Surmodics Annual Report 2022

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the ﬁscal year ended September 30, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transion period from ________ to ________ Commission File Number 0-23837 Surmodics, Inc. (Exact name of Registrant as speciﬁed in its Charter) Minnesota (State or other jurisdicon of incorporaon or organizaon) 9924 West 74th Street Eden Prairie, Minnesota (Address of principal execuve oﬃces) 41-1356149 (I.R.S. Employer Idenﬁcaon No.) 55344 (Zip Code) Securies registered pursuant to Secon 12(b) of the Act: Registrant’s telephone number, including area code: (952) 500-7000 Title of each class Common Stock, $0.05 par value Trading Symbol(s) SRDX Name of each exchange on which registered Nasdaq Global Select Market Securies registered pursuant to Secon 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as deﬁned in Rule 405 of the Securies Act. YES ☐ NO ☒ Indicate by check mark if the Registrant is not required to ﬁle reports pursuant to Secon 13 or 15(d) of the Act. YES ☐ NO ☒ Indicate by check mark whether the Registrant: (1) has ﬁled all reports required to be ﬁled by Secon 13 or 15(d) of the Securies Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to ﬁle such reports), and (2) has been subject to such ﬁling requirements for the past 90 days. YES ☒ NO ☐ Indicate by check mark whether the Registrant has submied electronically every Interacve Data File required to be submied pursuant to Rule 405 of Regulaon S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such ﬁles). YES ☒ NO ☐ Indicate by check mark whether the registrant is a large accelerated ﬁler, an accelerated ﬁler, a non-accelerated ﬁler, a smaller reporng company, or an emerging growth company. See the deﬁnions of “large accelerated ﬁler,” “accelerated ﬁler,” “smaller reporng company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated ﬁler Non-accelerated ﬁler ☒ ☐ Accelerated ﬁler Smaller reporng company ☐ ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transion period for complying with any new or revised ﬁnancial accounng standards provided pursuant to Secon 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has ﬁled a report on and aestaon to its management’s assessment of the eﬀecveness of its internal control over ﬁnancial reporng under Secon 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounng ﬁrm that prepared or issued its audit report. ☒ 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 vong and non-vong common equity held by non-aﬃliates of the Registrant as of March 31, 2022 was approximately $613 million (based on the closing price of the Registrant’s Common Stock on such date). The number of shares of Registrant’s Common Stock outstanding as of November 18, 2022 was 14,040,000. DOCUMENTS INCORPORATED BY REFERENCE Porons of the Registrant’s Proxy Statement for the Registrant’s 2023 Annual Meeng of Shareholders are incorporated by reference into Part III. TABLE OF CONTENTS Forward-looking Statements Part I Item 1. Business Item 1A. Item 1B. Item 2. Item 3. Item 4. Part II Item 5. Item 6. Item 7. Informaon About Our Execuve Oﬃcers Risk Factors Unresolved Staﬀ Comments Properes Legal Proceedings Mine Safety Disclosures Market for Registrant’s Common Equity, Related Stockholder Maers and Issuer Purchases of Equity Securies [Reserved] Management’s Discussion and Analysis of Financial Condion and Results of Operaons Item 7A. Quantave and Qualitave Disclosures About Market Risk Item 8. Item 9. Item 9A. Item 9B. Item 9C. Part III Item 10. Item 11. Item 12. Item 13. Item 14. Part IV Item 15. Item 16. Signatures Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounng and Financial Disclosure Controls and Procedures Other Informaon Disclosure Regarding Foreign Jurisdicons that Prevent Inspecons Directors, Execuve Oﬃcers and Corporate Governance Execuve Compensaon Security Ownership of Certain Beneﬁcial Owners and Management and Related Stockholder Maers Certain Relaonships and Related Transacons, and Director Independence Principal Accountant Fees and Services Exhibits and Financial Statement Schedules Form 10-K Summary 2 Page 3 5 19 21 32 32 32 32 33 34 35 48 49 83 83 83 84 84 84 84 84 84 85 88 89 Forward-looking Statements Certain statements contained in this Form 10-K, or in other reports of the Company and other wrien and oral statements made from me to me by the Company, do not relate strictly to historical or current facts. As such, they are considered “forward-looking statements” that provide current expectaons or forecasts of future events. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securies Ligaon Reform Act of 1995. These statements include, but are not limited to, the expected results of clinical studies, future clinical studies, and their potenal ming; our strategies for growth, including our ability to sign new license agreements, conduct clinical evaluaons, complete process and manufacturing validaons, and bring new products to market; planned limited market evaluaons for our products; the development of future products and their ancipated aributes; regulatory submissions and approvals; our intent to pursue certain regulatory acons, including to expand the ﬁeld of use for our thrombectomy products; the potenal impact of U.S. Food and Drug Administraon (“FDA”) communicaons; our iniaons for product evaluaon acvies; potenal future milestone payments related to our SurVeil™ drug-coated balloon (“DCB”); revenue potenal related to the potenal commercial launch of the SurVeil DCB; future commercializaon of our other DCB products; potenal partnership opportunies for our DCB products; future revenue growth, our longer-term valuaon-creaon strategy, and our future potenal; plans for future clinical investment in new products; potenal future disease rates; future opportunies and goals related to new product oﬀerings; future gross margins and operang expenses; esmated future amorzaon expense; expectaons regarding operang expenses and interest expense; recognion of unrecognized compensaon costs; ancipated patent expiraons and their potenal impacts on our royales revenue; potenal future customer acons; research and development plans and expenses, including the esmated cost associated with the TRANSCEND clinical trial; ancipated cash requirements; future cash ﬂow and sources of funding, and their ability together with exisng cash, cash equivalents, and investments to provide liquidity suﬃcient to meet our cash needs and fund our operaons and planned capital expenditures for the next twelve months; future property and equipment investment levels; expectaons regarding declaring or paying dividends; plans regarding our securies investments and the potenal impact of interest rate ﬂuctuaons; expectaons regarding the maturity of debt; the impact of potenal lawsuits or claims; where our manufacturing acvies will take place for various categories of products; the impact of potenal change in raw material prices, sources of raw materials and our ability to manufacture raw materials ourselves; the impact of Abbo and Medtronic, as well as other signiﬁcant customers; our ability to recognize the expected beneﬁts of our acquisions; our strategic transformaon to become a provider of vascular intervenon medical device products; future income tax expense (beneﬁt), including from the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"); the future impact of oﬀ-balance sheet arrangements and contractual obligaons; and the impact of the adopon of new accounng pronouncements. Without liming the foregoing, words or phrases such as “ancipate,” “believe,” “could,” “esmate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,” “project,” “will” and similar terminology, generally idenfy forward-looking statements. Forward-looking statements may also represent challenging goals for us. These statements, which represent our expectaons or beliefs concerning various future events, are based on current expectaons that involve a number of risks and uncertaines that could cause actual results to diﬀer materially from those of such forward-looking statements. We cauon that undue reliance should not be placed on such forward-looking statements, which speak only as of the date made. Some of the factors which could cause results to diﬀer from those expressed in any forward-looking statement are set forth under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K. We disclaim any intent or obligaon to update publicly these forward-looking statements, whether because of new informaon, future events or otherwise. Although it is not possible to create a comprehensive list of all factors that may cause actual results to diﬀer from our forward-looking statements, such factors include, among others: 1. 2. 3. 4. 5. ongoing operang losses, increased interest expense, and failure to generate cash ﬂows from operaons, which could impact expected expenditures and investments in growth iniaves; our reliance on a small number of signiﬁcant customers, including our largest customers, Abbo and Medtronic, which causes our ﬁnancial results and stock price to be subject to factors aﬀecng those signiﬁcant customers and their products, the ming of market introducon of their or compeng products, product safety or eﬃcacy concerns and intellectual property ligaon impacng such customers, which could adversely aﬀect our growth strategy and the royales revenue we derive; clinical and regulatory developments relang to the evaluaon of risks associated with paclitaxel-coated products, which developments may adversely impact our ability to complete our TRANSCEND clinical trial on any parcular me frame, obtain markeng approval (or the ming of any such approval) for our SurVeil DCB and other paclitaxel-coated products, to treat peripheral artery disease in the femoral and/or popliteal arteries; our ability to successfully develop, obtain regulatory approval for, commercialize, and manufacture at commercial volumes our SurVeil and other DCB products, including our reliance on clinical research organizaons to manage the TRANSCEND clinical trial and uncertainty related to the impacts of any clinical research relave to drug-coated balloons, including our Avess™ DCB, other DCB products and other catheter and balloon-based products, which will impact our ability to receive addional milestone payments under our agreement with Abbo; general economic condions that are beyond our control, such as the impact of recession, inﬂaon, rising interest rates, customer mergers and acquisions, business investment, changes in consumer conﬁdence, and medical epidemics or pandemics such as 3 6. 7. 