly oﬀset by a $0.6 million decrease in research, development and other revenue as we experienced delays in customer research anddevelopment programs.During ﬁscal 2018, 2017 and 2016, $6.3 million, $8.4 million, and $12.1 million, respec(cid:42)vely, of Medical Device royalty revenue was generated from ourthird-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). There was a royalty rate step down for licensed customers at the (cid:42)me these patents expired, which resulted indecreases in royalty revenue from licenses of our third-genera(cid:42)on coa(cid:42)ng technology, as compared with the prior years. While we have con(cid:42)nued to earnroyalty revenue from licenses of our third-genera(cid:42)on PhotoLink technology, we are ac(cid:42)vely seeking to convert customers using this genera(cid:42)on of PhotoLinkcoatings to our Serene coating technologies.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 2017 revenue was aresult 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 inproduct sales were driven primarily by increased demand for reagents as well as balloon catheter sales. Product revenue increased due to increases in reagentsales and sales of balloon catheters and other medical devices. The increase in research, development and other revenue of $1.4 million was primarily due to anincrease in demand from new and exis(cid:42)ng customers for our coa(cid:42)ng and feasibility services. Royalty and licensing revenue declined by $1.4 million, ascompared with ﬁscal 2016. 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.In Vitro Diagnos(cid:44)cs. In Vitro Diagnos(cid:42)cs revenue was $20.8 million in ﬁscal 2018, a 9% increase from $19.1 million in ﬁscal 2017. Revenue growth infiscal 2018 was driven by sales volume increases in our microarray slides, distributed antigen products and BioFX-branded products.33In 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 ﬁscal 2017 revenuereﬂected strong growth in stabiliza(cid:42)on, substrate, and an(cid:42)gen product sales which was more than oﬀset by a revenue decline from a signiﬁcant microarraycustomer that was acquired by one of its competitors.The following is a summary of major costs and expenses as a percentage of total revenue: For the Year Ended September 30, 2018 2017 2016 (dollars in thousands) Amount % TotalRevenue Amount % TotalRevenue Amount % TotalRevenue Product costs $13,997 17% $11,422 16% $10,908 15%Research and development 40,973 50% 31,817 44% 18,498 26%Selling, general and administrative 24,111 30% 20,478 28% 18,000 25%Acquired in-process research and development 7,888 10% — — — — Acquired intangible asset amortization 2,491 3% 2,419 3% 2,422 3%Contingent consideration expense (gain) 675 1% (127) 0% 1,492 — Acquisition transaction, integration and other costs — — — — 3,187 4% Product costs. Product gross margins (deﬁned as product sales less related product costs) were 63%, 65% and 65% of product sales in ﬁscal 2018, 2017and 2016, respec(cid:42)vely. Product costs have grown over each of the past three ﬁscal years, largely driven by increased product sales in each of our business units.In ﬁscal 2018, product cost growth from the prior year resulted from signiﬁcant increases in balloon catheter sales, as well as product mix in our IVD segment,which was skewed toward lower-margin products. As we grow our medical device business, product gross margins may con(cid:42)nue to be impacted during thescale-up period of our manufacturing operations, particularly in our Irish facility.Research and development expenses. The ﬁscal 2018 increase in R&D expense of $9.2 million, or 29%, as compared with ﬁscal 2017 was primarily theresult of expense related to the TRANSCEND clinical trial for our SurVeil DCB, as well as internal R&D expense related to development of our whole-productsolu(cid:42)ons products, development and clinical study ac(cid:42)vi(cid:42)es related to our Sundance™ and Avess DCB’s. Internal R&D costs include employee costs, 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, including clinical costs. Theﬁscal 2017 increase in R&D expense of $13.3 million, or 72%, as compared with ﬁscal 2016 was primarily the result of addi(cid:42)onal internal R&D expense relatedto development of our whole-product solutions products, including our DCB development and clinical study activities. Additionally, in fiscal 2017, we recognizedimpairment charges totaling $0.3 million related to in process R&D intangible assets acquired with the fiscal 2016 Creagh Medical acquisition. We anticipate R&Dexpenses will be in the low-to-mid ﬁ(cid:80)ies as a percent of ﬁscal 2019 revenue. Our increased R&D investment will be driven by con(cid:42)nued enrollment in ourTRANSCEND clinical trial and expected commencement of a first in-human clinical study for our Avess DCB.Selling, general and administra(cid:44)ve expenses. Selling, general and administra(cid:42)ve (“SG&A”) expenses increased by $3.6 million or 18%, compared withﬁscal 2017, primarily driven by a $1.6 million increase in stock based and incen(cid:42)ve compensa(cid:42)on as well as an es(cid:42)mated customer claim accrual totaling $1.0million, as well as $0.5 million of costs associated with the Abbo(cid:48) agreement. SG&A expenses increased by $2.5 million or 14%, in ﬁscal 2017 as compared withﬁscal 2016, primarily as the result of infrastructure investments to support our whole-product 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. Addi(cid:42)onally, ﬁscal 2016 SG&A expenses included $1.7 million a(cid:48)ributable tofiscal 2016 acquisitions. We expect SG&A expenses as a percent of fiscal 2019 revenue to decrease slightly from fiscal 2018.Acquired in-process research and development. As a result of the Embolitech agreement, we recognized acquired in-process research and developmentexpense totaling $7.9 million in fiscal 2018, representing the present value of upfront and probable future payments expected to be made under the agreement.Acquisition 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 2018 or 2017.Acquisi(cid:44)on related intangible asset amor(cid:44)za(cid:44)on. We have previously acquired certain intangible assets through business combina(cid:42)ons, which are beingamortized over periods ranging from four to 14 years. Amortization expense on acquired intangible assets was $2.5 million, $2.4 million and $2.4 million in fiscal2018, fiscal 2017 and fiscal 2016, respectively.34Con(cid:44)ngent considera(cid:44)on expense (gain). In ﬁscal 2018, 2017 and 2016, we recorded $0.7 million, ($0.1) million and $1.5 million, respec(cid:42)vely, of netcon(cid:42)ngent considera(cid:42)on expense (gain) 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 our previously-disclosed ﬁscal 2016 acquisi(cid:42)ons. Expense (gain) in each ﬁscal year relate to changes in the probability and (cid:42)ming of achieving certain revenue and opera(cid:42)onalmilestones, as well as expense for the passage of (cid:42)me (i.e. accre(cid:42)on). Accre(cid:42)on was reduced in ﬁscal 2018 due to payment of a por(cid:42)on of one of the con(cid:42)ngentobliga(cid:42)ons, as well as the reduc(cid:42)on in the fair value of the obliga(cid:42)ons that occurred in ﬁscal 2017. In ﬁscal 2019, if there are changes in the amount, probabilityor (cid:42)ming of achievement of con(cid:42)ngent considera(cid:42)on milestones, there may be material adjustments in the consolidated statements of opera(cid:42)ons to reﬂectchanges in the fair value of contingent consideration liabilities.Other income (loss). Major classifications of other income (loss) are as follows: Year Ended September 30, (dollars in thousands) 2018 2017 2016 Investment income, net $851 $390 $63 Foreign exchange gain (loss) 239 (504) (481)Gains on strategic investments and other 177 44 507 Other income (loss) $1,267 $(70) $89 Other income (loss) has varied as a result of gains from available-for-sale securi(cid:42)es and strategic investments, as well as foreign currency exchange rateﬂuctua(cid:42)ons. The increase in investment income in ﬁscal 2018 as compared with ﬁscal 2017 is the result of higher interest rates on debt investments, as well asan increase in investment principal stemming from the $25 million Abbo(cid:48) payment. Investment income increased in ﬁscal 2017 as compared with ﬁscal 2016due primarily to higher interest rates realized on debt investments. In addi(cid:42)on, investment income in ﬁscal 2016 was impacted by lower investment balances dueto cash needed to execute strategic acquisi(cid:42)ons. Fiscal 2016 included considera(cid:42)on received from the sale of our ownership interest in a strategic investment of$0.5 million. Fiscal 2018, 2017 and 2016 included $0.2 million, ($0.5) million and ($0.5) million of foreign currency gains (losses), primarily related to Euro-denominated con(cid:42)ngent considera(cid:42)on liabili(cid:42)es arising from the Creagh Medical acquisi(cid:42)on. These gains (losses) reﬂect weakening (strengthening) of the Euroas compared with the U.S. dollar in each respective period. Income tax provision. In December 2017, the Tax Cuts and Jobs Act (“TCJA”) tax legisla(cid:42)on was signed into law, which reduced the U.S. Federal statutorytax rate from 35% to 21%, among other changes. As of September 30, 2018, we have completed our assessment of the TCJA which resulted in discrete taxexpense of $1.6 million in ﬁscal 2018 stemming from the revalua(cid:42)on of our net deferred tax assets based on the change in the enacted tax rate. U.S. tax lawrequires that taxpayers with a ﬁscal year beginning before and ending a(cid:80)er the eﬀec(cid:42)ve date of a rate change calculate a blended tax rate for the year based onthe pro rata number of days in the year before and after such effective date. Accordingly, for fiscal 2018, our statutory income tax rate was 24.5% in the U.S.The reconcilia(cid:42)on of the statutory U.S. federal tax rate of 24.5%, 35% and 35% in ﬁscal 2018, 2017 and 2016, respec(cid:42)vely, and our eﬀec(cid:42)ve tax rate is asfollows: Year Ended September 30, 2018 2017 2016 Statutory U.S. federal income tax rate 24.5% 35.0% 35.0%State income taxes, net of federal benefit 9.6 0.3 0.8 Subsidiary capital gain — — 15.5 Rate differential (4.9) 13.5 3.7 Valuation allowance change (12.7) 7.2 (14.8)Federal and foreign research and development tax credits 22.7 (10.0) (3.4)Stock based compensation 27.4 4.7 (3.6)Manufacturing deduction — (4.4) (1.6)Transaction costs — — 4.5 Contingent consideration expense (gain) (2.2) (0.6) 3.1 U.S. Federal & State Rate Change (21.0) — — Tax reserve change (2.1) (0.7) 1.5 Other (0.5) (0.8) 0.4 Effective tax rate 40.8% 44.2% 41.1% 35The diﬀerence between the respec(cid:42)ve U.S. federal statutory tax rates and our annual eﬀec(cid:42)ve tax rates reﬂects the impact of various diﬀerences betweenamounts recorded in our consolidated financial statements and our tax returns.Our eﬀec(cid:42)ve tax rate in ﬁscal 2018 diﬀered from the U.S. federal statutory rate due primarily to the impact of U.S. tax rate decreases on our deferred taxassets, research and development tax credits, and excess tax beneﬁts associated with stock-based compensa(cid:42)on. Addi(cid:42)onally, as in prior years, opera(cid:42)ng lossesin Ireland, where the 12.5% statutory rate tax beneﬁts are oﬀset by a full valua(cid:42)on allowance, non-deduc(cid:42)ble amor(cid:42)za(cid:42)on expense, and con(cid:42)ngentconsidera(cid:42)on expense impacted the eﬀec(cid:42)ve tax rate in ﬁscal 2018. These items had an inverse impact rela(cid:42)ve to the impact of the same items in prior years dueto the fact that we generated a net loss in our U.S. opera(cid:42)ons in ﬁscal 2018, as compared with net income generated in prior years. As a result, items thatdecreased the amount of taxes payable, such as federal R&D tax credits, increased the amount of the tax beneﬁt rela(cid:42)ve to the pretax net loss incurred, thusincreasing the effective tax rate.The variability in our ﬁscal 2017 eﬀec(cid:42)ve tax rate from the U.S. federal statutory rate is primarily the result of opera(cid:42)ng losses in Ireland, where the12.5% statutory rate tax beneﬁts are oﬀset by a full valua(cid:42)on allowance, non-deduc(cid:42)ble amor(cid:42)za(cid:42)on expense, non-taxable con(cid:42)ngent considera(cid:42)on gains, andforeign currency 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 and excess tax beneﬁtsassociated with stock-based compensation.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. We have historically recorded other-than-temporary impairment losses with no income tax eﬀect as it has not beenmore likely than not that we would generate suﬃcient capital gains to realize these beneﬁts. Consequently, other-than-temporary impairments and capital gains,if any, are recorded without any income tax expense or beneﬁt. In ﬁscal 2016, we u(cid:42)lized $7.5 million of previously generated capital losses by accelera(cid:42)ngbuilt-in gains in our IVD 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)onallowance during fiscal 2016.During ﬁscal 2018, 2017 and 2016, we recognized net excess tax beneﬁt (expense) from share op(cid:42)ons exercised, expired, forfeited, or vested totaling$2.0 million, ($0.2) million and $0.6 million, respec(cid:42)vely. The eﬀect of these items has had a signiﬁcant eﬀect on our eﬀec(cid:42)ve tax rate due to the level of stockaward activity over the past three years, and we anticipate it will continue to have an impact in fiscal 2019.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 effective rate by 1.3% in fiscal 2016. The PATH Act made the research and development tax credit permanent.Segment Operating ResultsOperating results for each of our reportable segments were as follows: For the Year Ended September 30, Increase/(Decrease) Increase/(Decrease) (dollars in thousands) 2018 2017 2016 2018 vs. 2017 2017 vs. 2016 Operating (loss) income Medical Device $(8,478) $6,902 $16,975 $(15,380) (223)% $(10,073) (59)%In Vitro Diagnostics 8,619 8,293 7,115 326 4% 1,178 17%Total segment operating income 141 15,195 24,090 (15,054) (99)% (8,895) (37)%Corporate (8,940) (8,092) (7,231) (848) 10% (861) 12%Total operating (loss) income $(8,799) $7,103 $16,859 $(15,902) (224)% $(9,756) (58)%Medical Device. Opera(cid:42)ng losses in ﬁscal 2018, as compared with opera(cid:42)ng income in ﬁscal 2017, were driven by $7.9 million in higher R&D expenses, a$7.9 million acquired in-process research and development charge from the Embolitech transac(cid:42)on, a $1.0 million increase in SG&A, as well as a $0.8 millionincrease in con(cid:42)ngent considera(cid:42)on expense, partly oﬀset by the revenue increases described above. R&D expense increased as we began enrollment in theTRANSCEND clinical trial, incurred pre-clinical expenses related to our other DCB programs and con(cid:42)nued investment in proprietary product developmentac(cid:42)vi(cid:42)es. SG&A expenses increased due to increased expense related to stock based and incen(cid:42)ve compensa(cid:42)on, as well as con(cid:42)nued investment ininfrastructure necessary to support our whole-products solutions strategy.36The 59% decrease in Medical Device opera(cid:42)ng income in ﬁscal 2017, as compared with ﬁscal 2016, was primarily the result of higher R&D expenses anda $1.4 million decrease in royalty and license fee revenue, par(cid:42)ally oﬀset by incremental product gross margin of $0.4 million from increased product sales and$1.4 million from increased research, development and other revenue. Fiscal 2017 beneﬁted from receipt of a $1.1 million license fee arising from a customer’sacquisi(cid:42)on and our sale of related jointly-owned intellectual property to the acquirer. R&D expenses increased by $13.2 million from ﬁscal 2016 as weaccelerated investment in our whole-product solu(cid:42)ons product development, including our DCB programs. Further, SG&A expenses increased $2.5 million dueto investment in infrastructure necessary to support our whole-products solu(cid:42)ons strategy, as well as $1.2 million of incremental professional fees related toaccounting, audit and legal services. The net decrease in current-year opera(cid:42)ng income resul(cid:42)ng from these items was par(cid:42)ally oﬀset by a net gain on thecontingent consideration obligations of $0.1 million in fiscal 2017, as compared with a net expense of $1.5 million in fiscal 2016.In Vitro Diagnostics. Opera(cid:42)ng income in our IVD segment increased by 4% in ﬁscal 2018 as compared with ﬁscal 2017 resul(cid:42)ng from increased productsales resul(cid:42)ng in product gross margin increases of $1.0 million, par(cid:42)ally oﬀset by increased R&D, SG&A and allocated corporate costs. Product gross marginsas a percent of sales decreased to 64.6% in fiscal 2018 from 65.4% in 2017 due to unfavorable product mix.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 product gross margins asproduct 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 and acquired intangibleamor(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 revenue decline from a signiﬁcantmicroarray customer that was acquired by one of its compe(cid:42)tors. Product gross margins increased to 65.4% in ﬁscal 2017 from 64.3% in 2016 due to favorableproduct mix. Operating income benefited from increased operating leverage from higher revenue.