8. the COVID-19 pandemic, which has negavely impacted, and will likely connue to negavely impact, our business and results from operaons; our ability to successfully and proﬁtably commercialize our vascular intervenon products, including our Pounce™ Venous Thrombectomy System, through our direct salesforce, or otherwise; our ability to comply with the covenants in our credit facility; the diﬃcules and uncertaines associated with the lengthy and costly new product development and foreign and domesc regulatory approval processes, such as delays, diﬃcules or failures in achieving acceptable clinical results or obtaining foreign or FDA markeng clearances or approvals, which may result in lost market opportunies, failure to bring new products to market or postpone or preclude product commercializaon by licensees or ourselves; 9. whether operang expenses that we incur related to the development and commercializaon of new technologies and products are eﬀecve; 10. our ability to successfully perform product development acvies, the related research and development expense impact, and governmental and regulatory compliance acvies, which we have not previously undertaken in any signiﬁcant manner; 11. impairment of goodwill and intangible assets or the establishment of reserves against other assets on our balance sheet; and 12. other factors described under “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K, which you are encouraged to read carefully. Many of these factors are outside our control and knowledge and could result in increased volality in period-to-period results. Investors are advised not to place undue reliance upon our forward-looking statements and to consult any further disclosures by us on this subject in our ﬁlings with the SEC. 4 TABLE OF CONTENTS PART I ITEM 1. BUSINESS. OVERVIEW Surmodics, Inc. (referred to as “Surmodics,” the “Company,” “we,” “us,” “our” and other like terms) is a leading provider of performance coang technologies for intravascular medical devices and chemical and biological components for in vitro diagnosc (“IVD”) immunoassay tests and microarrays. Surmodics also develops and commercializes highly diﬀerenated vascular intervenon medical devices that are designed to address unmet clinical needs and engineered to the most demanding requirements. This key growth strategy leverages the combinaon of the Company’s experse in proprietary surface modiﬁcaon and drug-delivery coang technologies, along with its device design, development and manufacturing capabilies. The Company’s mission is to improve the detecon and treatment of disease. Surmodics is headquartered in Eden Prairie, Minnesota. SURMODICS’ REPORTABLE SEGMENTS: MEDICAL DEVICE IN VITRO DIAGNOSTICS (“IVD”) Manufacture of performance coangs, including surface modiﬁcaon coang technologies to improve access, deliverability and predictable deployment of medical devices and drug-delivery coang technologies to provide site-speciﬁc drug-delivery from the surface of a medical device, with end markets that include coronary, peripheral, neuro-vascular and structural heart, among others. Manufacture of vascular intervenon medical devices, including drug- coated balloons, mechanical thrombectomy devices, and radial access balloon catheters and guide sheaths. SURMODICS’ PRIMARY REVENUE SOURCES: Manufacture of chemical and biological components used in in vitro diagnosc immunoassay and molecular tests within the diagnosc and biomedical research markets. Component products include protein stabilizers, substrates, surface coangs and angens. PRODUCT SALES ROYALTIES & LICENSE FEES RESEARCH & DEVELOPMENT •IVD chemical and biological components, including: protein stabilizers, substrates, surface coangs and angens to the diagnosc and biomedical research markets (IVD segment) •Performance coang reagents, the chemicals used in performance coangs by licensees (Medical Device segment) •Vascular intervenon medical devices and related products to original equipment manufacturer suppliers and distributors, as well as directly to healthcare providers (Medical Device segment) •Performance coang royales from licensing of our proprietary performance coang technologies to medical device manufacturers (Medical Device segment) •SurVeil™ DCB license fees associated with exclusive worldwide commercializaon rights pursuant to our Development and Distribuon Agreement with Abbo Vascular, Inc. (Medical Device segment) •Commercial development feasibility services and contract coang services (Medical Device segment) •Commercial development services (IVD segment) Revenue ﬂuctuates from quarter to quarter depending on, among other factors: our customers’ success in selling products incorporang our technologies; the occurrence of milestone events under our development contracts; the ming of introducons of licensed products by our customers and proprietary products by us and our distributors; the ming of introducons of products that compete with our, and our customers’, products; the number and acvity level associated with customer development projects; the number and terms of new license agreements that are ﬁnalized; and the value of reagent chemicals, medical device and diagnosc products sold to our customers. 5 TABLE OF CONTENTS The informaon below provides an overview of the principal products, services and markets for each of our two reportable segments. The discussion of other aspects of our business, including patents and proprietary rights, signiﬁcant customers, manufacturing, government regulaon, and our human capital, applies to our business in general, and we describe material segment informaon within these secons where relevant. Our Medical Device segment consists of two interrelated product plaorms: MEDICAL DEVICE SEGMENT • • Vascular Intervenon Medical Devices. We develop and manufacture our own proprietary vascular intervenon medical device products, which leverage our experse in performance coangs, product design and engineering capabilies. We believe our strategy of developing our own medical device products has increased, and will connue to increase, our relevance in the medical device industry. This strategy is key to our future growth and proﬁtability, providing us with the opportunity to capture more revenue and operang margin with vascular intervenon medical device products than we would by licensing our device-enabling technologies. Performance Coangs. Surmodics is an established market leader in proprietary surface modiﬁcaon coang technologies that impart lubricity, pro- healing and biocompability characteriscs, as well as drug-delivery capabilies (together, “performance coangs” or “performance coang technologies”) to medical devices and delivery systems. We develop and commercialize our performance coangs through license agreements with medical device manufacturers for use in their medical devices. OVERVIEW: VASCULAR INTERVENTION MEDICAL DEVICES MEDICAL DEVICE SEGMENT Our strategy is to develop a porolio of highly diﬀerenated medical devices for vascular intervenonal treatment. We invest in the development and commercializaon of devices that serve large, under-penetrated markets; address unmet clinical needs; improve clinical outcomes for paents; and reduce procedure costs. Our pipeline of vascular intervenon medical device products under development and recently commercialized includes the following primary plaorms: • Drug-coated balloons (“DCBs”) combine a pharmaceucal drug with a medical device to treat narrowing of the blood vessels supplying the legs, known as peripheral artery disease (“PAD”). • Mechanical thrombectomy devices to remove clots from arteries and veins in the peripheral vasculature (primarily the legs); and • Radial access devices that enable treatment of arterial lesions in the lower extremies via radial (wrist) access, and which can also be used in alternave access sites, including femoral access. In addion to these primary plaorms, our device manufacturing operaons include: • Specialty catheters. We have successfully developed, secured U.S. and European Union (“E.U.”) regulatory approvals, and executed commercializaon partnerships for several specialty catheter products. We have partnered with Medtronic plc (“Medtronic”) to distribute our Telemark microcatheter in the U.S. and Europe for coronary applicaons. We have partnered with Cook Medical to distribute our 0.014” and 0.018” low-proﬁle percutaneous transluminal angioplasty (“PTA”) balloon catheters in the U.S. and Europe. In addion, we leverage our proprietary balloon catheter technology to deliver contract-manufactured balloon catheter products to original equipment manufacturers (“OEMs”) on a limited scale. We commercialize device products using two strategies: • • Direct sales. As part of our long-term, value-creaon strategy, we established a direct salesforce in ﬁscal 2022 to sell our mechanical thrombectomy and radial access devices directly to healthcare providers. Strategic partnerships. For certain of our products, including our DCB products, our clinical development and commercializaon strategy is to ulize distribuon partnerships with large, strategic medical device companies. The exclusive distribuon partner for our SurVeil DCB is Abbo Vascular, Inc. (“Abbo”). For all of our products under development, as further described under the capon “Government Regulaon” below, the expected ming and potenal success of regulatory approval and commercializaon for the products pending regulatory approval can vary greatly given the signiﬁcant uncertainty inherent in the product development and regulatory approval processes. 6 TABLE OF CONTENTS Vascular Intervenon Medical Devices – Drug Coated Balloons (“DCBs”) MEDICAL DEVICE SEGMENT We have leveraged our performance coang technologies to successfully develop mulple DCB devices for use in vascular intervenons for the treatment of PAD. DCBs are used by physicians to expand the diameter (lumen) of a narrowed vessel, thus improving or restoring blood ﬂow. The drug coang helps to prevent the vessel from narrowing again (restenosis) aer treatment. PAD is a serious and under-diagnosed circulatory condion caused by build-up of arterial plaque, most commonly in the legs. Over 8 million Americans are aﬀected by PAD, which increases risk of coronary artery disease, heart aack and stroke, and can impair the ability to walk. If le untreated, PAD can lead to gangrene and limb amputaon. The following is a brief descripon of each of these devices and their stage of clinical development, with addional informaon about each device provided further below. • • • SurVeil DCB is a paclitaxel-coated DCB to treat PAD in the upper leg (superﬁcial femoral artery). The SurVeil DCB has the necessary regulatory approval for commercializaon in the E.U. As discussed below in further detail, ming of commercializaon in the E.U. is at the discreon of our exclusive distribuon partner, Abbo. In ﬁscal 2021, the TRANSCEND pivotal clinical trial of our SurVeil DCB met both the primary safety and primary eﬃcacy endpoints and was found to be non-inferior to the control device in those endpoints. Our applicaon to the U.S. Food and Drug Administraon (“FDA” or the “Agency”) for pre-market approval (“PMA”) of the SurVeil DCB is under review by the Agency. We have submied all required PMA modules, as well as a complete response to the FDA’s comments on our applicaon, including certain addional data requested by the Agency. SundanceTM DCB is a sirolimus-coated DCB used for the treatment of below-the-knee PAD, including crical limb ischemia (“CLI”). Our SWING ﬁrst-in- human, 35-paent, 36-month clinical study was designed to evaluate the safety and performance of our Sundance DCB when used to treat occlusive disease