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 $8.9 million, $8.1 million and $7.2 million in ﬁscal 2018, 2017 and 2016, respec(cid:42)vely. The $0.8 million, or 10% increase in corporateexpenses from ﬁscal 2017 to ﬁscal 2018 is due primarily to increases in regulatory personnel headcount, as well as stock based and incen(cid:42)ve compensa(cid:42)on. The$0.9 million, or 12% increase in corporate expenses in ﬁscal 2017 as compared with ﬁscal 2016 was due to increased professional services related toaccounting, audit and legal services.Liquidity and Capital ResourcesAs of September 30, 2018, we had working capital of $46.4 million, a $4.7 million decrease from $51.1 million as of September 30, 2017. Working capitalis deﬁned by us as current assets minus current liabili(cid:42)es. The decrease from the prior year-end is a result of con(cid:42)ngent considera(cid:42)on obliga(cid:42)ons totaling $11.0million related to the Creagh Medical acquisi(cid:42)on that are classiﬁed as current liabili(cid:42)es as of September 30, 2018, as well as increases in other accrued liabili(cid:42)esdriven by $2.4 million of incremental accrued clinical trial costs, $1.2 million of accrued construc(cid:42)on in progress and an es(cid:42)mated customer claim totaling $1.0million. These working capital reduc(cid:42)ons were partly oﬀset by the receipt of the $25.0 million upfront payment from Abbo(cid:48), of which $9.6 million is included inthe current por(cid:42)on of deferred revenue as of September 30, 2018. As of September 30, 2017, the Creagh Medical con(cid:42)ngent considera(cid:42)on obliga(cid:42)ons, whichare recorded at their estimated fair market value using Level 3 inputs, were included in long-term liabilities. Based on milestones achieved during the con(cid:42)ngencyperiod, a payment totaling €9.6 million is expected to be made by December 31, 2018, which is equivalent to approximately $11.1 million based on the exchangerate as of September 30, 2018. Our cash and cash equivalents and available-for-sale investments totaled $65.0 million as of September 30, 2018, an increase of$16.7 million from $48.3 million as of September 30, 2017, principally associated with cash ﬂow from opera(cid:42)ng ac(cid:42)vi(cid:42)es of $34.1 million oﬀset by $9.1 millionof plant and equipment expenditures, $5.0 million paid for acquired in process research and development assets, and $2.5 million of net cash payments fortaxes 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 2018 and 2017, 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, 2018 and 2017 of $41.4 million and $31.8 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:83)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.37We 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 onattractive terms.The following table is a summary of cash provided by (used in) opera(cid:42)ng, inves(cid:42)ng, and ﬁnancing ac(cid:42)vi(cid:42)es, the eﬀect of exchange rate changes on cashand cash equivalents, and the net change in cash and cash equivalents: For the Years Ended September 30, 2018 2017 2016 (dollars in thousands) Cash provided by (used in): Operating activities $34,052 $14,053 $25,166 Investing activities (23,500) (16,189) (55,468)Financing activities (3,393) (6,510) (199)Effect of exchange rates on changes in cash and cash equivalents (25) 193 (100)Net change in cash and cash equivalents $7,134 $(8,453) $(30,601) Opera(cid:44)ng Ac(cid:44)vi(cid:44)es. During ﬁscal 2018, 2017 and 2016, we had net (loss) income of ($4.5) million, $3.9 million and $10.0 million, respec(cid:42)vely. Netchanges in opera(cid:42)ng assets and liabili(cid:42)es increased (reduced) cash ﬂows from opera(cid:42)ng ac(cid:42)vi(cid:42)es by $21.2 million, ($0.8 million) and $4.8 million in ﬁscal 2018,2017 and 2016, respectively. Significant changes in operating assets and liabilities affecting cash flows during these years included: •Cash provided by deferred revenue was $20.7 million in ﬁscal 2018, as compared with less than $0.1 million in the ﬁscal 2017 and 2016periods, due to the $25.0 million upfront fee received from Abbott in fiscal 2018, net of amounts recognized to date. •Cash used for prepaids and other current assets totaled $1.6 million and $0.6 million in ﬁscal 2018 and 2017, respec(cid:42)vely, as compared withcash from prepaids and other current assets of $0.4 million in the ﬁscal 2016. These changes were primarily due to increases in refundableIrish research and development tax credit assets and other reimbursable R&D expenses as well as increased prepaid clinical trial expenses inboth fiscal 2018 and 2017. •Cash provided by accrued liabili(cid:42)es was $3.4 million, $0.6 million and $0.4 million in ﬁscal 2018, 2017 and 2016, respec(cid:42)vely. The increase incash from accrued liabili(cid:42)es in ﬁscal 2018 was driven primarily by a $2.4 million increase in accrued clinical study expense and a $1.0 millionaccrued customer claim related to an estimated overpayment of coating royalties. •Cash provided by (used for) accrued compensa(cid:42)on was $1.7 million, ($1.6) million and $2.6 million in ﬁscal 2018, 2017 and 2016,respectively. The changes in each ﬁscal year are primarily a result in ﬂuctua(cid:42)ons in annual accrued incen(cid:42)ve compensa(cid:42)on payments relatedto achievement levels against the Company’s performance objectives. •Cash provided by (used for) accounts receivable was ($1.8) million, ($0.5) million and $0.9 million in ﬁscal 2018, 2017 and 2016, respec(cid:42)vely.In ﬁscal 2018 and 2017, increases in product sales in the fourth quarter drove increases in accounts receivable, while ﬁscal 2016 benefitedfrom a $2.4 million customer payment due in the fourth quarter of fiscal 2015 and paid in the first quarter of fiscal 2016.Investing Activities. 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 $23.5 million, $16.2 million and $55.5 million in ﬁscal 2018, 2017and 2016, respec(cid:42)vely. We invested $9.1 million, $6.4 million and $8.2 million in property and equipment in ﬁscal 2018, 2017 and 2016, respec(cid:42)vely. Fiscal2018 and 2017 capital expenditures were primarily related to investments in property and equipment to facilitate our whole-products strategy, including thebuildout of our R&D facility in Eden Prairie, Minnesota in ﬁscal 2018, as well as expansion of R&D and manufacturing clean rooms as well as an analy(cid:42)cal lab inour Irish facility. Fiscal 2016 capital expenditures included our purchase of the Irish facility for $2.8 million and our acquisi(cid:42)ons of Creagh Medical andNorMedix for $25.9 million of net cash. We purchased available-for-sale securi(cid:42)es totaling $9.6 million, $9.8 million and $22.0 million, net of sales proceeds, infiscal 2018, 2017 and 2016, respectively.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 $3.4 million, $6.5 million and $0.2 million in ﬁscal 2018,2017 and 2016, respec(cid:42)vely. In ﬁscal 2018, our cash used for ﬁnancing ac(cid:42)vi(cid:42)es was primarily related to $4.5 million to purchase common stock to payemployee taxes resul(cid:42)ng from stock award ac(cid:42)vity during the ﬁscal year. The primary ﬁnancing ac(cid:42)vi(cid:42)es in ﬁscal 2017 were the repurchase of common stockunder our stock repurchase authorization for $4.7 million38and $2.2 million paid to purchase common stock to pay employee taxes resulting from stock award activity during the fiscal year. The primary financing activitiesin ﬁscal 2016 related to the payment of con(cid:42)ngent considera(cid:42)on required by the terms of a prior-year acquisi(cid:42)on in our IVD segment and payments of $0.4million to purchase common stock to pay employee taxes resul(cid:42)ng primarily from the issuance of common shares associated with our ﬁscal 2013-2015performance share program. We also generated $2.1 million, $0.4 million and $0.5 million in ﬁscal 2018, 2017 and 2016, respec(cid:42)vely, from the sale of commonstock 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. Wedid not repurchase any shares in fiscal 2018 or fiscal 2016.As of November 30, 2018, the Company has an aggregate of $25.3 million available for future common stock purchases under the current authorization.Customer Concentra(cid:44)ons. Our licensed technologies provide royalty and license fee revenue. We have licenses with a diverse base of customers andcertain customers have mul(cid:42)ple products using our technology. Medtronic is our largest licensing customer at approximately 16% of total consolidated revenue(including product sales revenue) for ﬁscal 2018. Medtronic has several separately licensed products that generate royalty revenue for Surmodics, none ofwhich represented more than 4% of our total revenue. During ﬁscal 2018, we signed a license with Abbo(cid:48) for our SurVeil DCB. As a result of license fee revenuefrom this agreement, revenue from Abbott comprised 11% of our total consolidated revenue for fiscal 2018. No other individual customer constitutes more than10% 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, 2018, we did not have any off-balance sheet arrangements.Presented below is a summary of contractual obliga(cid:42)ons as of September 30, 2018 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. (dollars in thousands) Total Less than1 Year 1-3 Years 4-5 Years More than5 Years Operating leases $4,014 $443 $848 $790 $1,933 Contingent consideration (1) 14,466 11,041 3,425 — — Minimum annual royalty obligation (2) 2,088 232 464 464 928 Clinical trial CRO obligations (3) 13,161 5,637 5,077 1,656 791 Total $33,729 $17,353 $9,814 $2,910 $3,652 (1)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. The considera(cid:42)onpayable under the Creagh Medical acquisi(cid:42)on agreement was ﬁnalized as of September 30, 2018 and will be paid in December 2018. This obliga(cid:42)on isdenominated in Euros and not hedged and will ﬂuctuate accordingly depending on the foreign currency exchange rate eﬀec(cid:42)ve on the payment date. Inconnec(cid:42)on with the acquisi(cid:42)on of NorMedix, we are con(cid:42)ngently liable for milestone payments aggrega(cid:42)ng up to $7.0 million. While it is not certain ifthese payments will be made, the amounts included in this table reﬂect our best es(cid:42)mates. Note 4 to the consolidated ﬁnancial statements in “Item 8.Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for addi(cid:42)onal informa(cid:42)on regarding these acquisi(cid:42)ons and the relatedcontingent consideration liabilities.39(2)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, 2018) 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.(3)CRO obliga(cid:42)ons represent contractual periodic payments for services performed and milestone payments to third-party CROs for services related to ourongoing clinical trials. The (cid:42)ming of payments and recogni(cid:42)on of expenses under these contracts is dependent on enrollment in our ongoing clinical trialsand may be diﬀerent from the amounts presented, which are es(cid:42)mated based on projected enrollment rates. The aggregate future contractual obliga(cid:42)on isup to $13.2 million as of September 30, 2018.As of September 30, 2018, 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 receive 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.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 assetsrecognized from the costs to obtain or fulﬁll a contract. We will adopt this accoun(cid:42)ng standard beginning in the ﬁrst quarter of ﬁscal year 2019 (October 1,2018) using the modiﬁed retrospec(cid:42)ve approach. The impact of the adop(cid:42)on will be material to the consolidated ﬁnancial statements due to an an(cid:42)cipated one-quarter acceleration of minimum license fees and sales-based royalty revenue earned under its hydrophilic license agreements. Under the modiﬁed retrospec(cid:42)veapproach, the Company will apply the new revenue standard to all new revenue contracts ini(cid:42)ated on or a(cid:80)er the eﬀec(cid:42)ve date, and, for contracts which haveremaining obliga(cid:42)ons as of the eﬀec(cid:42)ve date, the Company will adjust the beginning balance of retained earnings. These changes will result in an increase ofapproximately $5.9 million to retained earnings, including establishment of contract receivable assets on the consolidated balance sheets of $7.6 million and adeferred tax liability of $1.7 million upon adoption.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. While we are evalua(cid:42)ng the impact of the lease guidance on its consolidated ﬁnancial statements, we an(cid:42)cipate that the impactwill be material due to the right-of-use assets and lease liabili(cid:42)es related to our exis(cid:42)ng opera(cid:42)ng leases that will be recorded on the Company’s consolidatedbalance sheets upon adoption of the standard.Accounting Standards AdoptedIn January 2017, the FASB issued ASU No. 2017-01, Clarifying the Deﬁni(cid:44)on of a Business. The new guidance changed the deﬁni(cid:42)on of a business as itrelates to evalua(cid:42)on of transac(cid:42)ons under Accoun(cid:42)ng Standards Codiﬁca(cid:42)on (“ASC”) Topic 805 Business Combina(cid:42)ons, introducing a screen whereby atransac(cid:42)on would not be considered a business combina(cid:42)on if substan(cid:42)ally all of the fair value of the gross assets acquired (or disposed of) is concentrated in asingle identifiable assets or group of similar40iden(cid:42)ﬁable assets. The accoun(cid:42)ng standard is eﬀec(cid:42)ve for ﬁscal years beginning a(cid:80)er December 15, 2017, with early adop(cid:42)on permi(cid:48)ed. This accoun(cid:42)ngguidance was adopted during fiscal 2018, in conjunction with the acquisition of in-process research and development assets from Embolitech. The applica(cid:42)on ofthis guidance to the Embolitech transaction resulted in a determination that the acquired assets did not constitute a business.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, substan(cid:42)ally all of which are less than one year. Becauseof the credit criteria of our investment policies, the primary market risk associated with these investments is interest rate risk. Surmodics does not use deriva(cid:42)veﬁnancial instruments to manage interest rate risk or to speculate on future changes in interest rates. As of September 30, 2018, the Company owned no interest-bearing securi(cid:42)es with more than ten months remaining un(cid:42)l maturity, and therefore a one percentage point increase in interest rates would not have a materialimpact on the results of opera(cid:42)ons or cash ﬂows. Our policy also allows the Company to hold a substan(cid:42)al por(cid:42)on of our funds in cash and cash equivalents,which are deﬁned as ﬁnancial instruments 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 2018,2017 and ﬁscal 2016, we recognized $0.1 million, ($0.5) million and ($0.4) million, respec(cid:42)vely, in foreign currency gains (losses) which were primarily relatedto our Euro-denominated obliga(cid:42)on to pay con(cid:42)ngent considera(cid:42)on in December 2018. Other than the Ireland opera(cid:42)ons and the previously disclosed Euro-denominated con(cid:42)ngent considera(cid:42)on obliga(cid:42)on, our interna(cid:42)onal opera(cid:42)ons consist primarily of sales of reagent and stabiliza(cid:42)on chemicals and changes inforeign currencies 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 either U.S. dollars orEuros. We generate royalty revenue from customers’ product sales in foreign jurisdic(cid:42)ons, which are converted and paid in U.S. dollars per contractual terms.Substan(cid:42)ally all of our purchasing transac(cid:42)ons are denominated in either U.S. Dollars or Euros. To date, we have not entered into any foreign currency forwardexchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.The consolidated balance sheets as of September 30, 2018 and 2017 and the consolidated statements of opera(cid:42)ons, comprehensive (loss) income,stockholders’ equity and cash ﬂows for each of the three years in the period ended September 30, 2018, together with Report of Independent Registered PublicAccounting Firm 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.41In 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, 2018, 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, 2018, 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.2.Internal Control over Financial Reporting.a. Management’s Annual Report on Internal Control Over Financial Repor(cid:44)ng. Our management is responsible for establishing and maintaining adequateinternal control 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 aprocess designed to provide reasonable assurance regarding the reliability of ﬁnancial repor(cid:42)ng and the prepara(cid:42)on of ﬁnancial statements for externalpurposes in accordance with U.S. GAAP. Our internal control over ﬁnancial repor(cid:42)ng includes those policies and procedures that: (i) pertain to the maintenanceof 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 thattransac(cid:42)ons are recorded as necessary to permit prepara(cid:42)on of ﬁnancial statements in accordance with U.S. GAAP, and that our receipts and expenditures arebeing made only in accordance with authoriza(cid:42)on of our management and directors; and (iii) provide reasonable assurance regarding preven(cid:42)on or (cid:42)melydetection of unauthorized acquisition, use or disposition of assets that could have a material effect on our consolidated 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, 2018.