of the infra-popliteal arteries. The inial study data have demonstrated an excellent safety proﬁle, with no major amputaons and low rates of major adverse events. There were no clinically driven target lesion revascularizaons in study parcipants between six and 12 months post procedure. The study also shows promising signals of potenal performance of the device, with target lesion patency maintained at 12 months in 80% of per protocol paents. We are in the process of idenfying and evaluang potenal partnership opportunies for the clinical development and future commercializaon of the Sundance DCB. AvessTM DCB is a paclitaxel-coated DCB used for the treatment of arteriovenous (“AV”) ﬁstulae commonly associated with hemodialysis in paents with end-stage renal disease (“ESRD”). In ﬁscal 2020, results of the ﬁrst-in-human clinical study of our Avess DCB demonstrated promising early safety data and performance insights. We plan to evaluate our strategy for further clinical investment in the Avess DCB based on the experience we gain from the PMA applicaon process for SurVeil DCB. Our DCB products are required to go through clinical studies in order for us to obtain regulatory approval or clearance to market the product in the U.S. Each clinical study includes one or more primary endpoints, which measure the eﬀecveness and/or safety of a device based on the product’s ability to achieve one or more pre-speciﬁed outcomes. Primary endpoints are selected based on the proposed intended use of the medical device. A pivotal trial is a deﬁnive study designed to gather evidence to evaluate the safety and eﬀecveness of a product prior to its markeng. SurVeil DCB. Our SurVeil product is a paclitaxel-coated DCB to treat PAD in the upper leg (superﬁcial femoral artery). The SurVeil DCB is a next-generaon device that ulizes best-in-class technology for the treatment of PAD, including a proprietary paclitaxel drug-excipient formulaon for a durable balloon coang manufactured using an innovave process to improve coang uniformity. The design of the SurVeil DCB is intended to provide more uniform drug distribuon, beer eﬃciency of drug transfer, and fewer downstream parculates and downstream embolizaon. Abbo has exclusive worldwide commercializaon rights for the SurVeil DCB under a Development and Distribuon Agreement (the “Abbo Agreement”), as further discussed below. The development of our SurVeil DCB started in ﬁscal 2016 and has been a major component of our vascular intervenon product strategy. Below is a summary of our clinical and regulatory progress related to the SurVeil DCB. • PREVEIL Early Feasibility Trial. In ﬁscal 2017, the PREVEIL early feasibility clinical trial of the SurVeil DCB met its primary endpoint by demonstrang peak paclitaxel plasma concentraons post-index procedure. Consistent with pre-clinical data, systemic drug levels were low and cleared rapidly. Data from the PREVEIL study demonstrated excellent safety results, with 91.7% of treated paents free of clinically driven target lesion revascularizaon through 24 months. 7 TABLE OF CONTENTS • • • TRANSCEND Pivotal Clinical Trial. In ﬁscal 2017, we received an invesgaonal device exempon from the FDA to iniate a pivotal clinical trial of the SurVeil DCB. The TRANSCEND trial provided the data necessary to evaluate the safety and eﬀecveness of our SurVeil DCB compared with the Medtronic IN.PACT® Admiral® DCB in treang PAD in the upper leg. The trial enrolled 446 subjects at 65 global sites. The trial’s primary eﬃcacy endpoint is primary patency, deﬁned as a composite of freedom from restenosis and clinically-driven target lesion revascularizaon through 12 months post-index procedure. All randomized subjects will be followed through 60 months post-index procedure. The TRANSCEND clinical trial data is being used to support an applicaon for regulatory approval and reimbursement for the SurVeil DCB in the U.S. We esmate that the total cost of the TRANSCEND clinical trial will range between $37 million to $40 million from incepon to compleon, with approximately 85% of esmated total trial costs incurred as of September 30, 2022. TRANSCEND trial enrollment began in the ﬁrst quarter of ﬁscal 2018 and was completed in the fourth quarter of ﬁscal 2019. In January 2021, we announced the TRANSCEND 12-month pivotal clinical trial met both the primary safety and primary eﬃcacy endpoints, and the SurVeil DCB was found to be non-inferior in those endpoints to the Medtronic IN.PACT® Admiral® DCB, while delivering a substanally lower drug dose. In November 2022, we announced TRANSCEND 24-month data demonstrated comparable, sustained clinical outcomes between the SurVeil DCB and IN.PACT® Admiral® DCB cohorts through 24 months. Funconal outcomes for treated paents also demonstrated connuous improvement at the two- year point. Status of E.U. Regulatory Approval (CE Mark). In ﬁscal 2020, we received Conformité Européenne Mark (“CE Mark”) approval of the SurVeil DCB, which is a prerequisite for commercializaon in the E.U. The meline for commercializaon of the SurVeil DCB in the E.U. is to be determined at the discreon of Abbo, subject to the terms of the Abbo Agreement. Status of U.S. Regulatory Approval (FDA pre-market approval, or “PMA”). In the third quarter of ﬁscal 2021, we submied the fourth and ﬁnal module of our PMA applicaon to the FDA for our SurVeil DCB, including two- and three-year mortality data from the TRANSCEND trial as requested by the Agency. In October 2022, we submied a complete response to FDA comments on our PMA applicaon for the SurVeil DCB, including certain addional data requested by the Agency. Unless and unl FDA approval has been obtained, our SurVeil DCB may not be oﬀered for commercial sale in the U.S. Abbo Agreement. In ﬁscal 2018, we entered into the Abbo Agreement, which provided Abbo with exclusive worldwide commercializaon rights for the SurVeil DCB. Pursuant to the terms of the Abbo Agreement, the Company has received, as of September 30, 2022, upfront and milestone payments totaling $60.8 million. The Company may receive an addional $30 million conngent milestone payment, pursuant to the terms of the Abbo Agreement, upon PMA of our SurVeil DCB by the FDA. The milestone payment is reduced to $27 million if PMA is received aer December 31, 2022, but before June 30, 2023, and to $24 million if PMA is received on or aer June 30, 2023, pursuant to the terms of the Abbo Agreement. Surmodics is responsible for conducng all necessary clinical trials and other acvies required to achieve U.S. and E.U. regulatory clearances for the SurVeil DCB, including compleon of the ongoing TRANSCEND pivotal clinical trial. Expenses related to these acvies are paid by Surmodics. Abbo and Surmodics parcipate on a joint development commiee charged with providing guidance on the Company’s clinical and regulatory acvies related to the SurVeil DCB product. Upon commercial launch of the SurVeil DCB by Abbo, Surmodics will be responsible for manufacturing clinical and commercial quanes of the product and will realize revenue from product sales to Abbo, as well as a share of proﬁts resulng from sales to third pares. Paclitaxel Long-term Mortality Signal. On March 15, 2019, the FDA issued a communicaon (the “FDA communicaon”) to healthcare providers about the potenal for increased long-term mortality aer use of paclitaxel-coated balloons and paclitaxel-elung stents (collecvely “paclitaxel-coated products”) to treat PAD in the femoropopliteal artery. The FDA communicaon updated a previous noﬁcaon from the FDA on the same topic, which was in response to meta-analysis of randomized trials published in the Journal of the American Heart Associaon in December 2018. Subsequently, in August 2019, the FDA issued an update on the use of paclitaxel devices to treat PAD that recommended that physicians discuss the risks and beneﬁts of all available treatment opons with their paents. The original meta-analysis that triggered the FDA communicaon has been cricized for ﬂaws in its methodology. Since that meta- analysis was published, there has been ample data published or presented from large, observaonal datasets, subgroup analyses from randomized controlled trials, and long-term follow-up from the pivotal paclitaxel-coated products randomized controlled trials, none of which replicated an associaon between paclitaxel-coated products and mortality. Further, no clear mechanism relang paclitaxel to death has been described and a dose-response relaonship between paclitaxel and mortality has been established. Nevertheless, the August 2019 FDA recommendaons remain in place. The FDA communicaon and the potenal long-term mortality signal related to the use of paclitaxel-coated devices may adversely aﬀect market acceptance of our paclitaxel-coated DCB products and any revenue we may realize from the commercializaon of the SurVeil DCB if the FDA grants approval for the product. 8 TABLE OF CONTENTS Sundance DCB. Our sirolimus-coated Sundance DCB is used for the treatment of below-the-knee PAD, including CLI. CLI is esmated to impact between 2.1 million and 3.8 million Americans, a number that could grow to between 2.4 million and 4.7 million by 2030. Rates of amputaon and death are signiﬁcant for CLI paents, and there are currently no drug-delivery devices approved to treat the condion in the U.S. Sirolimus has potent an-inﬂammatory and an-proliferave eﬀects to inhibit cell division, without creang vascular toxicity, and has a proven history of safety and eﬃcacy in vascular anatomy. We leveraged our experse in performance coangs in the innovave design of our Sundance DCB, which in pre- clinical benchtop and animal tesng has shown clear advantages over compeve technologies, including superior drug coang durability, higher levels of drug transfer, and a unique ability to achieve sustained therapeuc levels in the ssue. Below is a summary of our clinical and regulatory progress related to the Sundance DCB. • • In October 2019, the FDA designated the Sundance DCB as a “Breakthrough Device” under the FDA’s Breakthrough Devices Program, which is designed to streamline the market clearance/approval process for products that have the potenal to provide for more eﬀecve treatment or diagnosis of life- threatening or irreversibly debilitang diseases or condions. Our SWING ﬁrst-in-human, 35-paent, 36-month clinical study was designed to evaluate the safety and performance of our Sundance DCB when used to treat occlusive disease of the infra-popliteal arteries. Enrollment and six-month follow up visits were completed in ﬁscal 2021. The inial study data have demonstrated an excellent safety proﬁle, with no major amputaons and low rates of major adverse events. There were no clinically driven target lesion revascularizaons in study parcipants between six and 12 months post procedure. The study also shows promising signals of potenal performance of the device, with target lesion patency maintained at 12 months in 80% of per protocol paents. We are in the process of idenfying and evaluang potenal partnership opportunies to complete the required pivotal clinical trial, seek regulatory approval and, if approved, commercialize the