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.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 30,2018. 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.b. Changes in Internal Controls Over Financial Reporting.There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) ofthe Exchange Act during the quarter ended September 30, 2018 that materially aﬀected, or are reasonable likely to materially aﬀect, our internal control overfinancial reporting.ITEM 9B. OTHER INFORMATION.None.42PART 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 2019 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 2018” 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 2019 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 2019 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, 2018: 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 992,538 (1) $19.96 (1) 675,587 (2)Equity compensation plans not approved by shareholders — N/A — Total 992,538 $19.96 675,587 (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 675,587 shares available for future issuance under the 2009 Equity Incen(cid:42)ve Plan. Excludes 189,620 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 2019 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 2019 Annual Meeting of Shareholders.43PART 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 OperationsF-4Consolidated Statements of Comprehensive (Loss) IncomeF-5Consolidated Statements of Stockholders’ EquityF-6Consolidated Statements of Cash FlowsF-7 to F-8Notes to Consolidated Financial StatementsF-9 to F-33 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:44)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 (1) Balance atBeginning ofPeriod AdditionsCharged(Credited)to Expenses DeductionsFromReserves Balance atEnd ofPeriod 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 Year Ended September 30, 2018: Allowance for doubtful accounts $230 $64 $147 (a) $147 (1)Uncollectible accounts written off and adjustments to the allowance.44UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549EXHIBIT INDEX TO FORM 10-KFor the Fiscal Year Ended September 30, 2018SURMODICS, 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. 4510.10* 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 Compensa(cid:42)on Policy, Amended and Restated as of July 18, 2017 – incorporated by reference to Exhibit 10.17 to theCompany’s Form 10-K filed on December 1, 2017, SEC File No. 0-23837. 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* 10.26* 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. 4610.27* 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. 10.28* 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. 10.29* 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. 10.30* 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. 10.31* 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. 10.32* Change of Control Agreement by and between Surmodics, Inc. and Thomas A. Greaney, dated as of February 22, 2018 – incorporated byreference to Exhibit 10.1 to the Company’s Form 8-K filed on February 23, 2018, SEC File No. 0-23837. 10.33*** Development and Distribu(cid:42)on Agreement between Surmodics, Inc. and Abbo(cid:48) Vascular, Inc., dated as of February 26, 2018. – incorporated byreference to Exhibit 10.2 to the Company’s Form 10-Q filed on May 4, 2018, SEC File No. 0-23837. 10.34** Change of Control Agreement by and between Surmodics, Inc. and Teri W. Sides, dated as of October 30, 2018. 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 Document 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***Por(cid:42)ons of this document, which have been separately ﬁled with the Securi(cid:42)es and Exchange Commission, have been omi(cid:48)ed pursuant to a request forconfidential treatment.47SIGNATURESPursuant 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: November 30, 2018Pursuant 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 TIMOTHY J. ARENS, and cons(cid:42)tutes and appoints said persons as his or hertrue 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, in any andall 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 November 30, 2018 /s/ Timothy J. ArensTimothy J. Arens Vice President, Corporate Development and Strategy;Interim Vice President, Finance and Chief FinancialOfficer (principal financial officer) November 30, 2018 /s/ John D. Manders Corporate Controller November 30, 2018John D. Manders/s/ Susan E. KnightSusan E. Knight (principal accounting officer)Chairman of the Board of Directors November 30, 2018 /s/ José H. BedoyaJosé H. Bedoya Director November 30, 2018 /s/ David R. Dantzker, M.D.David R. Dantzker, M.D. Director November 30, 2018 /s/ Ronald B. KalichRonald B. Kalich Director November 30, 2018 /s/ Shawn T McCormickShawn T McCormick Director November 30, 2018/s/ Lisa Wipperman Heine Director November 30, 2018Lisa Wipperman Heine 48 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders ofSurmodics, Inc.Eden Prairie, MinnesotaOpinion on Internal Control over Financial ReportingWe have audited the internal control over ﬁnancial repor(cid:42)ng of Surmodics, Inc. and subsidiaries (the “Company”) as of September 30, 2018, based on criteriaestablished in Internal Control — Integrated Framework (2013) issued by the Commi(cid:48)ee of Sponsoring Organiza(cid:42)ons of the Treadway Commission (COSO). Inour opinion, the Company maintained, in all material respects, eﬀec(cid:42)ve internal control over ﬁnancial repor(cid:42)ng as of September 30, 2018, based on criteriaestablished in Internal Control — Integrated Framework (2013) issued by COSO.We have also audited, in accordance with the standards of the Public Company Accoun(cid:42)ng Oversight Board (United States) (PCAOB), the consolidated ﬁnancialstatements as of and for the year ended September 30, 2018, of the Company and our report dated November 30, 2018, expressed an unqualiﬁed opinion onthose consolidated financial statements.Basis for OpinionThe Company’s management is responsible for maintaining eﬀec(cid:42)ve internal control over ﬁnancial repor(cid:42)ng and for its assessment of the eﬀec(cid:42)veness ofinternal control over ﬁnancial repor(cid:42)ng, included in the accompanying Management’s Report on Internal Control over Financial Repor(cid:42)ng. Our responsibility isto express an opinion on the Company’s internal control over ﬁnancial repor(cid:42)ng based on our audit. We are a public accoun(cid:42)ng ﬁrm registered with the PCAOBand are required to be independent with respect to the Company in accordance with the U.S. federal securi(cid:42)es laws and the applicable rules and regula(cid:42)ons ofthe Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether eﬀec(cid:42)ve internal control over ﬁnancial repor(cid:42)ng was maintained in all material respects. Our audit included obtaining anunderstanding of internal control over ﬁnancial repor(cid:42)ng, assessing the risk that a material weakness exists, tes(cid:42)ng and evalua(cid:42)ng the design and opera(cid:42)ngeﬀec(cid:42)veness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over ﬁnancial repor(cid:42)ng is a process designed to provide reasonable assurance regarding the reliability of ﬁnancial repor(cid:42)ng andthe prepara(cid:42)on of ﬁnancial statements for external purposes in accordance with generally accepted accoun(cid:42)ng principles. A company’s internal control overﬁnancial repor(cid:42)ng includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reﬂectthe transac(cid:42)ons and disposi(cid:42)ons of the assets of the company; (2) provide reasonable assurance that transac(cid:42)ons are recorded as necessary to permitprepara(cid:42)on of ﬁnancial statements in accordance with generally accepted accoun(cid:42)ng principles, and that receipts and expenditures of the company are beingmade only in accordance with authoriza(cid:42)ons of management and directors of the company; and (3) provide reasonable assurance regarding preven(cid:42)on ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limita(cid:42)ons, internal control over ﬁnancial repor(cid:42)ng may not prevent or detect misstatements. Also, projec(cid:42)ons of any evalua(cid:42)on ofeﬀec(cid:42)veness to future periods are subject to the risk that controls may become inadequate because of changes in condi(cid:42)ons, or that the degree of compliancewith the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP Minneapolis, MinnesotaNovember 30, 2018 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders ofSurmodics, Inc.Eden Prairie, MinnesotaOpinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Surmodics, Inc. and subsidiaries (the "Company") as of September 30, 2018 and 2017, andthe related consolidated statements of operations, comprehensive (loss) income, shareholders' equity, and cash flows for each of the three years in the periodended September 30, 2018, and the related notes and the financial statement schedule listed in the Index at Item 15 (collectively referred to as the "financialstatements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and2017, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2018, in conformity with accountingprinciples generally accepted in the United States of America.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internalcontrol over financial reporting as of September 30, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our report dated November 30, 2018, expressed an unqualified opinion on theCompany's internal control over financial reporting.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financialstatements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company inaccordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the ﬁnancial statements are free of material misstatement, whether due to error or fraud. Our audits included performing proceduresto assess the risks of material misstatement of the ﬁnancial statements, whether due to error or fraud, and performing procedures that respond to those risks.Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the ﬁnancial statements. Our audits also includedevalua(cid:42)ng the accoun(cid:42)ng principles used and signiﬁcant es(cid:42)mates made by management, as well as evalua(cid:42)ng the overall presenta(cid:42)on of the ﬁnancialstatements. We believe that our audits provide a reasonable basis for our opinion. /s/ DELOITTE & TOUCHE LLP Minneapolis, MinnesotaNovember 30, 2018 We have served as the Company’s auditor since 2002. F-2 Surmodics, Inc. and SubsidiariesConsolidated Balance SheetsAs of September 30 2018 2017 (In thousands, except share andper share data) ASSETS Current Assets: Cash and cash equivalents $23,318 $16,534 Restricted cash 350 — Available-for-sale securities 41,352 31,802 Accounts receivable, net of allowance for doubtful accounts of $147 and $230 as of September 30, 2018 and 2017, respectively 8,877 7,211 Inventories 4,016 3,516 Income tax receivable 1,152 599 Prepaids and other 2,462 1,221 Total Current Assets 81,527 60,883 Property and equipment, net 30,143 22,942 Deferred income taxes 6,304 4,027 Intangible assets, net 17,683 20,562 Goodwill 27,032 27,282 Other assets 1,446 897 Total Assets $164,135 $136,593 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable $2,546 $2,396 Accrued liabilities: Compensation 5,635 3,822 Accrued other 6,265 1,773 Deferred revenue 9,646 62 Contingent consideration 11,041 1,750 Total Current Liabilities 35,133 9,803 Contingent consideration, less current portion 3,425 13,114 Deferred revenue, less current portion 11,247 181 Other long-term liabilities 5,720 1,938 Total Liabilities 55,525 25,036 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; 13,397,647 and 13,094,988 shares issued and outstanding, as of September 30, 2018 and 2017, respectively 670 655 Additional paid-in capital 7,607 5,413 Accumulated other comprehensive income 2,718 3,417 Retained earnings 97,615 102,072 Total Stockholders’ Equity 108,610 111,557 Total Liabilities and Stockholders’ Equity $164,135 $136,593 The accompanying notes are an integral part of these consolidated financial statements. F-3 Surmodics, Inc. and SubsidiariesConsolidated Statements of OperationsFor the Years Ended September 30 2018 2017 2016 (In thousands, exceptper share data) Revenue: Product sales $37,953 $32,790 $30,999 Royalties and license fees 35,424 31,787 33,203 Research, development and other 7,959 8,535 7,164 Total revenue 81,336 73,112 71,366 Operating costs and expenses: Product costs 13,997 11,422 10,908 Research and development 40,973 31,817 18,498 Selling, general and administrative 24,111 20,478 18,000 Acquired in-process research and development 7,888 — — Acquired intangible asset amortization 2,491 2,419 2,422 Contingent consideration expense (gain) 675 (127) 1,492 Acquisition transaction, integration and other costs — — 3,187 Total operating costs and expenses 90,135 66,009 54,507 Operating (loss) income (8,799) 7,103 16,859 Other income (loss): Investment income, net 851 390 63 Foreign exchange gain (loss) 239 (504) (481)Gains on strategic investments and other 177 44 507 Other income (loss) 1,267 (70) 89 (Loss) income before income taxes (7,532) 7,033 16,948 Income tax benefit (provision) 3,075 (3,107) (6,963)Net (loss) income $(4,457) $3,926 $9,985 Basic net (loss) income per share: $(0.34) $0.30 $0.77 Diluted net (loss) income per share: $(0.34) $0.29 $0.76 Weighted average number of shares outstanding: Basic 13,157 13,153 12,998 Diluted 13,157 13,389 13,219 The accompanying notes are an integral part of these consolidated financial statements. F-4 Surmodics, Inc. and SubsidiariesConsolidated Statements of Comprehensive (Loss) IncomeFor the Years Ended September 30 2018 2017 2016 (In thousands) Net (loss) income $(4,457) $3,926 $9,985 Other comprehensive (loss) income: Unrealized holding (losses) gains on available-for-sale securities, net of tax (38) 49 (68)Foreign currency translation adjustments (661) 2,095 1,336 Other comprehensive (loss) income (699) 2,144 1,268 Comprehensive (loss) income $(5,156) $6,070 $11,253The 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, 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 Net loss — — — — (4,457) (4,457)Other comprehensive loss, net of tax — — — (699) — (699)Issuance of common stock 137 7 333 — — 340 Common stock options exercised, net 440 22 1,727 — — 1,749 Purchase of common stock to pay employee taxes (274) (14) (4,673) — — (4,687)Stock-based compensation — — 4,807 — — 4,807 Balance at September 30, 2018 13,398 $670 $7,607 $2,718 $97,615 $108,610 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 2018 2017 2016 (In thousands) Operating Activities: Net (loss) income $(4,457) $3,926 $9,985 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 6,431 5,555 4,873 Stock-based compensation 4,807 3,472 3,844 Contingent consideration expense (gain) 675 (127) 1,492 Unrealized foreign exchange (gain) loss (148) 474 444 Acquired in-process research and development 7,888 — — Deferred taxes (2,277) 1,000 261 Gains on strategic investments (177) (43) (514)Provision for bad debts 85 208 — Impairment losses on intangible assets — 427 — Property and equipment disposal (gain) loss — 6 (66)Other, net 45 — 13 Change in operating assets and liabilities Accounts receivable (1,773) (528) 911 Inventories (513) 97 (143)Prepaids and other (1,584) (599) 409 Accounts payable and accrued liabilities 5,241 368 3,710 Income taxes (842) (59) 76 Deferred revenue 20,651 (124) (129)Net cash provided by operating activities 34,052 14,053 25,166 Investing Activities: Purchases of property and equipment (9,092) (6,432) (8,192)Cash proceeds from sale of property and equipment — — 89 Purchases of available-for-sale securities (81,536) (73,671) (24,517)Sales and maturities of available-for-sale securities 71,951 63,871 2,498 Purchase of in-process research and development (Note 11) (5,000) — — Payments for acquisition, net of cash acquired — — (25,859)Cash received from strategic investments 177 43 513 Net cash used in investing activities (23,500) (16,189) (55,468)Financing Activities: Issuance of common stock 2,089 444 494 Repurchase of common stock — (4,702) — Payments for taxes related to net share settlement of equity awards (4,557) (2,156) (388)Payment of deferred financing costs — (96) — Payment of contingent consideration (925) — (305)Net cash used in financing activities (3,393) (6,510) (199)Effect of exchange rate changes on cash (25) 193 (100)Net change in cash and cash equivalents 7,134 (8,453) (30,601)Cash, Restricted Cash and Cash Equivalents: Beginning of year 16,534 24,987 55,588 End of year $23,668 $16,534 $24,987The 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 2018 2017 2016 (In thousands) Supplemental Information: Cash paid for income taxes $914 $2,114 $6,710 Noncash financing and investing activities: Acquisition of property and equipment on account, net of refundable credits inother current assets $632 $109 $50 Acquisition of property and equipment in long-term deferred rent 1,200 — — Acquisition of in process research and development in other long-termliabilities 2,888 — — Accrual of employee taxes on common stock exercises 130 — 1,585 Contingent consideration and debt assumed in acquisitions — — 12,584The 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 majority 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 surface coa(cid:42)ng chemical sales to thediagnos(cid:42)c and biomedical research markets as well as medical device (such as balloons and catheters) and related products sales to original equipmentmanufacturer (“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, Restricted Cash and Cash EquivalentsCash, restricted cash and cash equivalents consist of financial instruments with maturities of three months or less at the Company’s acquisition date of thesecurity and are stated at cost which approximates fair value and may include money market instruments, cer(cid:42)ﬁcates of deposit, repurchase agreements andcommercial paper instruments. Restricted cash represents cash balances restricted pursuant to the terms of a real estate lease .InvestmentsInvestments consisted principally of commercial paper and corporate bond securi(cid:42)es and are classiﬁed as available-for-sale as of September 30, 2018and 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 ofopera(cid:42)ons and reported in the consolidated statements of comprehensive (loss) income as well as a separate component of stockholders’ equity in theconsolidated balance sheets, except for other-than-temporary impairments, which are reported as a charge to current earnings. A loss would be recognizedwhen there is an other-than-temporary impairment in the fair value of any individual security classiﬁed as available-for-sale, with the associated net unrealizedloss reclassiﬁed out of accumulated other comprehensive income with a corresponding adjustment to other income (loss). This adjustment would result in a newcost basis for the investment. No such adjustments occurred during the years ended September 30, 2018, 2017 or 2016. Interest earned on debt securi(cid:42)es,including amor(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-saledebt securities, 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, 2018 and 2017 were as follows(in thousands): September 30, 2018 (Dollars in thousands) Amortized Cost Unrealized Gains Unrealized Losses Fair Value Commercial paper and corporate bonds $41,403 $— $(51) $41,352 Total $41,403 $— $(51) $41,352 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 There were no held-to-maturity debt securi(cid:42)es as of September 30, 2018 or 2017 and no realized gains or losses on sales of available-for-sale securi(cid:42)esfor the years ended September 30, 2018, 2017 or 2016.F-9 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): 2018 2017 Raw materials $1,890 $1,603 Work in-process 780 659 Finished products 1,346 1,254 Total $4,016 $3,516 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 $3.7 million, $3.0 million and $2.3 million for the years ended September 30, 2018, 2017 and 2016,respectively.The September 30, 2018 and 2017 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 es(cid:42)mated useful lives of the assets. Leasehold improvements are amor(cid:42)zed over the shorter of the term of the lease or thees(cid:42)mated useful life of the asset. Expenditures for maintenance and repairs and minor renewals and be(cid:48)erments that do not extend or improve the life of therespective assets are expensed as incurred.Property and equipment consisted of the following components as of September 30 (in thousands): Useful Life 2018 2017 (In years) Land N/A $4,420 $4,420 Laboratory fixtures and equipment 3 to 10 22,024 19,491 Buildings and improvements 3 to 20 21,717 21,924 Leasehold improvements 10 4,836 — Office furniture and equipment 3 to 10 5,824 4,541 Construction-in-progress 4,834 2,493 Less accumulated depreciation (33,512) (29,927)Property and equipment, net $30,143 $22,942 Other AssetsOther assets consist principally of the following as of September 30 (in thousands): 2018 2017 ViaCyte, Inc. $479 $479 Other noncurrent assets 967 418 Other assets, net $1,446 $897 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.F-10 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 years ended September 30, 2018, 2017 and 2016, the Company recognized revenue of less than $0.1 million in each period from ac(cid:42)vity withcompanies 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 recordedamortization expense of $2.7 million, $2.6 million and $2.4 million for the years ended September 30, 2018, 2017 and 2016, respectively.Intangible assets consisted of the following as of September 30 (in thousands): 2018 Weighted AverageOriginal Life (Years) Gross CarryingAmount AccumulatedAmortization Net Definite-lived intangible assets: Customer lists and relationships 8.9 $18,086 $(9,377) $8,709 Developed technology 11.5 9,656 (2,361) 7,295 Non-compete 5.0 230 (150) 80 Patents and other 16.5 2,321 (1,569) 752 Subtotal 30,293 (13,457) 16,836 Unamortized intangible assets: In-process research and development 267 — 267 Trademarks and trade names 580 — 580 Total $31,140 $(13,457) $17,683 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 Based on the intangible assets in service, excluding any possible future amor(cid:42)za(cid:42)on associated with acquired in process research and development(“IPR&D”), which has not met technological feasibility as of September 30, 2018, estimated amortization expense for each of the next five fiscal years is as follows(in thousands): 2019 $2,690 2020 2,514 2021 2,375 2022 2,336 2023 1,737 F-11 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 or abandonment of the IPR&D project.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 were 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 severalestimates about fair value, most of which are based on projected future cash flows.The Company performed its annual impairment analysis as of August 31, 2018 and did not record any impairment charges in ﬁscal 2018 as there were noindicators of impairment associated with the indeﬁnite-lived intangible assets. As a result of the August 31, 2017 impairment analysis, impairment losses onindeﬁnite-lived intangible assets of $0.3 million and $0.1 million were recorded in research and development and selling, general and administra(cid:42)ve expenses,respec(cid:42)vely, in the consolidated statements of opera(cid:42)ons for ﬁscal 2017. No other impairment losses were iden(cid:42)ﬁed during the annual impairment analyses inﬁscal 2018 or 2017. The valua(cid:42)on methodology for determining the decline in value of the indeﬁnite-lived intangible assets was based on inputs that requiremanagement judgment and are Level 3 inputs, as discussed in Note 5 to the consolidated financial statements.GoodwillGoodwill represents the excess of the purchase price of an acquired business over the fair value assigned to the assets purchased and liabili(cid:42)es assumed.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 for goodwill. The carryingamount of goodwill is evaluated annually, and between annual evalua(cid:42)ons if events occur or circumstances change indica(cid:42)ng that it is more likely than not thatthe fair value of a reporting unit is less than its carrying amount.The Company’s repor(cid:42)ng units are the In Vitro Diagnos(cid:42)cs and Medical Device opera(cid:42)ng segments. Inherent in the determina(cid:42)on of fair value of therepor(cid:42)ng units are certain es(cid:42)mates and judgments, including the interpreta(cid:42)on of current economic indicators and market valua(cid:42)ons as well as the Company’sstrategic plans with regard to its operations.The Company performed its annual assessment of goodwill for impairment as of August 31, 2018 and no goodwill impairment charges were recorded asthere were no indicators of impairment associated with either of the reporting units. The impairment assessment is reliant on forecasted cash flows, as well as theselected discount rate when a quan(cid:42)ta(cid:42)ve assessment is necessary, which are inherently subjec(cid:42)ve and require signiﬁcant management es(cid:42)mates. Diﬀerences inthe repor(cid:42)ng units’ actual future opera(cid:42)ng results as compared with these forecasted es(cid:42)mates could materially aﬀect the es(cid:42)ma(cid:42)on of the fair value of thereporting units.The Company did not record any goodwill impairment charges in the years ended September 30, 2018, 2017 or 2016.Goodwill as of September 30, 2018 and 2017 totaled $27.0 million and $27.3 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 acquisi(cid:42)on of Creagh Medical, Ltd. and NorMedix, Inc. inﬁscal 2016 (Note 4), the Medical Device repor(cid:42)ng segment added $17.9 million of goodwill during ﬁscal 2016, $13.4 million of which is denominated in Eurosand subject to revaluation due to fluctuations in exchange rates.F-12 The change in the carrying amount of goodwill by segment for the years ended September 30, 2018 and 2017 was as follows (in thousands): (Dollars in thousands) In VitroDiagnostics MedicalDevice Total 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 Foreign currency translation adjustment — (250) (250)Balance as of September 30, 2018 $8,010 $19,022 $27,032 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 2018, 2017and 2016, 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.Accrued LiabilitiesOther accrued liabilities consisted of the following as of September 30 (in thousands): 2018 2017 Accrued professional fees $311 $501 Accrued clinical study expense 2,839 411 Accrued purchases 533 596 Customer claim 1,000 — Construction in progress 1,199 — Deferred rent 121 18 Other 262 247 Total $6,265 $1,773 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 coa(cid:42)ng,and medical device technologies to customers; (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 to the diagnos(cid:42)c and biomedical research markets as well as the sale of medical devices (such as balloons and catheters) andrelated products to 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, 2018, 2017 and 2016.F-13 Royal(cid:44)es and license fees. The Company licenses technology to third par(cid:42)es and collects royal(cid:42)es. Sales-based royalty revenue is generated when acustomer sells products incorpora(cid:42)ng the Company’s licensed technologies. Royalty revenue is recognized as licensees report it to the Company, and payment istypically submi(cid:48)ed concurrently with the report. For stand-alone license agreements, up-front license fees are recognized based on the terms of the relatedlicensing agreement, either over the term of the agreement or at the point in time when the earnings process is complete. Minimum royalty fees are recognized inthe period 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 OEM and distributor sales and are recognized at the (cid:42)me of shipment. The Company’s sales termsprovide no right of return outside of the standard warranty policy. Payment terms are generally set at 30-45 days.Research and development. The Company performs third-party research and development 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 license(s) to Surmodics’technology, research, development and clinical ac(cid:42)vi(cid:42)es, and product sales based on the needs of its customers. For example, a customer may enter into anarrangement to obtain a license to Surmodics’ intellectual property which may also include research, development and clinical ac(cid:42)vi(cid:42)es, as well as 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, milestone payments con(cid:42)ngent upon advancement of the product through development and clinical stages to successful commercializa(cid:42)on, per-unitpayments for supply of product, and royalty payments based on customer sales of product incorpora(cid:42)ng Surmodics’ technology. The Company’s license anddevelopment arrangements generally do not have refund provisions if the customer cancels or terminates the agreement. Typically all payments made are non-refundable.F-14 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 deferred revenue of $20.9million and $0.3 million as of September 30, 2018 and 2017, respec(cid:42)vely recorded in current and long-term deferred revenue on the consolidated balancesheets.ConcentrationsThe Company has licenses and supply agreements with a diverse base of customers and certain customers have mul(cid:42)ple products using the Company’stechnology. Medtronic plc (“Medtronic”) is the Company’s largest customer at approximately 16%, 18% and 25% of total consolidated revenue for the yearsended September 30, 2018, 2017 and 2016, respec(cid:42)vely. Medtronic has several separately-licensed products that generate royalty revenue for Surmodics, noneof which represented more than 4% of Surmodics’ total revenue. As discussed in Note 3, the Company entered into an agreement with Abbo(cid:48) Vascular, Inc.(“Abbo(cid:48)”) during the year ended September 30, 2018. As a result of revenue recognized under this and other agreements, revenue from Abbo(cid:48) and its aﬃliatesaccounted for 11% of consolidated revenue in the year ended September 30, 2018. No other individual customer cons(cid:42)tutes more than 10% of the Company’stotal revenue. The loss of Medtronic, Abbo(cid:48) or any of our largest customers, or reduc(cid:42)ons in business from them, could have a material adverse eﬀect on theCompany’s business, financial condition, results of operations, 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 earnings inthe period that includes the enactment date of such change.F-15 Research and DevelopmentResearch and development (“R&D”) costs are expensed as incurred. Some R&D costs are related to customer 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 and material expensesas 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 andmanagement expenses, clinical site reimbursements and third party fees. The Company’s clinical trials are administered by third-party clinical researchorganiza(cid:42)ons (“CROs”). These CROs generally bill monthly for certain services performed as well as upon achievement of certain milestones. The Companymonitors pa(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 each of theyears ended September 30, 2018 and 2017 as a reduction of R&D expense. No reimbursements were recorded during fiscal 2016.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 liabili(cid:42)es, the disclosure of con(cid:42)ngent assets and liabili(cid:42)es at the date of the consolidated ﬁnancial statements and thereported amounts of revenue and expenses during the reporting period. Ultimate results could differ from those estimates.Income Per Share DataBasic (loss) income per common share is calculated based on the weighted average number of common shares outstanding during the period. Dilutedincome per common share is computed by dividing income by the weighted average number of common and common equivalent shares outstanding during theperiod. The Company’s 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. However, these items have been excluded from the calcula(cid:42)on of diluted net loss per share as theireﬀect is an(cid:42)dilu(cid:42)ve for the year ended September 30, 2018, as a result of the net loss incurred for that period. Therefore, diluted weighted average number ofshares outstanding and diluted net loss per share were the same as basic weighted average number of shares outstanding and net loss per share for the yearended September 30, 2018.The following table sets forth the denominator for the computa(cid:42)on of basic and diluted income per share for each of the years ended September 30 (inthousands): 2018 2017 2016 Net income from continuing operations available to common shareholders $(4,457) $3,926 $9,985 Basic weighted average shares outstanding 13,157 13,153 12,998 Dilutive effect of outstanding stock options, non-vested restricted stock, restricted stock units and performance shares — 236 221 Diluted weighted average shares outstanding 13,157 13,389 13,219 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 and 0.7 million shares for ﬁscal 2017 and 2016, respec(cid:42)vely, as their inclusion would have had an an(cid:42)dilu(cid:42)ve eﬀect on diluted income per share forthose fiscal years.F-16 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 the period-end exchange rates, and revenue and expenses are translated at the average quarterly exchange rates during the period. The net eﬀect ofthese transla(cid:42)on adjustments on the consolidated ﬁnancial statements is recorded as a foreign currency transla(cid:42)on adjustment, a component of accumulatedother comprehensive income on the consolidated balance sheets. Realized foreign currency transac(cid:42)on gains and losses are included in other, income (loss) netin the consolidated statements of operations.New Accounting PronouncementsAccounting Standards to be AdoptedIn May 2014, the Financial Accoun(cid:42)ng Standards Board (“FASB”) issued Accoun(cid:42)ng Standards Update (“ASU”) 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 receive in exchange for those goods or services and the guidance may beadopted through either a full retrospec(cid:42)ve or modiﬁed retrospec(cid:42)ve approach. The guidance also requires 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. Addi(cid:42)onally, qualita(cid:42)ve and quan(cid:42)ta(cid:42)ve disclosures are requiredabout customer contracts, signiﬁcant judgments and changes in judgments, and assets recognized from the costs to obtain or fulﬁll a contract. This accoun(cid:42)ngstandard will be adopted by the Company beginning in the ﬁrst quarter of ﬁscal year 