Sundance DCB. Avess DCB. Our paclitaxel-coated Avess DCB is used for the treatment of AV ﬁstulae commonly used to deliver hemodialysis in paents with ESRD. It is esmated that approximately 800,000 U.S. paents and nearly ﬁve million paents worldwide live with ESRD. In the U.S., an esmated 70% of dialysis paents eventually receive dialysis via AV ﬁstula. Stenosis in AV ﬁstulae is a common problem, and preserving ﬁstula patency is a contributor to a reducon of related signiﬁcant Medicare system cost, as well as paent sasfacon. Our Avess DCB includes a proprietary drug-excipient formulaon for the balloon coang and is manufactured using a proprietary process to improve coang uniformity. Pre-clinical data for our Avess DCB has shown a three to ﬁve mes higher target ssue drug concentraon, a more evenly distributed and durable drug eﬀect, and lower incidence of downstream drug concentraons compared to control DCBs. In ﬁscal 2019, we commenced and completed enrollment in a ﬁrst in-human, 12-paent clinical study of our Avess DCB. In ﬁscal 2020, inial study results were received and demonstrated promising early safety data and performance insights, with greater than 90% of treated paents free from revascularizaon at six months. In ﬁscal 2021, we completed design veriﬁcaon for the full matrix of balloon sizes for the base balloon catheter for our Avess DCB and began the process validaon work on the base catheter. Addionally, the FDA has provided high-level feedback on Avess DCB pivotal clinical trial design consideraons. We plan to evaluate our strategy for further clinical investment in the Avess DCB based on the experience we gain from the PMA applicaon process for SurVeil DCB. Vascular Intervenon Medical Devices – Mechanical Thrombectomy MEDICAL DEVICE SEGMENT We have successfully developed, internally and through acquisions, two FDA 510(k) cleared mechanical thrombectomy devices for the non-surgical removal of thrombi and emboli (clots) from the peripheral vasculature (legs). We believe that the ease of use, intuive design and eﬃcient performance of our thrombectomy products make these devices viable ﬁrst-line treatment opons for intervenonalists. • • PounceTM Arterial Thrombectomy System is designed for the removal of clots from arteries in the legs, known as peripheral arterial occlusion (“PAO”), which is associated with PAD. During ﬁscal 2022, we established a direct salesforce and commenced commercial sales of our Pounce Arterial Thrombectomy System to hospitals and clinics. Pounce Venous Thrombectomy System is designed for the removal of clots from veins in the legs generally associated with venous thromboembolism (“VTE”). Limited market evaluaons are planned for ﬁscal 2023 to obtain physician feedback across a variety of cases and clinical condions. 9 TABLE OF CONTENTS Our thrombectomy devices represent a core oﬀering within our vascular intervenon product strategy, providing the opportunity for: • • Rapid growth in large, under-penetrated markets; and Improved clinical outcomes and reduced healthcare costs, with single session treatment for removal of diﬃcult clots, no capital equipment, and the potenal to reduce the need for thrombolyc drugs. PAO is the blocking of arteries by clots or plaque, is a peripheral vascular condion commonly associated with CLI. Oen, these arterial clots require surgical intervenon and have proven diﬃcult to remove with currently available medical device technologies. Depending on the age and magnitude of the occlusion and the viability of the threatened limb, exisng treatments for this condion may include catheter directed thrombolysis, surgical embolectomy, and/or percutaneous mechanical thrombectomy. In cases in which the occlusion has caused irreversible damage to the limb, acute limb ischemia can result in the amputaon of a lower extremity. VTE is blood clots in the veins and is an under-diagnosed and serious, yet treatable, medical condion that can cause disability and death. VTE includes deep vein thrombosis (“DVT”), which occurs when a blood clot forms in a deep vein, usually in the lower leg, thigh, or pelvis, and pulmonary embolism (“PE”), which occurs when a clot breaks loose and travels through the bloodstream to the lungs. VTE aﬀects approximately 1.2 million U.S. paents each year, of which approximately 800,000 are aﬀected by DVT. The current standard of care for treang VTE is conservave medical management with ancoagulant drugs designed to prevent further blood clong. While ancoagulaon remains the most widespread therapy for DVT, intervenonal treatment has demonstrated the potenal for beer outcomes in select paents. We believe our proprietary Pounce arterial and venous thrombectomy devices provide physicians with the opportunity to treat PAD and VTE in a more eﬀecve, cost-eﬃcient manner than currently available treatments. The devices oﬀer innovave designs that may reduce the need for the use of thrombolycs. Thrombolycs are oen associated with complicaons, which can include bleeding complicaons, longer hospital stays and higher cost of treatment. Our Pounce arterial and venous thrombectomy devices are designed to reduce procedure me, eﬃciently remove large volumes of clot, and eliminate the need for addional external capital equipment, thereby providing an easy-to-use, on-the-table, single-session soluon for clinicians. Pounce Arterial Thrombectomy. Our Pounce Arterial Thrombectomy System, which received FDA 510(k) clearance in ﬁscal 2020, is a mechanical thrombectomy device intended for the non-surgical removal of thrombi and emboli from the peripheral arterial vasculature. The device consists of three components: a 5 Fr basket delivery catheter, a basket wire, and a funnel assembly. Aer the basket wire is delivered distal to the locaon of the thrombus, two ninol self-expanding baskets are deployed to collect and entrain the clot into a funnel-shaped ninol wire mesh. With the clot entrained, the funnel assembly is then collapsed into a 7 Fr procedure guide sheath through which the clot is withdrawn and removed from the body. Physician feedback indicates the Pounce Arterial Thrombectomy System is capable of achieving posive outcomes with minimal blood loss and with minimal use of thrombolycs. The device oﬀers an intuive, grab-and-go design to simplify setup and reduce the physician’s learning curve. Pounce Venous Thrombectomy. Our Pounce Venous Thrombectomy System, which received FDA 510(k) clearance in ﬁscal 2021, is a mechanical thrombectomy catheter for use in venous vascular beds that is speciﬁcally designed to remove large, mixed-morphology blood clots commonly found with VTE. The Pounce Venous Thrombectomy System has also received CE Mark approval, which is a prerequisite for commercializaon in the E.U. The device’s dual-acon technology features a constant spring tension basket, which provides opmal wall apposion over a range of vessel diameters, to engage and collect the clot, while the motor-driven Archimedes screw macerates and removes the collected clot. As with our Pounce arterial device, the Pounce Venous Thrombectomy System is intuive and approachable to facilitate widespread adopon, with a low learning curve for the physician. We acquired the venous thrombectomy device technology with our ﬁscal 2021 acquision of Vetex Medical Limited (“Vetex”), which was privately held and is based in Galway, Ireland. We acquired Vetex with an upfront cash payment of $39.9 million. Addional payments of up to $7 million, of which $3.5 million of which are guaranteed, may be made upon achievement of certain product development and regulatory milestones. Limited market evaluaons for the Pounce Venous Thrombectomy System are planned for ﬁscal 2023 to obtain physician feedback across a variety of cases and clinical condions. The real-world feedback obtained through these evaluaons will help inform any potenal design enhancements that could beneﬁt physicians and paents, while opmizing commercial success. The FDA requires speciﬁc indicaons for devices to be marketed for treatment of certain aspects of VTE, such as DVT and PE. The Pounce Venous Thrombectomy System is indicated for mechanical de-clong and controlled and selected infusion of physician speciﬁed ﬂuids, including thrombolycs, in the peripheral vasculature. The device currently is not indicated for the treatment of DVT or PE. We intend to pursue development and regulatory acons that would expand the ﬁeld of use for our thrombectomy products, which may include speciﬁc indicaons, and which may include DVT and PE. 10 TABLE OF CONTENTS Vascular Intervenon Medical Devices – Radial Access MEDICAL DEVICE SEGMENT We have successfully developed and secured FDA 510(k) regulatory clearance for our Sublime™ porolio of devices designed for vascular intervenon via radial (wrist) access that can also be used via femoral (thigh) access. Our Sublime devices are used to access and treat narrowed arteries both above and below the knee, commonly associated with PAD. During ﬁscal 2022, we established a direct salesforce and commenced commercial sales of our Sublime device porolio to hospitals and clinics. These radial access devices include: • • • Sublime guide sheath to provide the conduit for peripheral intervenon with an access point at the wrist that enables treatment all the way to the pedal loop of the foot; Sublime .014 RX PTA dilataon catheter for treatment of lesions in arteries below the knee all the way to the paent’s foot and around the pedal loop; and Sublime .018 RX PTA dilataon catheter for treatment of lesions in arteries above and below the knee. Our Sublime device porolio is unique in that each of these devices are purpose built for above- and below-the-knee peripheral intervenons that can employ both a convenonal transfemoral approach and a transradial approach. Our Sublime guide sheath performance is enhanced by our latest generaon hydrophilic coang. We believe that radial access procedures oﬀer signiﬁcant beneﬁts by improving paent comfort, reducing recovery and ambulaon mes, and potenally lowering access site complicaons. Our Sublime device porolio meets an unmet clinical need by providing the longer, lower-proﬁle devices that are robust enough to deliver treatment from the wrist all the way to the pedal loop in the foot. We believe the Sublime device porolio is uniquely posioned to lead the market for dedicated devices that facilitate a radial-to-peripheral approach. Below are a few of the unique advantages of our Sublime devices. • • Our Sublime guide sheath is the only 5F guide sheath available in a length up to 150cm, making it an ideal device for operators who seek a smaller proﬁle sheath to help minimize radial artery spasm or to treat smaller paents when performing peripheral intervenons via radial access. Physician feedback has indicated our Sublime guide sheath oﬀers a low-proﬁle design for paent comfort, superior trackability through tortuous anatomy, and resistance to kinking when compared to alternave devices. Our Sublime .014 RX PTA dilataon catheter is the longest catheter of its kind in the U.S. market, at 250 cm. Physician feedback has indicated both our Sublime .014 and .018 catheters provide superb deliverability and the ability to cross challenging lesions. OVERVIEW: PERFORMANCE COATINGS MEDICAL DEVICE SEGMENT Surmodics’ industry-leading performance coangs are used in a minimally invasive procedure every minute of every day. Surmodics’ surface-enhancing performance coangs add diﬀerenated value to more than 150 medical, biotechnology and pharmaceucal product families worldwide. Our customers use Surmodics’ performance coangs to enable, opmize and diﬀerenate their device products. These performance coangs include: • • • Hydrophilic coangs enable vascular device performance and maneuverability by reducing fricon by imparng the necessary lubricity (smoothness or slipperiness) for minimally invasive, intravascular procedures. Surmodics’ low-parculate, hydrophilic coangs have a proven track record, meeng demanding regulatory requirements in the following clinical segments: coronary, peripheral, neurovascular and structural heart devices. Drug delivery coangs enable a device to achieve the desired biological eﬀect through the precisely controlled transfer of a pharmaceucal drug to targeted ssues. Surmodics possesses experse across a range of compounds to meet a variety of clinical needs. Hemocompable coangs improve the safety and funcon of devices by reducing the risk of thrombus (clot) formaon acvely (heparin) or passively (non-heparin). Surmodics generates royales revenue by licensing our performance coang technologies to medical device manufacturers, product revenue from sales to licensees of the chemical reagents used in coangs, and R&D revenue from commercial development feasibility services and contract coang services. 11 TABLE OF CONTENTS Our performance coangs are diﬀerenated by their ﬂexibility, durability and ease of use. In terms of ﬂexibility, coangs can be applied to many kinds of surfaces and can immobilize a variety of chemical, pharmaceucal and biological agents. Addionally, the surface modiﬁcaon process can be tailored to provide customers with the ability to improve their devices’ performance by choosing the speciﬁc coang properes desired for parcular applicaons. Our performance coang technologies can also be combined to deliver mulple surface-enhancing characteriscs on the same device. The connuing trend toward minimally invasive surgical procedures, which oen employ catheter-based delivery technologies, has increased the demand for hydrophilic (i.e., lubricious or slippery) coangs and other coang technologies, including drug-delivery coangs. For example, stents, parcularly drug-elung stents, have signiﬁcantly reduced the need for repeat intravascular procedures or more invasive cardiac bypass surgery. Transcatheter heart valve repair or replacement via a minimally invasive catheter-based system has enabled the treatment of paents suﬀering from heart valve disease who are too ill to undergo open-heart surgery. Hydrophilic Coangs. Our proprietary PhotoLinkTM coang technology (“PhotoLink Technology”) is a versale, easily applied, coang technology that modiﬁes medical device surfaces by creang covalent bonds between device surfaces and a variety of chemical agents. PhotoLink Technology can impart many performance-enhancing characteriscs, such as advanced lubricity (slipperiness or smoothness) and hemocompability (prevenng blood clot formaon), when bound onto surfaces of medical devices or other biological materials without materially changing the dimensions or other physical properes of devices. PhotoLink Technology reagents can be applied to a range of substrates. The coang formulaons are easily applied to the material surface by a variety of methods including, but not limited to, dipping, spraying, roll-coang and ink-jeng. We connue to expand our proprietary reagent porolio for use by our customers. These reagents enable our customers to develop novel surface features for their devices, sasfying the expanding healthcare industry requirements. We are also connually working to expand the list of materials that are compable with our surface modiﬁcaon and device drug-delivery reagents. Addionally, we develop coang processes and coang equipment to meet the device quality, manufacturing throughput, and cost requirements of our customers. The PhotoLink Technology coang process is relavely simple to use and is easily integrated into the customer’s manufacturing operaons. In addion, the process does not subject the coated products to harsh chemical or temperature condions, produces no hazardous byproducts, and does not require lengthy processing or curing me. Further, coangs incorporang the PhotoLink Technology are generally compable with accepted sterilizaon processes, so the surface aributes are not lost when the medical device is sterilized. The latest generaon of our Photolink Technology, our SereneTM hydrophilic coang plaorm, opmizes lubricity and durability, while signiﬁcantly reducing parculates generaon. This latest generaon, PhotoLink Technology-enabled coang has demonstrated excellent lubricity on a wide range of substrates and has been used on FDA-cleared coronary, peripheral and structural heart devices. Drug-delivery Coangs. Our device drug-delivery coang technologies allow therapeuc 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 (from several months to over a year), illustrang the wide range of release proﬁles that can be achieved with our coang systems. On a wide range of devices, drug-elung coangs can help improve device performance, increase paent safety, and enable innovave new treatments. DCBs are a typical example of short-term use drug-delivery devices. An example of longer-term drug-delivery devices is drug elung stents. We work with companies in the medical device and biotechnology industries to develop specialized coangs that allow for the controlled release of drugs from device surfaces. We see at least three primary areas with strong future potenal: (1) improving the funcon of a device which itself is necessary to treat the medical condion; (2) enabling site-speciﬁc drug delivery while liming systemic exposure; and (3) enhancing the biocompability of a medical device to ensure that it connues to funcon over a long period of me. 12 TABLE OF CONTENTS Performance Coangs – Licensing Arrangements MEDICAL DEVICE SEGMENT We commercialize our performance coang technologies primarily through licensing arrangements with medical device manufacturers. We believe this approach allows us to focus our resources on further developing new technologies and expanding our licensing acvies. Many of our technologies have been designed to allow manufacturers to implement them easily into their own manufacturing processes so customers can control producon and quality internally without the need to send their products to a contract manufacturer. We generate the largest proporon of our revenue through licensing arrangements. Royales revenue represented 30%, 29% and 30% of our total revenue in ﬁscal 2022, 2021 and 2020, respecvely. Revenue from these licensing arrangements typically includes royales based on a percentage of licensees’ product sales, minimum royales and milestone payments. In both ﬁscal 2022 and 2021, we saw double-digit year-over-year growth in revenue associated with our latest generaon Serene hydrophilic coang technology driven by customer product launches and resulng market share increases associated with the customer device applicaons that incorporate this latest generaon coang technology. The increase in revenue associated with our Serene hydrophilic coang technology oﬀset decreases in revenue associated with our fourth-generaon PhotoLink hydrophilic coang technology as our licenses for the fourth-generaon technology transioned from higher patent royalty rates to lower know-how royalty rates when the patents for the fourth-generaon technology expired, which generally occurred in the ﬁrst quarter of our ﬁscal 2020. The licensing process for our performance coang technologies begins with the customer specifying a desired product feature to be created, such as lubricity or drug delivery. Because each device and coang applicaon is unique, we rounely conduct a feasibility study to qualify each new potenal product applicaon, oen generang commercial development revenue. Feasibility studies can range in duraon from several months to a year. Aer we complete a feasibility study, our customers cannot market their product unl they receive regulatory approval. As further described under the capon “Government Regulaon,” the regulatory approval process varies in each country and ranges from several months to four or more years. At any me prior to a customer’s commercial launch, a license agreement may be executed granng the licensee rights to use our technology. We oen support our customers by providing coang assistance for parts required in animal tests and human clinical trials. Typically, we complete a technology transfer to most customers which enables those customers to apply the coang at their own facilies. We also generate revenue from reagent chemical product sales to licensees for use in their coang processes, as well as from providing contract coang services. License agreement terms are generally for a speciﬁed number of years or our patent’s life, whichever is longer, although a license generally may be terminated by the licensee for any reason with advance wrien noce. In cases where the royalty obligaon extends beyond the life of the applicable patent, it is because the license also includes rights to our know-how or other proprietary rights. Under these circumstances, the royalty obligaon typically connues at a reduced royalty rate for a speciﬁed number of years, generally ed to the date on which the licensee’s medical device product was ﬁrst sold. Our license agreements may include certain license fees and/or milestone payments. Substanally all our licensed performance coangs technology applicaons are nonexclusive, allowing us to license each technology to mulple customers. Moreover, even exclusive performance coangs technology licenses generally are limited to a speciﬁc “ﬁeld of use,” allowing us the opportunity to further license technology to other customers. The royalty rate on a substanal number of the coangs agreements has tradionally been in the range of two to three percent, but there are certain contracts with lower or higher rates. In certain agreements, our royalty is based on an agreed-upon amount per unit. License fees, milestone payments, and royalty rates are based on various factors, including the licensed product’s or technology’s stage of development, the perceived value of our technology to the customer’s product, the size of the potenal market, and whether the arrangement is exclusive or nonexclusive. Our agreements oen incorporate a minimum royalty to be paid by the licensee. Royalty payments generally commence one quarter aer the customer’s actual product sales occur because of the delay in reporng sales by our licensees. We esmate and recognize sales-based royales revenue from our performance coang licensees in the same quarter that the underlying customer product sale occurs. We have over 150 licensed product classes (customer products ulizing Surmodics technology) already in the market generang royales and greater than 100 customer product classes incorporang our technology in various stages of pre-commercializaon. Under our performance coang technology license agreements, the responsibility for securing regulatory approval for and ulmately commercializing these products rests with our customers. Our reliance on our customers in this regard and the potenal risks to our operaons as a result are discussed in “Risk Factors” in Part I, Item IA of this Annual Report on Form 10-K. Moreover, we are oen contractually obligated to keep the details concerning our customers’ R&D eﬀorts (including the ming of expected regulatory ﬁlings, approvals and market introducons) conﬁdenal. 