2019 (October 1, 2018) using the modiﬁed retrospec(cid:42)ve approach and theimpact 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 sales-based royaltyrevenue earned under its hydrophilic license agreements. Under the modiﬁed retrospec(cid:42)ve approach, the Company will apply the new revenue standard to allnew revenue contracts ini(cid:42)ated on or a(cid:80)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 willadjust the beginning balance of retained earnings. These changes will result in an increase of approximately $5.9 million to retained earnings, includingestablishment of contract assets on the consolidated balance sheets of $7.6 million and a deferred tax liability of $1.7 million upon adoption.In February 2016, the FASB issued ASU 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 the Company beginning the ﬁrst quarter of ﬁscal year 2020 (October 1, 2019)and will be implemented using a modified retrospective approach, which is one of two allowed adoption methods. While the Company is evaluating the impact ofthe lease guidance on its consolidated ﬁnancial statements, the Company an(cid:42)cipates that the impact will be material due to the right-of-use assets and leaseliabilities related to existing operating leases 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 January 2017, the FASB issued ASU No. 2017-01, Clarifying the Deﬁni(cid:44)on of a Business. The new guidance changed the deﬁni(cid:42)on of a business as itrelates to evalua(cid:42)on of transac(cid:42)ons under Accoun(cid:42)ng Standards Codiﬁca(cid:42)on (“ASC”) Topic 805 Business Combina(cid:44)ons, introducing a screen whereby atransac(cid:42)on would not be considered a business combina(cid:42)on if substan(cid:42)ally all of the fair value of the gross assets acquired (or disposed of) is concentrated in asingle iden(cid:42)ﬁable assets or group of similar iden(cid:42)ﬁable assets. The accoun(cid:42)ng standard is eﬀec(cid:42)ve for ﬁscal years beginning a(cid:80)er December 15, 2017, with earlyadop(cid:42)on permi(cid:48)ed. This accoun(cid:42)ng guidance was adopted during ﬁscal 2018, in conjunc(cid:42)on with the acquisi(cid:42)on of in-process research and developmentassets from Embolitech, LLC further discussed in Note 11 (the “Embolitech Transac(cid:42)on”). The applica(cid:42)on of this guidance to the Embolitech Transac(cid:42)on resultedin a determination that the acquired assets did not constitute a business.F-17 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. Collaborative ArrangementOn February 26, 2018, the Company entered into an agreement with Abbo(cid:48) whereby Abbo(cid:48) will have exclusive worldwide commercializa(cid:42)on rights forSurmodics' SurVeil® drug-coated balloon to treat the superﬁcial femoral artery, which is currently being evaluated in a U.S. pivotal clinical trial. Separately,Abbo(cid:48) also received op(cid:42)ons to nego(cid:42)ate agreements for Surmodics' below-the-knee and arteriovenous (AV) ﬁstula DCB products, which are currently in pre-clinical development. Surmodics is responsible for conduc(cid:42)ng all necessary clinical trials and other ac(cid:42)vi(cid:42)es required to achieve U.S. and European Unionregulatory clearances for the SurVeil DCB, including comple(cid:42)on of the ongoing TRANSCEND clinical trial. Abbo(cid:48) and Surmodics will par(cid:42)cipate on a jointdevelopment committee charged with providing guidance on the Company’s clinical and regulatory activities with regard to the SurVeil DCB.The Company has received a $25 million upfront fee and may receive up to $67 million of addi(cid:42)onal payments upon achievement of various clinical andregulatory milestones. Revenue from the upfront fee and clinical and regulatory milestone payments, if any are achieved, are recognized within royal(cid:42)es andlicense fees in the consolidated statements of opera(cid:42)ons as the clinical and regulatory ac(cid:42)vi(cid:42)es are performed on a propor(cid:42)onal performance basis based onactual costs incurred rela(cid:42)ve to the expected total cost of the underlying ac(cid:42)vi(cid:42)es, most notably the comple(cid:42)on of the TRANSCEND clinical trial. A signiﬁcantcomponent of the cost of this trial is the cost of our outsourced clinical trial clinical research organiza(cid:42)on (“CRO”) consultants, which are es(cid:42)mated based onexecuted statements of work, project budgets, and pa(cid:42)ent enrollment (cid:42)ming, among other things. A signiﬁcant change to the Company’s es(cid:42)mate of the costs tocomplete the TRANSCEND clinical trial could have a material eﬀect on the Company’s results of opera(cid:42)ons. The total expected cost of the trial is a signiﬁcantmanagement estimate and is reviewed and assessed each reporting period.For the year ended September 30, 2018, the Company recognized revenue totaling $4.4 million from the upfront fee from the Abbo(cid:48) arrangement. Theremainder of the $25 million upfront fee is included in deferred revenue in current and long-term deferred revenue as of September 30, 2018, totaling $9.6million and $11.1 million, respectively. Upon receipt of regulatory approval for the SurVeil DCB, Abbott will have the right to purchase commercial units from theCompany and Surmodics will realize revenue from product sales to Abbo(cid:48) at an agreed-upon transfer price, as well as a share of net proﬁts resul(cid:42)ng from third-party product sales by Abbott. 4. Business CombinationsFor all business combina(cid:42)ons, the Company records all assets and liabili(cid:42)es of the acquired business, including goodwill and other iden(cid:42)ﬁed intangibleassets, at their respec(cid:42)ve fair values as of the acquisi(cid:42)on date. Con(cid:42)ngent considera(cid:42)on, if any, is recognized at its fair value on the acquisi(cid:42)on date and changesin fair value are recognized in earnings until settlement. Acquisition-related transaction costs are expensed as incurred.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. Based on milestones achieved during the con(cid:42)ngency period, a payment totaling €9.6 million is expected to be made by December 31,2018, which is equivalent to approximately $11.1 million as of September 30, 2018. As of September 30, 2018, the Company has paid $18.4 million in cash forthis 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 $2.7 million for the ﬁscal year endedSeptember 30, 2016. Creagh Medical’s opera(cid:42)ng results have been included in the Medical Device segment since the acquisi(cid:42)on date. The Company realized$3.3 million of revenue and a loss of $2.7 million from Creagh Medical’s operations for the period from the acquisition date through September 30, 2016.F-18 Creagh Medical designs and manufactures percutaneous transluminal angioplasty (“PTA”) balloon catheters. The purchase price of Creagh Medicalconsisted 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 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. This acquisi(cid:42)on strengthened the Company’s vascular device exper(cid:42)se and R&Dcapabili(cid:42)es and 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 upfrontpayment of $7.0 million, and up to $7.0 million based on achievement of revenue and value-crea(cid:42)ng opera(cid:42)onal milestones through September 30, 2019.During the year ended September 30, 2018, a total of $0.9 million was paid to the sellers for revenue and strategic milestones achieved. In November 2018, theshare purchase agreement was amended to modify or clarify the deﬁni(cid:42)on of the remaining, unearned revenue and strategic milestones and to ﬁx the paymentdate for any milestones achieved during the remaining con(cid:42)ngency period. Addi(cid:42)onal con(cid:42)ngent considera(cid:42)on earned under the amended NorMedix sharepurchase agreement, if any, will be payable in November 2019. Total transac(cid:42)on, integra(cid:42)on and other costs associated with the NorMedix acquisi(cid:42)onaggregated $0.3 million for the year ended September 30, 2016. NorMedix’s opera(cid:42)ng results have been included in the Medical Device segment since theacquisi(cid:42)on date. The Company realized $0.9 million of revenue and a loss of $0.4 million from NorMedix’s opera(cid:42)ons for the period from the acquisi(cid:42)on datethrough September 30, 2016. F-19 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 $10,408The 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 UsefulLife (In years)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 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 ResultsThe 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 tax impact of the adjustments reﬂects no tax beneﬁt from either the con(cid:42)ngent considera(cid:42)on expense or asigniﬁcant por(cid:42)on of the transac(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 doesnot reﬂect an Irish tax beneﬁt 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 deferredtax liabili(cid:42)es and a valua(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 acorresponding increase to a deferred tax valua(cid:42)on allowance. NorMedix amor(cid:42)za(cid:42)on expense reﬂects a tax beneﬁt based on the Company’s incremental U.S. taxrate.F-20 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 would havebeen had the acquisi(cid:42)on occurred at the beginning of ﬁscal 2015. Addi(cid:42)onally, the unaudited pro forma ﬁnancial informa(cid:42)on does not a(cid:48)empt to project thefuture operating results of the combined company. Years Ended September 30, 2016 (In thousands, except per share data)(Unaudited) Revenue $72,416 Income from continuing operations 10,590 Loss from discontinued operations, net of income taxes — Net income $12,315 Per share amounts: Basic net income per share $0.95 Diluted net income per share $0.93 5. 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.The Company did not have any Level 1 assets as of September 30, 2018 or 2017. 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, 2018 and 2017 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, 2018 is a $14.5 million con(cid:42)ngent considera(cid:42)on liability, of which $3.4 million is noncurrent. Includedin 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. The current con(cid:42)ngentconsidera(cid:42)on liability represents the liability for revenue and strategic milestones achieved during a con(cid:42)ngency period which ended September 30, 2018. Thenon-current con(cid:42)ngent considera(cid:42)on liabili(cid:42)es are subject to achievement of revenue and value-crea(cid:42)ng milestones in the period ending September 30, 2019.There were no Level 3 assets as of September 30, 2018 or 2017.F-21 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, 2018 and 2017 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, 2018(in thousands): QuotedPricesin ActiveMarkets forIdenticalInstruments(Level 1) SignificantOtherObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) Total FairValue as ofSeptember 30,2018 Assets Cash equivalents $— $13,999 $— $13,999 Available-for-sale securities — 41,352 $41,352 Total assets $— $55,351 $— $55,351 Liabilities Contingent consideration $— $— $(14,466) $(14,466)Total liabilities $— $— $(14,466) $(14,466) 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): QuotedPricesin 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 summarizes the changes in the contingent consideration liability for the years ended September 30, 2018 and 2017: (Dollars in thousands) 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 Additions — Fair value adjustments 288 Settlements (925)Interest accretion 387 Foreign currency translation (148)Contingent consideration liability at September 30, 2018 $14,466 There were no transfers of assets or liabilities to or from amounts measured using Level 3 fair value measurements during fiscal 2018 or 2017. 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, 2018 and 2017. The con(cid:42)ngency period for the Creagh Medical con(cid:42)ngent considera(cid:42)on obliga(cid:42)on ended September 30, 2018. Based onthe milestones achieved during the con(cid:42)ngency period, the Company will pay Creagh Medical shareholders approximately €9.6 million by December 31, 2018.This obliga(cid:42)on was discounted using the Company’s annualized cost of debt for the three-month period between September 30, 2018 and the expectedse(cid:48)lement date, or 2.3%, and is included in current con(cid:42)ngent considera(cid:42)on on the consolidated balance sheet as of September 30, 2018 at the then-eﬀec(cid:42)veforeign currency exchange rate. In November 2018, the NorMedix share purchase agreement was amended to modify or clarify the deﬁni(cid:42)on of the remaining,unearned revenue and strategic milestones and to ﬁx the payment date for any milestones achieved during the remaining con(cid:42)ngency period. Probability ofcomple(cid:42)on for the redeﬁned milestones is reﬂected in the es(cid:42)mated fair value of the NorMedix con(cid:42)ngent considera(cid:42)on obliga(cid:42)on as of September 30, 2018.For the revenue-based milestones, the Company discounted forecasted revenue by 20.5%, which represents the Company’s weighted average cost of capital forthe transac(cid:42)on, adjusted for 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 pricingapproach, which also considered the Company’s risk of non-payment of the revenue-based milestones. Outstanding strategic milestones were projected to havea 5% to 95% probability of achievement as of September 30, 2018, and related payments were discounted using the Company’s es(cid:42)mated cost of debt for theremaining con(cid:42)ngency period, or 6.0%. In ﬁscal 2017, for the revenue-based milestones, the Company discounted forecasted revenue by 14.0% to 23.5%, whichrepresents the 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 valueof revenue was 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. Strategic milestones were projected to have a 25% to 100% probability of achievement and related payments were discounted using the Company’s es(cid:42)matedcost of debt for the remaining contingency periods, or 2.7% to 3.0%.F-23 To the extent 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 €9.6million (approximately $11.0 million as of September 30, 2018) con(cid:42)ngent considera(cid:42)on related to the Creagh Medical acquisi(cid:42)on is denominated in Euros andis not hedged. The Company recorded foreign currency gains (losses) of $0.1 million, ($0.5) million and ($0.4) million, respec(cid:42)vely, in the years endedSeptember 30, 2018, 2017 and 2016, respectively, related to this contingent consideration obligation as it 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. 6. 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 6, 2015 and November 5, 2014, the Company’s Board of Directors authorized the repurchase of up to $20.0 million and $30.0 million,respec(cid:42)vely, of the Company’s outstanding common stock in open-market purchases, privately nego(cid:42)ated transac(cid:42)ons, block trades, accelerated sharerepurchase transac(cid:42)ons, tender oﬀers or by any combina(cid:42)on of such methods. The authoriza(cid:42)ons have no ﬁxed expira(cid:42)on 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. As of September 30, 2018, $25.3 millionremained available to the Company for the purchase of its common stock under outstanding authorizations. 7. 