13 TABLE OF CONTENTS Our licensing agreements generally require us to keep our customers’ idenes conﬁdenal, unless they approve of such disclosure. Licensed customers that allow the use of their name include: Abbo Laboratories and Abbo Vascular, Inc., Boston Scienﬁc Corporaon (“Boston Scienﬁc”), Cook Medical, Cordis Corporaon, Covidien PLC (a subsidiary of Medtronic), Edwards Lifesciences Corporaon, Evalve, Inc. (a subsidiary of Abbo), ev3 Inc. (a subsidiary of Medtronic), Medtronic, OrbusNeich Medical, Inc., and Spectranecs Corporaon (a subsidiary of Koninklijke Philips N.V.). Performance Coangs – R&D Services for Customers MEDICAL DEVICE SEGMENT For our medical device coangs customers, we have disnct, speciﬁcally-dedicated R&D facilies and personnel to support delivery of R&D services. We work with our customers to integrate the best possible surface modiﬁcaon and device drug-delivery technologies with their products, not only to meet their performance requirements, but also to perform services quickly so that the product may reach the market ahead of the compeon. To quickly solve problems that might arise during the development and opmizaon process, we oﬀer extensive capabilies in analycal chemistry and surface characterizaon within our R&D organizaon. Our state-of-the-art instrumentaon and extensive experience allow us to test the purity of coang reagents, to monitor the eluon rate of drug from coangs, to measure coang thickness and smoothness, and to map the distribuon of chemicals throughout coangs. We believe our capabilies in this area exceed those of our competors. Our R&D staﬀ support our business development staﬀ and business units in performing feasibility studies, as well as providing technical assistance to exisng and potenal customers. These services, which generate research, development and other revenue, include opmizing the relevant technologies for speciﬁc customer applicaons; supporng clinical trials; training customers; and integrang our technologies and know-how into customer manufacturing operaons. Compeon MEDICAL DEVICE SEGMENT We are developing and commercializing diﬀerenated vascular intervenon medical devices that integrate our performance coangs, catheter, balloon and other proprietary technologies. This high degree of diﬀerenaon is strategically designed to capture market share in a highly compeve, dynamic industry. Our vascular intervenon products compete with the global leaders in the vascular medical device market. We believe our vascular intervenon products will be compeve on the basis of their safety and eﬃcacy as a result of the innovave design and diﬀerenated coang and device design technology. We believe these innovaons will enable our vascular intervenon products to demonstrate improvements in paent outcomes through reduced invasiveness compared to other devices used for comparable procedures. We believe that the intense compeon within the medical device market creates opportunies for our performance coang technologies as medical device manufacturers seek to diﬀerenate their products through new enhancements or to remain compeve with enhancements oﬀered by other manufacturers. Because a signiﬁcant poron of our revenue depends on royales derived from our customers’ medical device product sales incorporang our performance coang technologies, we are also aﬀected by compeon within the markets for such devices. As we typically license our performance coang technologies on a non-exclusive basis, we beneﬁt by oﬀering our technologies to mulple compeng manufacturers of a device. However, compeon in the medical device market could also have an adverse eﬀect on us. While we seek to license our coangs products to established manufacturers, in certain cases, our performance coangs licensees may compete directly with larger, dominant manufacturers with extensive product lines and greater sales, markeng and distribuon capabilies. We also are unable to control other factors that may impact commercializaon of our vascular intervenon products and licensees with medical devices that ulize our performance coangs, such as regulatory approval, markeng and sales eﬀorts of our customers and licensees, and compeve pricing pressures within the parcular market. Many of our exisng and potenal competors have greater ﬁnancial, technical and markeng resources than we have. The ability of performance coang technologies to improve the performance of medical devices and drugs and to enable new product categories has resulted in increased compeon in these markets. Some of our competors oﬀer device drug-delivery technologies, while others specialize in lubricious or hemocompable coang technology. Some of these companies target cardiovascular, peripheral or other medical device applicaons. In addion, because of the many product possibilies aﬀorded by performance coangs, many of the large medical device manufacturers have developed, or are engaged in eﬀorts to develop, internal competency in the area of performance coangs, including drug-delivery technologies. 14 TABLE OF CONTENTS We diﬀerenate ourselves from our performance coangs competors by providing what we believe is a high value-added approach. We have a proven track record of our customers successfully navigang the regulatory approval process with devices ulizing our enabling technology. We believe that the primary factors customers consider in choosing a parcular technology include performance (e.g., ﬂexibility, ability to ﬁne tune drug eluon proﬁles, biocompability), ease of manufacturing, me-to-market, intellectual property protecon, ability to produce mulple products from a single process, compliance with manufacturing regulaons, ability to manufacture clinical and commercial products, customer service and total cost of goods (including manufacturing process labor). We believe our technologies deliver exceponal performance in these areas, allowing us to compete favorably with respect to these factors. With respect to our licensed performance coang technologies, we believe that the cost and me required to obtain the necessary regulatory approvals signiﬁcantly reduces the likelihood of a customer changing the manufacturing process it uses once a device or drug has been approved for sale. R&D Strategy MEDICAL DEVICE SEGMENT Our signiﬁcant R&D investments over the past several years reﬂect our ongoing commitment to strengthen our proprietary product pipeline and broaden our capacity for medical device R&D acvies. In ﬁscal 2022, 2021 and 2020, consolidated R&D expense as a percentage of consolidated revenue was 51%, 45% and 53%, respecvely. In ﬁscal 2022, R&D expense was largely associated with our investments in vascular intervenon product development; clinical trials for DCBs; and in R&D and regulatory infrastructure, facilies and personnel. R&D expenses primarily consist of research, development, clinical and regulatory acvies related to the design, development and commercializaon of our products, as well as costs associated with our contract coang services R&D services revenue. We intend to connue our development eﬀorts to expand our proprietary medical device oﬀerings, including advancing our performance coang technologies to beer meet these needs across mulple medical markets and to capture more of the ﬁnal product value. We ancipate R&D expenses will connue to be signiﬁcant in ﬁscal 2023 and beyond, primarily related to medical device product development, including connued investment in our Pounce and Sublime plaorms. To strengthen our licensing business model, R&D personnel and facilies for our vascular intervenon products are fully segregated from those for our performance coangs to preserve conﬁdenal informaon of our coangs customers (licensees). In our Medical Device segment, we conduct R&D in mulple facilies. Two of those separate facilies are located in Eden Prairie, Minnesota. Our R&D facilies are as follows: • • • • Performance coangs facility – Eden Prairie, Minnesota – commercial development and feasibility services for performance coangs customers (licensees); internal R&D for performance coangs products; coangs reagent manufacturing; coang services; and development and manufacturing of our DCB products. Vascular intervenon products facility – Eden Prairie, Minnesota – internal R&D for vascular intervenon products, other than DCBs, and manufacturing capacity for our Pounce arterial thrombectomy product. Vascular intervenon facility – Ballinasloe, Ireland – design and manufacture of balloon-based peripheral vascular devices, including the Sublime plaorm and our DCB products. Vascular intervenon facility – Galway, Ireland – internal R&D for Pounce venous thrombectomy product. We have robust procedures to ensure that we protect our coangs customers’ (licensees) intellectual property and avoid conﬂicts of interest. R&D personnel have speciﬁc roles and are part of disnct teams, clearly segregated between: (i) performance coangs technologies R&D, including customer development to support our licensing partnership model and (ii) internal R&D acvies to further advance our vascular intervenon product porolio. Our procedures include strict restricons for physical access to customers’ products and records and limitaons on computer ﬁle access based on an R&D team member’s role. 15 TABLE OF CONTENTS IN VITRO DIAGNOSTICS SEGMENT Surmodics’ In Vitro Diagnoscs (“IVD”) segment provides leading in vitro diagnosc companies with the crical components for developing sensive, reproducible immunoassays to enable our customers’ diagnosc tests to detect the absence or presence of disease. We develop, manufacture and sell chemical and biological components for in vitro diagnosc immunoassay tests and molecular diagnosc tests for the diagnosc and biomedical research markets. Our porolio of IVD chemical and biological component products includes: • • • • Protein Stabilizers. We oﬀer a full line of stabilizaon products for the IVD market. These products increase sensivity and speciﬁcity and reduce false posive and false negave results, while extending the diagnosc test’s shelf life, thereby producing more consistent assay results. Our stabilizaon products are ready-to-use, eliminang the in-house manufacturing preparaon me and cost of producing stabilizaon and blocking reagents. Substrates. We provide colorimetric and chemiluminescent substrates to the IVD market under our BioFX® trademark. A substrate is the diagnosc test kit component that detects and