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): 2018 2017 2016 Product costs $69 $90 $22 Research and development 801 510 324 Selling, general and administrative 3,937 2,872 3,498 Total stock-based compensation expense $4,807 $3,472 $3,844 As of September 30, 2018, approximately $5.7 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 $0.6 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, 2018, there were 675,587 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.F-24 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 2018, 2017 and 2016 were $10.91, $7.63 and $6.95, respec(cid:42)vely. The assump(cid:42)ons used as inputs in themodel for the years ended September 30 were as follows: 2018 2017 2016 Risk-free interest rates 2.18% 1.74% 1.89%Expected life 4.8 years 4.6 years 4.6 years Expected volatility 33% 34% 37%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 years or upon termina(cid:42)on ofemployment or service as a Board member. With respect to members of the Board, non-qualiﬁed stock op(cid:42)ons generally become exercisable on a pro-rata basisover the one-year period following the date of grant. With respect to employees, non-qualiﬁed stock op(cid:42)ons generally become exercisable with respect 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)on expensesrecognized related to these awards, which totaled $1.6 million, $1.3 million and $1.2 million during fiscal 2018, 2017 and 2016, respectively. As of September 30, 2018, the aggregate intrinsic value of the op(cid:42)on shares outstanding and op(cid:42)on shares exercisable was $34.4 million and $12.4million, respec(cid:42)vely. As of September 30, 2018, the average remaining contractual life of op(cid:42)ons outstanding and op(cid:42)ons exercisable was 4.9 years and3.8 years, respec(cid:42)vely. The total pre-tax intrinsic value of op(cid:42)ons exercised during ﬁscal 2018, 2017 and 2016 was $12.1 million, $0.1 million and $5.1 million,respectively. The intrinsic value represents the difference between the exercise price and the fair market value of the Company’s common stock on the last day ofthe 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 2018,2017 and 2016: Number ofShares WeightedAverageExercise Price 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 Granted 269,961 34.08 Exercised (450,495) 19.46 Forfeited and expired (110,825) 30.18 Outstanding at September 30, 2018 710,546 26.28 Exercisable at September 30, 2018 236,302 $22.33F-25 Restricted 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 $1.0 million, $0.5 million and$0.3 million during fiscal 2018, 2017 and 2016, respectively.The following table summarizes all restricted stock awards activity during fiscal 2018, 2017 and 2016: Number ofShares WeightedAverageGrant Price 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 Granted 56,244 34.38 Vested (28,717) 23.78 Forfeited (10,020) 29.10 Balance at September 30, 2018 85,424 $30.30 Performance Share AwardsThe 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 period for ﬁscal 2014 awards (2014 – 2016), and are cumula(cid:42)veearnings before interest, income taxes, deprecia(cid:42)on and amor(cid:42)za(cid:42)on (“EBITDA”) for ﬁscal 2015 awards (2015 – 2017), ﬁscal 2016 awards (2016-2018) andﬁscal 2017 awards (2016-2018). The Commi(cid:48)ee did not approve Performance Share awards in ﬁscal 2018. Assuming that the minimum performance level isa(cid:48)ained, the number of shares that may actually vest 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 as prac(cid:42)cable following the end of the performance periods, subject to Commi(cid:48)ee approval and veriﬁca(cid:42)on ofresults. The per-unit compensa(cid:42)on cost related to the shares to be granted under each performance period is ﬁxed on the grant date, which is the date theperformance period begins. Compensa(cid:42)on expense is recognized in each period based on management’s best es(cid:42)mate of the achievement level of the speciﬁedperformance objec(cid:42)ves for Performance Shares for each open performance period. In ﬁscal 2018, the Company recognized expense of $1.5 million related toprobable achievement of performance objec(cid:42)ves for three-year Performance Shares granted in ﬁscal 2017 and 2016. In ﬁscal 2017, the Company recognizedexpense of $1.2 million related to probable achievement of performance objec(cid:42)ves for three-year Performance Shares granted in ﬁscal 2017, 2016 and 2015. Inﬁscal 2016, the Company recognized expense of $1.9 million related to probable achievement of performance objec(cid:42)ves for three-year Performance Sharesgranted in fiscal 2016, 2015 and 2014. The stock-based compensation table above includes the Performance Shares expenses.The fair values of the Performance Shares, at target, were $1.2 million and $1.3 million for grants awarded in ﬁscal 2017 and 2016, respec(cid:42)vely. Duringthe year ended September 30, 2018, the resigna(cid:42)on of an execu(cid:42)ve resulted in the forfeiture of 12,217 Performance Shares at their respec(cid:42)ve originalperformance targets.F-26 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 2016 - 2018 11,910 59,548 119,096 Fiscal 2017 - 2019 9,352 46,758 93,516 The Fiscal 2016 – 2018 awards are expected to be ﬁnalized in December 2018 at an es(cid:42)mated 76,400 shares based on performance objec(cid:42)ve results.Based on the Company’s performance through September 30, 2018, it is es(cid:42)mated that approximately 78,226 shares may be earned for the Fiscal 2017 – 2019performance 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, 2018 and 2017, 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 ﬁscal 2018, 2017 and 2016 totaled $0.1 million or less for each year. The stock-based compensa(cid:42)on table above includes the Employee StockPurchase Plan expenses.Restricted Stock and Deferred Stock UnitsThe Company awarded 21,535 and 16,004 restricted stock units (“RSU”) in ﬁscal 2018 and 2017, respec(cid:42)vely, under the 2009 Plan to non-employeedirectors and certain key employees in foreign jurisdic(cid:42)ons with forfeitures of 528 and 495 in ﬁscal 2018 and 2017, 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, 2018 and 2017, outstanding RSU’s totaled 60,182 and 44,391, respec(cid:42)vely,with an es(cid:42)mated fair value of $4.5 million and $1.4 million, respec(cid:42)vely. Compensa(cid:42)on expense is recognized over the ves(cid:42)ng term based on the fair value ofthe common shares on the date of grant. The stock-based compensa(cid:42)on table above includes RSU expenses recognized related to these awards, which totaled$0.5 million, $0.3 million and $0.2 million in fiscal 2018, 2017 and 2016, respectively.Directors may elect to receive their annual fees for services to the Board in deferred stock units (“DSUs”). As of September 30, 2018 and 2017,outstanding DSUs totaled 26,991 and 24,441, respec(cid:42)vely, with an es(cid:42)mated fair value of $2.0 million and $0.8 million, respec(cid:42)vely. These DSUs are fully vestedwhen granted. Stock-based compensa(cid:42)on expense related to DSU awards, totaled $0.1 million, $0.1 million and $0.2 million in ﬁscal 2018, 2017 and 2016,respectively.8. Revolving Credit FacilityThe Company had a revolving credit facility with available principal totaling $30.0 million, which was scheduled to terminate on November 1, 2019.TheCompany terminated this agreement on March 29, 2018, at which time there was no outstanding balance. F-27 9. Income TaxesIncome taxes from con(cid:42)nuing opera(cid:42)ons in the accompanying consolidated statements of opera(cid:42)ons for the years ended September 30 are as follows (inthousands): 2018 2017 2016 Current (benefit) provision: U.S. Federal $(890) $2,125 $6,550 U.S. State 51 (72) 250 International 41 54 (98)Total current (benefit) provision (798) 2,107 6,702 Deferred (benefit) provision: U.S. Federal (2,006) 1,085 169 U.S. State (271) (85) (43)International — — 135 Total deferred (benefit) provision (2,277) 1,000 261 Total (benefit) provision $(3,075) $3,107 $6,963 In December 2017, the Tax Cuts and Jobs Act (“TCJA”) tax legisla(cid:42)on was signed into law, which reduced the U.S. Federal statutory tax rate from 35% to21%, among other changes. As of September 30, 2018, the Company has fully completed its accoun(cid:42)ng for the tax eﬀects of the enactment of the TCJA. Theﬁscal 2018 tax provision includes discrete tax expense of $1.6 million from the revalua(cid:42)on of the Company’s net deferred tax assets based on the enacted taxrate of 21%, as compared with the previous rate of 35%. U.S. tax law requires that taxpayers with a ﬁscal year beginning before and ending a(cid:80)er the eﬀec(cid:42)vedate of a rate change calculate a blended tax rate for the year based on the pro rata number of days in the year before and a(cid:80)er such eﬀec(cid:42)ve date. As a result,for the ﬁscal year ended September 30, 2018, our U.S. federal statutory income tax rate will be 24.5%. The reconcilia(cid:42)on of the diﬀerence between amountscalculated at the statutory U.S. federal tax rate of 24.5%, 35% and 35% for ﬁscal 2018, 2017 and 2016, respec(cid:42)vely, and the Company’s eﬀec(cid:42)ve tax rate fromcontinuing operations is as follows (in thousands): 2018 2017 2016 Amount at statutory U.S. federal income tax rate $(1,845) $2,461 $5,932 Change because of the following items: State income taxes, net of federal benefit (724) (13) 142 Stock-based compensation (2,063) 330 (607)Valuation allowance change 960 665 (2,500)Tax reserve change 158 (52) 258 Federal manufacturing deduction — (313) (280)U.S. Federal and foreign research and development credits (1,710) (706) (571)Gain on strategic investment and corporate subsidiary — — 2,630 Foreign rate differential 371 948 622 Acquisition-related transaction costs — — 768 Contingent consideration expense (gain) 165 (45) 522 Unrealized foreign currency exchange (gain) loss on contingentconsideration obligation (23) 170 — Federal and state rate change 1,582 — — Other 54 (338) 47 Income tax (benefit) provision $(3,075) $3,107 $6,963 The federal research and development tax credit for ﬁscal 2016 includes the beneﬁt generated for the period from October 1, 2015 to December 31,2015, prior to the expira(cid:42)on of the beneﬁt in that period. During ﬁscal 2016, the Company u(cid:42)lized $7.5 million of capital losses generated in prior years byaccelera(cid:42)ng built-in gains in the Company’s IVD subsidiary. For tax purposes, this resulted in an increase in the Company’s tax basis in the IVD subsidiary and a$2.6 million reduction in both deferred tax assets and the valuation allowance as of September 30, 2016.F-28 Excess tax beneﬁts (shor(cid:83)alls) related to stock based compensa(cid:42)on expense are recorded within income tax beneﬁt (expense) in the consolidatedstatements of operations and totaled $2.0 million, ($0.2) million and $0.6 million for the fiscal years ended September 30, 2018, 2017 and 2016, respectively.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): 2018 2017 Depreciable assets $(1,019) $(3,335)Accruals and reserves 1,308 1,123 Stock-based compensation 1,798 3,370 Impaired strategic investments 1,687 2,701 NOL carryforwards 4,637 3,627 U.S. Federal and state R&D credits 1,896 242 Other 538 810 Valuation allowance (4,541) (4,511)Total deferred tax assets $6,304 $4,027 As of September 30, 2018 and 2017, the Company recorded deferred tax asset valua(cid:42)on allowances of $4.5 million. The valua(cid:42)on allowances areprimarily related to other-than-temporary impairment losses on strategic investments, state R&D credit carryforwards, and net opera(cid:42)ng loss carryforwards ofCreagh Medical. As of September 30, 2018, the Company had federal and state R&D credit carryforwards of $1.9 million that will begin expiring in 2029 andfederal and state net opera(cid:42)ng loss carryforwards of $1.3 million and $0.3 million that will begin expiring in 2033 and 2022, respec(cid:42)vely. Ireland net opera(cid:42)ngloss carryforward assets totaling $3.2 million, much of which was acquired as part of the Creagh Medical acquisi(cid:42)on in ﬁscal 2016, have an unlimitedcarryforward period. The U.S. federal and Minnesota net opera(cid:42)ng losses acquired as part of the NorMedix acquisi(cid:42)on are subject to the IRC Sec(cid:42)on 382limitation rules. The Company has projected that these loss carryforwards will be utilized with over the nine 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): 2018 2017 2016 Beginning of fiscal year $1,481 $1,508 $1,248 Increases in tax positions for prior years 61 8 77 Decreases in tax positions for prior years — (35) (21)Increases in tax positions for current year 735 216 365 Settlements with taxing authorities (613) — — Lapse of the statute of limitations (105) (216) (161)End of fiscal year $1,559 $1,481 $1,508 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 30,2018, 2017 and 2016, respec(cid:42)vely, are $1.4 million, $1.2 million and $1.2 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, 2018, 2017 and 2016, a gross balance of$0.4 million, $0.5 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”) completedan examina(cid:42)on of our ﬁscal 2016 U.S. federal income tax return in the third quarter of ﬁscal 2018, with a payment made associated primarily with (cid:42)mingadjustments. U.S. federal income tax returns for years prior to ﬁscal 2015 are no longer subject to examina(cid:42)on by federal tax authori(cid:42)es. For tax returns forstate and local jurisdictions, the Company is no longer subject to examination for tax years generally before fiscal 2007. For tax returns for non-U.S.F-29 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 been indemniﬁed of liabilityfor 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 the related share purchaseagreements. As of September 30, 2018 and 2017, there were no undistributed earnings in foreign subsidiaries. 10. 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, $0.7 million and $0.3 million have been expensed in the years ended September 30, 2018, 2017 and 2016, respectively. 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 (cid:42)me. In some ac(cid:42)ons, the claimants seek damages as well as other relief, including injunc(cid:42)ons barring the sale ofproducts that are the subject of the lawsuit, which if granted, could require signiﬁcant expenditures or result in lost revenue. The Company records a liability inthe consolidated ﬁnancial statements for these ac(cid:42)ons when a loss is known or considered probable and the amount can be reasonably es(cid:42)mated. If thereasonable es(cid:42)mate of a known or probable loss is a range, and no amount within the range is a be(cid:48)er es(cid:42)mate, the minimum amount of the range is accrued. Ifa loss is possible but not known or probable, and can be reasonably es(cid:42)mated, the es(cid:42)mated loss or range of loss is disclosed. In most cases, signiﬁcant judgmentis required to estimate the amount and timing of a loss to be recorded.On January 17, 2018, we entered into a se(cid:48)lement agreement fully resolving the previously disclosed li(cid:42)ga(cid:42)on involving Merit Medical Systems, Inc.(“Merit”) and NorMedix. In April 2018, a customer no(cid:42)ﬁed the Company that it believes it overpaid hydrophilic coa(cid:42)ng royal(cid:42)es to the Company from January2009 through December 2017. During the year ended September 30, 2018, the Company recorded $1.0 million in selling, general and administra(cid:42)ve expensesrelated to this claim. These amounts are included in other accrued liabilities on the condensed consolidated balance sheets as of September 30, 2018.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, 2018 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 drug-delivery 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 $232,000 using a euro to US $ exchange rate of 1.1602 as of September 30, 2018) 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$2.1 million. The license is currently utilized with one of Surmodics’ drug-delivery technology customers.F-30 Opera(cid:44)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, 2018, 2017 and 2016 was $0.5 million, $0.1 million and $0.1 million, respec(cid:42)vely. In November 2017, the Company executed a lease for a36,000 square feet of oﬃce and R&D facility in Eden Prairie, Minnesota. Contractual obliga(cid:42)ons under the lease agreement total $4.0 million over the ten-yearlease term, which commenced in May 2018. Annual commitments pursuant to opera(cid:42)ng lease agreements in place as of September 30, 2018 are as follows (inthousands): Year Ended September 30, 2019 $443 2020 452 2021 396 2022 391 2023 399 Thereafter 1,933 Total minimum lease payments $4,014 Clinical Trials. The Company has engaged CRO consultants to assist with the administra(cid:42)on of its ongoing clinical trials. The Company has executed acontract with a CRO for services rendered in connec(cid:42)on with the TRANSCEND pivotal clinical trial for the SurVeil DCB, including pass-through expenses paid bythe CRO of up to $20 million in the aggregate. As of September 30, 2018, an es(cid:42)mated $13.2 million remains to be paid on this contract, which may varydepending on actual pass-through expenses incurred to execute the trial. The Company es(cid:42)mates that the total cost of the TRANSCEND clinical trial will be in therange of $32 million to $40 million from incep(cid:42)on to comple(cid:42)on. In the event the Company were to terminate any trial, it may incur certain ﬁnancial penal(cid:42)eswhich would become payable to the CRO for costs to wind down the terminated trial.Asset Acquisition. In May 2018, the Company entered into an asset purchase agreement with Embolitech, LLC (“Embolitech”) to acquire certain intellectualproperty assets. As part of the Embolitech Transac(cid:42)on, the Company paid the sellers $5.0 million in ﬁscal 2018. Addi(cid:42)onally, the Company is obligated to pay$3.5 million in several installments beginning December 2019 and ending December 2023. These payments may be accelerated upon the occurrence of certainsales and regulatory milestones. An addi(cid:42)onal $2.0 million payment is con(cid:42)ngent upon the achievement of certain regulatory milestones within a con(cid:42)ngencyperiod ending in 2033. The present value of the probable payments totaling $7.9 million is recorded as acquired in-process research and development expenseon the consolidated statement of opera(cid:42)ons for the year ended September 30, 2018. As of September 30, 2018, $2.9 million is included in other long-termliabilities related to the guaranteed installment payments on the consolidated balance sheets.