signals that a reacon has taken place so that a result can be recorded. Colorimetric substrates signal a posive diagnosc result through a color change. Chemiluminescent substrates signal a posive diagnosc result by eming light. We believe that our substrates oﬀer a high level of stability, sensivity and consistency. Surface Coangs for Molecular Diagnosc Applicaons. We oﬀer custom coangs for molecular diagnosc applicaons, including DNA, RNA and protein microarrays. Our TRIDIA™ surface coangs bind molecules to a variety of surfaces and geometries and may be customized for selecvity using passivang polymers and reacve groups. This proprietary technology immobilizes DNA and protein to adhere to tesng surfaces. We oﬀer other surface coangs that improve ﬂow characteriscs through membranes and microﬂuidic channels on diagnosc devices, including point-of-care components. Angens and Anbodies. We are the exclusive distributor in the U.S., Canada and Puerto Rico (and non-exclusive distributor in Japan) of the BBI Soluons’ DIARECTTM line of angens and anbodies (“DIARECT”). DIARECT produces the majority of these angens and anbodies using recombinant technology. Our IVD products address the following customer needs: • Immunoassay Diagnoscs. Surmodics develops, manufactures and sells high-performing, consistent-quality and stable immunoassay component products to enable our customers’ diagnosc tests to detect the absence or presence of disease. An immunoassay is a biochemical test that measures the presence or concentraon of a target molecule, or analyte, in a biological ﬂuid or sample. Analyte levels are correlated to the paent’s disease state or medical condion to diagnose the presence, absence or severity of disease. Analytes can range from large molecules such as proteins to small molecules such as hormones. Immunoassays are developed and produced using mulple components. The component’s selecon and opmizaon confer the assay quality and performance of the assay in terms of sensivity and speciﬁcity. IVD companies select these crical biochemical and reagent components to meet the assay’s diagnosc speciﬁcaons. • Molecular Diagnoscs – DNA and Protein Immobilizaon. Surmodics has developed various surface chemistries for both DNA and protein immobilizaon. Our TRIDIA™ product opmizes DNA, RNA, protein, and cell aachment for molecular diagnosc and immunoassay applicaons, reducing non-speciﬁc background and improving sensivity. Surmodics’ versale coangs bind molecules to a variety of surfaces and geometries and may be customized for selecvity using passivang polymers and reacve groups. Both DNA and protein microarrays are useful tools for the pharmaceucal, diagnosc and research industries. During a DNA gene analysis, typically thousands of diﬀerent probes need to be placed in a paern on a surface, called a DNA microarray. These microarrays are used by the pharmaceucal industry to screen for new drugs; by genome mappers to sequence human, animal or plant genomes; or by diagnosc companies to search a paent sample for disease-causing bacteria or viruses. However, DNA does not readily adhere to most surfaces. Protein microarrays are used as diagnosc and research tools to determine the presence and/or quanty of proteins in a biological sample. The most common type of protein microarray is the anbody microarray, where anbodies are spoed onto a surface and used as capture molecules for protein detecon. Customer R&D. The sales cycle for our IVD products generally begins when an IVD company iniates the process to develop a new, or improve a current, diagnosc test. During product development, these companies seek to source the test’s crical components with reagents that it produces internally or with reagents from a supplier, such as Surmodics. 16 TABLE OF CONTENTS As IVD tests are developed and various reagents are tested, companies will generally seek to opmize the sensivity (false negave reducons), speciﬁcity (false posive reducons), speed (me from sample to results), convenience (ideally as few steps as possible), and cost eﬀecveness. Upon regulatory approval or clearance, the customer’s diagnosc test can be sold in the marketplace. It may take several years aer approval or clearance for the test to achieve peak market share and opmize Surmodics’ revenue. New Product R&D. Our R&D eﬀorts to grow our IVD business segment include idenfying and addressing unmet needs that exist in the global IVD marketplace. Our pipeline of IVD products includes components for immunoassay and molecular diagnosc applicaons, such as new protein stabilizers, detecon technologies, accessory reagents and surface coangs that have the potenal to add greater sensivity, speciﬁcity, speed, convenience, and lower cost for IVD test manufacturers. Compeon. The diagnoscs market is highly fragmented. In the product lines in which we compete, we face an array of competors ranging from large manufacturers with mulple business lines to small manufacturers that oﬀer a limited selecon of products. Some of our competors have substanally more capital resources, markeng experience, R&D resources and producon facilies than we do. We believe that our products compete on performance, stability (shelf life), sensivity (lower levels detected, faster results), consistency and price. We believe that our connued compeve success will depend on our ability to gain market share, to develop or acquire new proprietary products, obtain patent or other protecon for our products and successfully market our products directly or through partners. OTHER FACTORS IMPACTING OUR OPERATIONS Patents and Proprietary Rights OTHER FACTORS IMPACTING OUR OPERATIONS Patents and other forms of proprietary rights are an essenal part of Surmodics’ business. We aggressively pursue patent protecon covering the proprietary technologies that we consider strategically important to our business. In addion to seeking patent protecon in the U.S., we also generally ﬁle patent applicaons in European countries and, on a selecve basis, other foreign countries. We strategically manage our patent porolio in a manner designed to ensure that we have valid and enforceable patent rights protecng our technological innovaons. As of September 30, 2022, Surmodics owned or had exclusive rights to 152 issued U.S. patents and 338 issued internaonal patents. As of the same date, we also owned or had exclusive rights to 57 U.S. pending patent applicaons and 92 foreign pending patent applicaons. 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 surface applicaons, including those described above. In parcular, we have 34 issued U.S. patents, three pending U.S. patent applicaons, 79 issued internaonal patents, and 11 pending internaonal patent applicaons protecng various aspects of these technologies, including composions, methods of manufacture and methods of coang devices. The expiraon dates for these patents and ancipated expiraon dates of the patent applicaons range from ﬁscal 2025 to 2039. These patents and patent applicaons represent disnct families, with each family generally covering a successive generaon of the technology, including improvements that enhance coang performance, manufacturability, or other important features desired by our customers. For addional details, refer to the capon “Performance Coangs – Licensing Arrangements” within this secon of this Annual Report on Form 10-K. We also rely upon trade secrets, trademarks and other un-patented proprietary technologies. We seek to maintain the conﬁdenality of such informaon by requiring employees, consultants and other pares to sign conﬁdenality agreements and by liming access by pares outside the Company to such informaon. There can be no assurance, however, that these measures will prevent the unauthorized disclosure or use of this informaon, or that others will not be able to independently develop such informaon. Addionally, there can be no assurance that any agreements regarding conﬁdenality and non- disclosure will not be breached, or, in the event of any breach, that adequate remedies would be available to us. Signiﬁcant Customers OTHER FACTORS IMPACTING OUR OPERATIONS Revenue from Abbo and Medtronic represented approximately 11% and 13%, respecvely, of our consolidated revenue for ﬁscal 2022. Revenue from these customers was generated from mulple products and ﬁelds of use, including revenue from the Abbo Agreement, substanally all of which were recognized in our Medical Device segment. No other customer accounted for more than 10% of our consolidated revenue in ﬁscal 2022. With respect to our Medical Device segment, revenue from Abbo and Medtronic represented approximately 15% and 18%, respecvely, of our Medical Device segment revenue for ﬁscal 2022, and revenue from one addional customer represented approximately 12% of our Medical Device segment revenue for ﬁscal 2022. No other customer accounted for greater than 6% of Medical Device segment revenue for ﬁscal 2022. 17 TABLE OF CONTENTS With respect to our IVD segment, revenue from two customers represented approximately 17% and 12%, respecvely, of our IVD segment revenue for ﬁscal 2022. No other customer accounted for greater than 9% of IVD segment revenue for ﬁscal 2022. Manufacturing OTHER FACTORS IMPACTING OUR OPERATIONS We manufacture the reagent chemicals used in our performance coangs and our IVD products in one of our Eden Prairie, Minnesota facilies. In certain limited circumstances, we also provide contract manufacturing services for our customers, including, for example, coang their medical devices that are intended for pre-clinical and clinical development (including human clinical trials), and products that are sold for commercial use by our customers. We manufacture PTA balloon catheters and microcatheters in our Ballinasloe, Ireland facility, which oﬀers a suite of capabilies, including balloon forming, extrusion, coang, braiding and assembly of ﬁnished products. We manufacture our vascular intervenon products, Pounce and Sublime, in our Ireland and U.S. facilies. At our Ballinasloe, Ireland manufacturing facility, we perform a limited volume of contract manufacturing of medical devices for our customers. We aempt to maintain mulple sources of supply for the key raw materials used to manufacture our products. We do, however, purchase some raw materials from single sources, but we believe that addional sources of supply are readily available. Further, to the extent addional sources of supply are not readily available, we believe that we could manufacture such raw materials. We follow quality management procedures in accordance with applicable regulaons and guidance for the development and manufacture of materials and device, biotechnology or combinaon products that support clinical trials and commercializaon. In order to meet our customers’ needs in this area, all of our manufacturing facilies in Eden Prairie, Minnesota and Ballinasloe, Ireland are cerﬁed to ISO 13485 and registered with the U.S. FDA as “Contract Manufacturers.” In addion, one of our manufacturing facilies and our warehouse facility in Eden Prairie, Minnesota are cerﬁed to ISO 9001. Government Regulaon OTHER FACTORS IMPACTING OUR OPERATIONS