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 designs, develops and manufactures interven(cid:42)onal medical devices, primarily for theperipheral vascular market; surface modiﬁca(cid:42)on coa(cid:42)ng technologies to improve access, deliverability, and predictable deployment of medical devices; as wellas drug-delivery coa(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 fordiagnos(cid:42)c test kits and biomedical 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, the Company acquired Creagh Medical and NorMedix, which are included in the Medical Device segment.F-31 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): 2018 2017 2016 Revenue: Medical Device $60,513 $53,983 $53,202 In Vitro Diagnostics 20,823 19,129 18,164 Total revenue $81,336 $73,112 $71,366 Operating (loss) income: Medical Device $(8,478) $6,902 $16,975 In Vitro Diagnostics 8,619 8,293 7,115 Total segment operating income 141 15,195 24,090 Corporate (8,940) (8,092) (7,231)Total operating (loss) income $(8,799) $7,103 $16,859 Depreciation and amortization: Medical Device $5,376 $4,453 $3,261 In Vitro Diagnostics 394 412 789 Corporate 661 690 823 Total depreciation and amortization $6,431 $5,555 $4,873 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: 2018 2017 2016 Medtronic 16% 18% 25%Abbott 11% N/A N/A The revenue from the customers 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: 2018 2017 2016 Domestic 79% 77% 79%Foreign 21% 23% 21% 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: 2018 2017 U.S. $26,652 $20,949 Ireland 21,174 22,555F-32 13. Quarterly Financial Data (Unaudited)The following is a summary of the unaudited quarterly results for the years ended September 30, 2018 and 2017 (in thousands, except per share data). FirstQuarter SecondQuarter ThirdQuarter FourthQuarter Fiscal 2018 Total revenue $17,013 $19,058 $22,227 $23,038 Operating (loss) income (633) 525 (6,250) (2,441)Net (loss) income (1,556) 1,534 (2,682) (1,753)Basic net (loss) income per share (1): (0.12) 0.12 (0.20) (0.13)Diluted net (loss) income per share (1): (0.12) 0.11 (0.20) (0.13) 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 (1)The sum of the quarterly net (loss) income per share amounts may not equal the annual income per share total because of changes in the weightedaverage number of shares outstanding that occurred during the year.In the first quarter of fiscal 2018, the Company recorded a $1.2 million charge related to the revaluation of deferred tax assets to reflect the change in theU.S. Federal tax rate from 35% to 21% in conjunction with the Tax Cuts and Jobs Act tax legislation.In the second quarter of ﬁscal 2018, the Company entered into a collabora(cid:42)ve arrangement with Abbo(cid:48), which resulted in license fee revenue totaling$4.4 million in the final nine months of the fiscal year.In May 2018, the Company acquired certain technology assets from Embolitech resulting in a $7.9 million charge in the third quarter of fiscal 2018.In the fourth quarter of fiscal 2017, the Company recorded a $1.1 million license fee related to a customer’s acquisition and the Company’s sale of relatedjointly-owned intellectual property to the acquirer. F-33 Exhibit 10.34CHANGE OF CONTROL AGREEMENT Parties:Surmodics, Inc.(“Company”)9924 West 74th StreetEden Prairie, MN 55344-3523 Ms. Teri Woodwick Sides(“Executive”)7462 Narcissus Lane N.Maple Grove, MN 55311 Date:October 30, 2018 RECITALS: 1.Executive serves as the Senior Vice President, Chief Marketing Officer of the Company, and Executive hasextensive knowledge and experience relating to the Company’s business. 2.The parties recognize that a “Change of Control” may materially change or diminish Executive’s responsibilitiesand substantially frustrate Executive’s commitment to the Company. 3.The parties further recognize that it is in the best interests of the Company and its stockholders to provide certainbenefits payable upon a “Change of Control Termination” to encourage Executive to continue in her position in the event of a Changeof Control. 4.The parties further desire to provide certain benefits payable upon a termination of Executive’s employmentfollowing a Change of Control. 5.The parties further recognize that it is in the best interests of the Company to protect confidential, proprietary, andtrade secret information of the Company, to prevent unfair competition by former executives of the Company following separation oftheir employment with the Company, and to secure cooperation from former executives with respect to matters related to theiremployment with the Company. AGREEMENTS: 1.Term of Agreement. Except as otherwise provided herein, this Agreement shall commence on the date executedby the parties and shall continue in effect until the twelve-month anniversary of the date on which a Change of Controloccurs. Notwithstanding the foregoing, if at any time during the term of this Agreement and prior to a Change of Control, Executive’semployment with the Company terminates for any reason or no reason, or if Executive no longer serves as an executive officer of theCompany, this Agreement shall immediately terminate, and Executive shall not be entitled to any of the compensation and benefits described in this Agreement. Any rights and obligationsaccruing before the termination or expiration of this Agreement shall survive to the extent necessary to enforce such rights andobligations. 2.Change of Control. For purposes of this Agreement, “Change of Control” shall mean any one or more of thefollowing events occurring after the date of this Agreement: (a)The purchase or other acquisition by any one person, or more than one person acting as a group, ofstock of the Company that, together with stock held by such person or group, constitutes more than50% of the total combined value or total combined voting power of all classes of stock issued by theCompany; provided, however, that if any one person or more than one person acting as a group isconsidered to own more than 50% of the total combined value or total combined voting power of suchstock, the acquisition of additional stock by the same person or persons shall not be considered aChange of Control; (b)A merger or consolidation to which the Company is a party if the individuals and entities who wereshareholders of the Company immediately prior to the effective date of such merger or consolidationhave, immediately following the effective date of such merger or consolidation, beneficial ownership (asdefined in Rule 13d-3 under the Securities Exchange Act of 1934) of less than fifty percent (50%) ofthe total combined voting power of all classes of securities issued by the surviving entity for the electionof directors of the surviving corporation; (c)Any one person, or more than one person acting as a group, acquires or has acquired during the twelve(12) month period ending on the date of the most recent acquisition by such person or persons, direct orindirect beneficial ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) ofstock of the Company constituting thirty-five percent (35%) or more of the total combined voting powerof all classes of stock issued by the Company; (d)The purchase or other acquisition by any one person, or more than one person acting as a group, ofsubstantially all of the total gross value of the assets of the Company during the twelve-month periodending on the date of the most recent purchase or other acquisition by such person or persons. Forpurposes of this Section 2(d), “gross value” means the value of the assets of the Company or the valueof the assets being disposed of, as the case may be, determined without regard to any liabilitiesassociated with such assets; (e)A change in the composition of the Board of the Company at any time during any consecutive twelve(12) month period such that the “Continuity Directors” cease for any reason to constitute at least a fiftypercent (50%) majority of the Board. For purposes of this event, “Continuity Directors” means thosemembers of the Board who either: (1)were directors at the beginning of such consecutive twelve (12) month period; or (2)were elected by, or on the nomination or recommendation of, at least a two-thirds (2/3)majority of the then-existing Board of Directors. In all cases, the determination of whether a Change of Control has occurred shall be made in accordance with theInternal Revenue Code of 1986, as amended (the “Code”), Section 409A and the regulations, notices and otherguidance of general applicability issued thereunder. 3.Change of Control Termination. For purposes of this Agreement, “Change of Control Termination” shall meanany of the following events occurring upon or within twelve (12) months after a Change of Control: (a)The termination of Executive’s employment by the Company for any reason, with or without cause,except for termination resulting from conduct by Executive constituting (i) a felony involving moralturpitude under either federal law or the law of the state of the Company’s incorporation, or (ii)Executive’s willful failure to fulfill her employment duties with the Company; provided, however, thatfor purposes of this clause (ii), an act or failure to act by Executive shall not be “willful” unless it isdone, or omitted to be done, in bad faith and without any reasonable belief that Executive’s action oromission was in the best interests of the Company; or (b)The termination of employment with the Company by Executive for “Good Reason.” Such terminationshall be accomplished by, and effective upon, Executive giving written notice to the Company of herdecision to terminate. “Good Reason” shall mean a good faith determination by Executive, inExecutive’s sole and absolute judgment, that any one or more of the following events has occurred, atany time during the term of this Agreement or after a Change of Control; provided, however, that suchevent shall not constitute Good Reason if Executive has expressly consented to such event in writing orif Executive fails to provide written notice of her decision to terminate, which notice describes the eventgiving rise to the resignation, within ninety (90) days of the occurrence of such event and the Company has not cured the event within thirty (30) days after receiving such notice from Executive. (1)A material change in Executive’s duties, responsibilities, or authority, or any removal ofExecutive from or any failure to re-elect Executive to any position which has the effect ofmaterially diminishing Executive’s duties, responsibility or authority; (2)A material reduction, in the aggregate, by the Company in Executive’s base salary (asincreased from time to time), variable pay opportunities (including short and long-term cashincentives and equity-based compensation), or the employee benefits to which Executive isentitled to participate in irrespective of any standard waiting periods with respect to the same,unless such material reduction is generally applicable to all executive officers of theCompany; (3)A requirement imposed by the Company on Executive that results in Executive being basedat a location that is outside of a fifty (50) mile radius of Executive’s prior job location; or (4)Any material breach by the Company of any employment agreement between Executive andthe Company. Termination for “Good Reason” shall not include Executive’s death or a termination for any reasonother than one of the events specified in clauses (1) through (4) above. For purposes of Section 4 of this Agreement only, with respect to the timing of payments thereunder, “Change of ControlTermination” shall mean the date of Executive’s “separation from service” with the Company within the meaning of Section409A(a)(2)(A)(i) of the Code (with “Company” for purposes of this paragraph to include any business entity that is treatedas a single employer with the Company under the rules of Section 414(b) and (c) of the Code). 4.Compensation and Benefits. Upon a termination of Executive’s employment for any reason, Executive shall beentitled to receive all salary and other compensation earned by Executive through the date of such termination at the rate in effectimmediately prior to such termination, and all other amounts to which Executive may be entitled to receive under any compensationplan maintained by the Company, subject to any distribution requirements contained in such compensation plans. In addition, subjectto the conditions and limitations contained in this Agreement, upon a Change of Control Termination, Executive shall be entitled to allof the following compensation and benefits: (a)Within five (5) business days after a Change of Control Termination, the Company shall pay toExecutive a severance payment equal to two (2) times the sum of (i) Executive’s base salary as of thedate of the Change of Control Termination, and (ii) an amount equal to Executive’s target short-termincentive opportunity for the year in which the Change of Control Termination occurs; (b)The Company shall continue to provide Executive, at the Company’s expense, with coverage under itslife, health, or dental benefit plans at a level comparable to the benefits which Executive was receivingor entitled to receive immediately prior to the Change of Control Termination or, if greater, at a levelcomparable to the benefits which Executive was receiving immediately prior to the event whichconstituted Good Reason. Such coverage shall continue for eighteen (18) months following suchChange of Control Termination or, if earlier, until Executive is eligible to be covered for such benefitsthrough her employment with another employer or continuation coverage under Section 4980B(COBRA) otherwise ends; (c)All outstanding Options or Stock Appreciation Rights shall become immediately exercisable, and therisks of forfeiture on any outstanding Restricted Stock Awards or Restricted Stock Unit Awards shallimmediately lapse. For purposes of this Agreement, “Option,” “Stock Appreciation Rights,”“Restricted Stock Awards” and “Restricted Stock Unit Awards” shall have the meaning set forth in theSurmodics, Inc. 2009 Equity Incentive Plan, or any successor plan; and (d)All shares or units subject to all outstanding Performance Awards shall become immediately vested andpayable at the target performance objectives set forth in said Performance Awards. For purposes of thisAgreement, “Performance Awards” and “Performance Period” shall have the meaning set forth in theSurmodics, Inc. 2009 Equity Incentive Plan, or any successor plan. The parties intend that the payment described in Section 4(a) shall be excluded from deferred compensation as a“short-term deferral” under Treas. Reg. § 1.409A-1(b)(4). The parties intend that the continuation of health anddental benefits described in Section 4(b) shall be excluded from deferred compensation pursuant to the medicalbenefits exception for separation pay plans under Treas. Reg. § 1.409A-1(b)(9)(v)(B). The parties intend that the continuation of life insurance benefits described in Section 4(b) shall be excluded fromdeferred compensation as separation pay due to an involuntary separation from service under Treas. Reg.§ 1.409A-1(b)(9)(iii), and the amounts payable for such continuation of life insurance coverage shall not exceed two times the lesser of (x) Executive’s annualized compensation based on the annual rate of pay forservices to the Company for the calendar year prior to the calendar year in which the Change of ControlTermination occurs (adjusted for any increase during the year that was expected to continue indefinitely ifExecutive had not separated from service) or (y) the compensation limit under Section 401(a)(17) of the Code forthe year in which the Change of Control Termination occurs. Further, in no event shall the benefits described inSection 4(b) extend beyond December 31st of the second calendar year following the calendar year in which theChange of Control Termination occurs. Notwithstanding the foregoing, if any of the payments described in Section 4 above are subject to therequirements of Code Section 409A and the Company determines that Executive is a “specified employee” asdefined in Code Section 409A as of the date of the Change of Control Termination, such payments shall not bepaid or commence earlier than the date that is six months after the Change of Control Termination, but shall bepaid or commence during the calendar year following the year in which the Change of Control Terminationoccurs and within 30 days of the earliest possible date permitted under Code Section 409A. 5.Limitation on Change of Control Payments. This Section 5 applies only in the event the Company determinesthat this Agreement is subject to the limitations of Code Section 280G, or any successor provision, and the regulations issuedthereunder. The intent of this Section 5 is to reduce any Change of Control Benefits, as defined below, that would otherwise becharacterized as a “parachute payment” as defined in Code Section 280G and be subject to an additional excise tax under CodeSection 4999 by the minimum amount necessary to avoid characterization as a parachute payment and avoid the imposition of theexcise tax, but only if doing so would provide a more favorable net after-tax result to the Executive than if the Change in ControlBenefits were not reduced and the Executive were subject to the excise tax. (a)In the event the Change of Control Benefits payable to Executive would collectively constitute a“parachute payment” as defined in Code Section 280G, and if the “net after-tax amount” of suchparachute payment to Executive is less than what the net after-tax amount to Executive would be if theChange of Control Benefits otherwise constituting the parachute payment were limited to the maximum“parachute value” of Change of Control Benefits that Executive could receive without giving rise to anyliability for any excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Change ofControl Benefits otherwise constituting the parachute payment shall be reduced so that the parachutevalue of all Change of Control Benefits, in the aggregate, will equal the maximum parachute value of allChange of Control Benefits that Executive can receive without any Change of Control Benefits beingsubject to the Excise Tax. Should such a reduction in Change of Control Benefits be required,Executive shall be entitled, subject to the following sentence, to designate those Change of Control Benefits under this Agreement or the other arrangements that will be reducedor eliminated so as to achieve the specified reduction in Change of Control Benefits to Executive andavoid characterization of such Change of Control Benefits as a parachute payment. The Company willprovide Executive with all information reasonably requested by Executive to permit Executive to makesuch designation. To the extent that Executive’s ability to make such a designation would cause any ofthe Change of Control Benefits to become subject to any additional tax under Code Section 409A, or ifExecutive fails to make such a designation within ten business days of receiving the requestedinformation from the Company, then the Company shall achieve the necessary reduction in the Changeof Control Benefits by reducing them in the following order: (a) reduction of cash payments payableunder this Agreement; (b) reduction of other payments and benefits to be provided to Executive; (c)cancellation or reduction of accelerated vesting of equity-based awards that are subject to performance-based vesting conditions; and (d) cancellation or reduction of accelerated vesting of equity-basedawards that are subject only to service-based vesting conditions. If the acceleration of the vesting ofExecutive’s equity-based awards is to be cancelled or reduced, such acceleration of vesting shall bereduced or cancelled in the reverse order of the date of grant. (b)For purposes of this Section 5, a “net after-tax amount” shall be determined by taking into account allapplicable income, excise and employment taxes, whether imposed at the federal, state or local level,including the Excise Tax, and the “parachute value” of the Change of Control Benefits means thepresent value as of the date of the Change of Control for purposes of Code Section 280G of the portionof such Change of Control Benefits that constitutes a parachute payment under Code Section 280G(b)(2). (c)For purposes of this Section 5, “Change of Control Benefits” shall mean any payment, benefit ortransfer of property in the nature of compensation paid to or for the benefit of Executive under anyarrangement which is considered contingent on a Change of Control for purposes of Code Section280G, including, without limitation, any and all of the Company’s salary, incentive payments, restrictedstock, stock option, equity-based compensation or benefit plans, programs or other arrangements, andshall include benefits payable under this Agreement. (d)For clarity, the Company shall have no obligation to provide any “tax gross-up” payment related to theExcise Tax in the event the Change of Control Benefits that would otherwise be characterized as aparachute payment are not reduced as set forth in Section 5(a) above and Executive is subject to theExcise Tax. 6.Withholding Taxes. The Company shall be entitled to deduct from all payments or benefits provided for underthis Agreement any federal, state or local income and employment-related taxes required by law to be withheld with respect to suchpayments or benefits. 7.Post-Termination Obligations and Conditions. (a)In the event of termination of Executive’s employment, the sole obligation of the Company under thisAgreement will be its obligation to make the payments called for by Sections 4 and 5 hereof, as the casemay be, and the Company will have no other obligation to Executive or to Executive’s beneficiary orestate. (b)Notwithstanding the foregoing provisions of Section 4, the Company will not be obligated to make anypayments to Executive under Sections 4(a) through 4(d) unless: (i) Executive has signed a release ofclaims in favor of the Company and its affiliates and related entities, and their directors, officers,insurers, employees and agents, provided such release shall not require Executive to release claimsExecutive may have for indemnification from the Company or rights of Executive under thisAgreement; (ii) all applicable rescission periods provided by law for releases of claims shall haveexpired and Executive shall have signed and not rescinded the release of claims; and (iii) Executive is instrict compliance with the terms of this Agreement as of the dates of such payments. (c)Immediately upon termination of Executive’s employment with the Company for any reason, Executivewill resign all positions then held as a director or officer of the Company and of any affiliated entity ofthe Company. (d)Upon termination of Executive’s employment with the Company, Executive shall promptly deliver tothe Company any and all Company records and any and all Company property in Executive’spossession or under Executive’s control, including, without limitation, manuals, books, blank forms,documents, letters, memoranda, notes, notebooks, reports, printouts, computer disks, computer tapes,source codes, data, tables or calculations and all copies thereof, documents that in whole or in partcontain any trade secrets or confidential, proprietary or other secret information of the Company and allcopies thereof, and keys, access cards, access codes, passwords, credit cards, personal computers,telephones, and other electronic equipment belonging to the Company. (e)Following termination of Executive’s employment with the Company for any reason, Executive will,upon reasonable request of the Company or its designee, cooperate with the Company in connectionwith the transition of Executive’s duties and responsibilities for the Company; consult with the Company regarding businessmatters that Executive was directly and substantially involved with while employed by the Company;and be reasonably available, with or without subpoena, to be interviewed, review documents or things,give depositions, testify, or engage in other reasonable activities in connection with any litigation orinvestigation, with respect to matters that Executive then has or may have knowledge of by virtue ofExecutive’s employment by or service to the Company or any related entity; provided, however, that: (i)the Company shall not unreasonably request such cooperation of Executive; (ii) the Company shallreimburse Executive or pay directly any reasonable expenses actually incurred in connection with suchcooperation and assistance by Executive; and (iii) Executive shall not be required to assist or cooperatewith the Company to the extent such assistance or cooperation would prevent Executive fromperforming, or would materially interfere with Executive’s performance of, the duties or responsibilitiesof her then-current occupation. (f)Executive will not at any time disparage, defame, or besmirch the reputation, character, image, products,or services of the Company or any of its affiliates, or the reputation or character of any of its current orformer directors, officers, employees, or agents; provided that nothing in this Section 7(f) is intended toprevent or interfere with Executive making any required or reasonable communications with, orproviding information to, any governmental, law enforcement, or stock exchange agency orrepresentative, or in connection with any governmental investigation, court, administrative or arbitrationproceeding. (g)The Company will direct its executive officers to not at any time disparage, defame, or besmirch thereputation, character or image of Executive; provided that nothing in this Section 7(g) is intended toprevent or interfere with the Company or its executive officers from making any required or reasonablecommunications with, or providing information to, any governmental, law enforcement, or stockexchange agency or representative, or in connection with any governmental investigation, court,administrative or arbitration proceeding.8.Successors and Assigns. This Agreement shall inure to the benefit of and shall be enforceable by Executive, herheirs and the personal representative of her estate, and shall be binding upon and inure to the benefit of the Company and its successorsand assigns. The Company will require the transferee of any sale of all or substantially all of the business and assets of the Companyor the survivor of any merger, consolidation or other transaction expressly to agree to honor this Agreement in the same manner and tothe same extent that the Company would be required to perform this Agreement if no such event had taken place. Failure of the Company to obtain such agreement before the effective date of such event shall be a material breach of this Agreement within themeaning of Section 3(b)(4) of this Agreement. 9.Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreementshall be in writing and shall be deemed to have been duly given when delivered or mailed by United States certified or registered mail,return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement or to suchother address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of addressshall be effective only upon receipt. All notices to the Company shall be directed to the attention of the Board of Directors of theCompany. 10.Captions. The headings or captions set forth in this Agreement are for convenience only and shall not affect themeaning or interpretation of this Agreement. 11.Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governedby the laws of the State of Minnesota. 12.Construction. Wherever possible, each term and provision of this Agreement shall be interpreted in such manneras to be effective and valid under applicable law. If any term or provision of this Agreement is invalid or unenforceable underapplicable law, (a) the remaining terms and provisions shall be unimpaired, and (b) the invalid or unenforceable term or provision shallbe deemed replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of theunenforceable term or provision. 13.Amendment; Waivers. This Agreement may not be modified, amended, waived or discharged in any mannerexcept by an instrument in writing signed by both parties hereto. The waiver by either party of compliance with any provision of thisAgreement by the other party shall not operate or be construed as a waiver of any other provision of this Agreement, or of anysubsequent breach by such party of a provision of this Agreement. 14.Section 409A. This Agreement is intended to satisfy, or be exempt from, the requirements of Section 409A(a)(2),(3) and (4) of the Code, including current and future guidance and regulations interpreting such provisions, and should be interpretedaccordingly. 15.Non-Competition, Invention, Non-Disclosure Agreement. Executive acknowledges and agrees that Executiveshall continue to comply with the terms of Executive’s Non-Competition, Invention, Non-Disclosure Agreement with the Company,dated October 30, 2018 (the “Non-Competition Agreement”), a copy of which has been provided to Executive with thisAgreement. Executive specifically acknowledges that the consideration Executive received in exchange for signing the Non-Competition Agreement was adequate. Executive further acknowledges that the Company would not enter into this Agreementwithout having the protections it has under the Non-Competition Agreement and therefore the consideration Executive is receiving inexchange for signing this Agreement constitutes additional consideration that the Company is providing in exchange for Executive agreeing to remain bound by the obligations under the Non-Competition Agreement. 16.Entire Agreement. This Agreement sets forth Executive’s sole and exclusive remedy with respect to severancebenefits payable to Executive upon a Change of Control Termination, and except for the Non-Competition Agreement supersedes allprior or contemporaneous negotiations, commitments, agreements (written or oral) and writings between the Company and Executivewith respect to the subject matter hereof, including but not limited to any negotiations, commitments, agreements or writings relating toany severance benefits payable to Executive, and constitutes the entire agreement and understanding between the parties hereto. Allsuch other negotiations, commitments, agreements and writings will have no further force or effect, and the parties to any such othernegotiation, commitment, agreement or writing will have no further rights or obligations thereunder. 16.Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be anoriginal but all of which together shall constitute one and the same instrument. 17.Arbitration. Any dispute arising out of or relating to this Agreement or the alleged breach of it, or the making ofthis Agreement, including claims of fraud in the inducement, shall be discussed between the disputing parties in a good faith effort toarrive at a mutual settlement of any such controversy. If, notwithstanding, such dispute cannot be resolved, such dispute shall besettled by binding arbitration. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdictionthereof. The arbitrator shall be a retired state or federal judge or an attorney who has practiced securities or business litigation for atleast 10 years. If the parties cannot agree on an arbitrator within 20 days, any party may request that the chief judge of the DistrictCourt for Hennepin County, Minnesota, select an arbitrator. Arbitration will be conducted pursuant to the provisions of thisAgreement, and the commercial arbitration rules of the American Arbitration Association, unless such rules are inconsistent with theprovisions of this Agreement. Limited civil discovery shall be permitted for the production of documents and taking ofdepositions. Unresolved discovery disputes may be brought to the attention of the arbitrator who may dispose of such dispute. Thearbitrator shall have the authority to award any remedy or relief that a court of this state could order or grant; provided, however, thatpunitive or exemplary damages shall not be awarded. Unless otherwise ordered by the arbitrator, the parties shall share equally in thepayment of the fees and expenses of the arbitrator. The arbitrator may award to the prevailing party, if any, as determined by thearbitrator, all of the prevailing party’s costs and fees, including the arbitrator’s fees, and expenses, and the prevailing party’s travelexpenses, out-of-pocket expenses and reasonable attorneys’ fees. Unless otherwise agreed by the parties, the place of any arbitrationproceedings shall be Hennepin County, Minnesota. [SIGNATURE PAGE TO FOLLOW] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the dayand year first above written. SURMODICS, INC. By: /s/ Gary R. MaharajIts: President and CEO /s/ Teryl L. W.SidesExecutive 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 Exhibit 23CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in 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 statement schedule of Surmodics, Inc. and subsidiaries dated November 30, 2018,and the effectiveness of Surmodics, Inc.’s and subsidiaries internal control over financial reporting dated November 30, 2018, appearing in this Annual Reporton Form 10-K of Surmodics Inc. for the year ended September 30, 2018. /s/ DELOITTE & TOUCHE LLP Minneapolis, MinnesotaNovember 30, 2018 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: November 30, 2018Signature:/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, Timothy J. Arens, 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:42)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:42)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:42)on rela(cid:42)ng to the registrant, including its consolidated subsidiaries, is made known to us by others within those en(cid:42)(cid:42)es, par(cid:42)cularlyduring the period in which this report is being prepared;(b) Designed such internal control over ﬁnancial repor(cid:42)ng, or caused such internal control over ﬁnancial repor(cid:42)ng to be designed under our supervision, toprovide reasonable assurance regarding the reliability of ﬁnancial repor(cid:42)ng and the prepara(cid:42)on of ﬁnancial statements for external purposes in accordancewith generally accepted accounting principles;(c) Evaluated the eﬀec(cid:42)veness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the eﬀec(cid:42)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:42)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:42)fying oﬃcer and I have disclosed, based on our most recent evalua(cid:42)on of internal control over ﬁnancial repor(cid:42)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:42)on of internal control over ﬁnancial repor(cid:42)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: November 30, 2018Signature:/s/ Timothy J. Arens Timothy J. Arens Interim Vice President of Finance and Chief 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, 2018, 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: November 30, 2018Signature:/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, 2018, as ﬁled with the Securi(cid:7)esand Exchange Commission (the “Report”), I, Timothy J. Arens, 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: November 30, 2018Signature:/s/ Timothy J. Arens Timothy J. Arens Interim Vice President of Finance and Chief Financial Officer

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