Medical device and in vitro diagnosc products are required to undergo regulatory review processes that are governed by the FDA and other internaonal regulatory authories. The process of regulatory review and approval is oen prolonged, expensive and uncertain. New medical devices can only be marketed in the U.S. aer a pre-market noﬁcaon for 510(k) clearance or a 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 applicaon process). In the E.U., regulatory approval is signiﬁed by the CE Mark, which is generally granted by one of several competent authories and is based on the submission of a design dossier, a manufacturer validaon assessment, a third-party assessment, and review of the design dossier by a “Noﬁed Body.” In 2017, the E.U. authorized a new medical device regulaon. The new regulaon, which imposes signiﬁcant addional pre-market and post-market requirements, became eﬀecve for devices submied for CE Mark aer May 2021. Medical devices granted CE Mark prior to May 2021 may connue to be sold unl May 2024 or unl the CE Mark expires, whichever comes ﬁrst, providing there are no signiﬁcant changes to the design or intended use of the device. For our customers’ products that incorporate our performance coang and IVD technologies, the burden of securing regulatory approval typically rests with the customer, as the medical device manufacturer. For our vascular intervenon products, including the SurVeil DCB, the burden of securing regulatory approval rests on us, unless we contract with other organizaons to pursue such approval. In support of our customers’ and our own regulatory ﬁlings, we maintain various conﬁdenal Device Master Files with the FDA and provide technical informaon to other regulatory agencies outside the U.S. regarding the nature, chemical structure and biocompability of our reagents. Our licensees generally do 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 conﬁdenal informaon with our customers. U.S. legislaon allows companies, prior to obtaining FDA clearance or approval to market a medical product in the U.S., to manufacture medical products in the U.S. and export them for sale in internaonal markets. This generally allows us to realize earned royales sooner and may result in opportunies to market our vascular intervenon products in other countries. However, sales of medical products outside the U.S. are subject to internaonal requirements that vary from country to country. The me required to obtain approval for sale internaonally may be longer or shorter than that required by the FDA. Human Capital OTHER FACTORS IMPACTING OUR OPERATIONS As of September 30, 2022, we had 447 employees, of which 132 were employed outside the U.S., primarily in manufacturing and R&D funcons. We are not a party to any collecve bargaining agreements. 18 TABLE OF CONTENTS Our success depends upon our ability to retain and aract highly qualiﬁed management and technical personnel. Talent management is crical to our ability to execute on our long-term growth strategy. Through our history of technological innovaon, we appreciate the importance of retenon, growth and development of our employees. We are commied to an inclusive culture which values equality, opportunity, and respect. In support of our inclusive culture, we believe we oﬀer compeve compensaon and beneﬁts, including an annual pay gap assessment; provide respecul workplace training to strengthen employee understanding; and strive to recruit a diverse talent pool across all levels of the organizaon. We are focused on the engagement and empowerment of our employees through demonstraon of our foundaonal values, which we refer to as the ﬁve Cs: we have courage to face challenges with determinaon, honesty and resourcefulness; candor to speak openly and respecully; collaboraon that recognizes teamwork as the key to success; camaraderie that is genuine and supporve; and commitment to our cause. SEC FILINGS We ﬁle annual reports, quarterly reports, proxy statements, and other documents with the SEC under the Securies Exchange Act of 1934, as amended (the “Exchange Act”). The SEC maintains a website that contains reports, proxy and informaon statements, and other informaon regarding issuers, including the Company, that ﬁle electronically with the SEC. The public may obtain any documents that we ﬁle with the SEC at hp://www.sec.gov. We make available, free of charge, copies of our annual report on Form 10-K, proxy statement, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports ﬁled or furnished pursuant to Secon 13(a) or 15(d) of the Exchange Act on our website, www.surmodics.com, as soon as reasonably praccable aer ﬁling such material electronically or otherwise furnishing it to the SEC. We are not including the informaon on our website as a part of, or incorporang it by reference into, our Form 10-K. As of November 18, 2022, the names, ages and posions of the Company’s execuve oﬃcers were as follows: EXECUTIVE OFFICERS Name Age Posion Gary R. Maharaj Timothy J. Arens Charles W. Olson Teryl L.W. Sides Joseph J. Sch Gordon S. Weber 59 55 58 53 57 59 President and Chief Execuve Oﬃcer Senior Vice President of Finance and Informaon Technology and Chief Financial Oﬃcer Senior Vice President and President, Medical Device Coangs Senior Vice President and President, Vascular Intervenons Senior Vice President Human Resources and President, In Vitro Diagnoscs Senior Vice President of Legal, General Counsel and Secretary Gary R. Maharaj joined the Company in December 2010 as President and Chief Execuve Oﬃcer and was also appointed to the Surmodics Board of Directors at such me. Prior to joining Surmodics, Mr. Maharaj served as President and Chief Execuve Oﬃcer of Arizant Inc., a provider of paent temperature management systems in hospital operang rooms, from 2006 to 2010. Previously, Mr. Maharaj served in several senior-level management posions for Augusne Medical, Inc. (predecessor to Arizant Inc.) from 1996 to 2006, including Vice President of Markeng, and Vice President of Research and Development. During his 34 years in the medical device industry, Mr. Maharaj has also served in various management and research posions for the orthopedic implant and rehabilitaon 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 Analysis and General Manager, In Vitro Diagnoscs in October 2010. He was promoted to Vice President of Finance and Interim Chief Financial Oﬃcer in August 2011 and in February 2013 became Vice President Corporate Development and Strategy. In May 2018, Mr. Arens was named interim Vice President of Finance and Chief Financial Oﬃcer for a second me and in February 2019 he was named Vice President of Finance and Chief Financial Oﬃcer. In April 2020, he was promoted to Senior Vice President of Finance and Informaon Technology and Chief Financial Oﬃcer. Prior to joining Surmodics, Mr. Arens was employed at St. Jude Medical, Inc., a medical technology company, from 2003 to 2007, in posions of increasing responsibility related to business development and strategic planning funcons. 19 TABLE OF CONTENTS Charles W. Olson joined the Company in July 2001 as Market Development Manager, was promoted in December 2002 to Director, Business Development, 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 posion of Vice President, Sales was added to his responsibilies. In November 2008, Mr. Olson was named Vice President of our Cardiovascular business unit, in October 2010, he was named Senior Vice President and General Manager, Medical Device, and in August 2016 he was named Senior Vice President of Commercial and Business Development, Medical Devices. In May 2022, Mr. Olson was named Senior Vice President and President, Medical Device Coangs. Prior to joining Surmodics, Mr. Olson was employed as General Manager at Minnesota Extrusion from 1998 to 2001 and at Lake Region Manufacturing in project management and technical sales from 1993 to 1998. Teryl L.W. Sides joined the Company in November 2018 as Senior Vice President and Chief Markeng Oﬃcer. In April 2020, Ms. Sides was promoted to Senior Vice President of Product Development and Chief Markeng Oﬃcer. In May 2022, Ms. Sides was named Senior Vice President and President, Vascular Intervenons. Before joining Surmodics, Ms. Sides served as Founder and Chief Execuve Oﬃcer of Projectory, a consulng ﬁrm that provides strategic markeng services to medical technology clients, ranging from start-ups to global businesses, from 2011 to 2018. Prior to joining Projectory, Ms. Sides was the Vice President of Markeng and Product Development for Arizant, Inc. from 1998 to 2011. Joseph J. Sch joined the Company in March 2010 as Vice President of Markeng, Corporate Development and Strategy. In August 2011, Mr. Sch became Vice President, Business Operaons and General Manager In Vitro Diagnoscs. In September 2013, Mr. Sch’s role was adjusted to Vice President and General Manager, In Vitro Diagnoscs. In April 2020, Mr. Sch was promoted to Senior Vice President and General Manager of Human Resources and In Vitro Diagnoscs. In May 2022, Mr. Sch was named Senior Vice President Human Resources and President, In Vitro Diagnoscs. Prior to joining Surmodics, Mr. Sch was Vice President of Corporate Development for Abraxis BioScience, LLC, a biotechnology company focused on oncology therapeucs, from 2009 to 2010. Prior to joining Abraxis, he was a Vice President for MGI Pharma, Inc., a biopharmaceucal company, from 2005 to 2009. Mr. Sch’s prior experience also includes serving as President/COO of Pharmaceucal Corp. of America (a subsidiary of Publicis Healthcare Specialty Group), and posions of increasing responsibility in sales and markeng at Sanoﬁ-Avens Pharmaceucals. Gordon S. Weber joined the Company in May 2020 as Senior Vice President of Legal, General Counsel and Secretary. Prior to joining Surmodics, Mr. Weber served as the Founder and President of Sapere Aude, LLC, a consulng ﬁrm, from 2018 to 2020. From 2017 to 2018, Mr. Weber served as Vice President, General Counsel and Secretary of CHF Soluons, Inc., which manufactures and markets ultraﬁltraon systems for paents suﬀering from ﬂuid overload. Mr. Weber served as Vice President, General Counsel and Secretary of Vascular Soluons, Inc., a medical device company focused on products treang coronary and peripheral vascular disease, from 2013 unl the company was acquired by Teleﬂex Incorporated in 2017. Mr. Weber pracced law for 13 years with Faegre & Benson LLP (now Faegre Drinker Biddle & Reath LLP), where he was Partner. Mr. Weber began his career with the accounng ﬁrm now known as KPMG and has served as Corporate Controller for Osmonics, Inc., an NYSE-listed manufacturer of ﬂuid ﬁltraon equipment. The execuve oﬃcers of the Company are elected by and serve at the discreon of the Board of Directors. None of our execuve oﬃcers are related to any other execuve oﬃcer or any of our directors. 20 TABLE OF CONTENTS ITEM 1A. RISK FACTORS. RISKS RELATING TO OUR BUSINESS, STRATEGY AND INDUSTRY We had a net loss for our 2022 ﬁscal year, expect to incur net losses in the future, and may not be able return to or sustain proﬁtability. We incurred a net loss of $27.3 million in our ﬁscal year ended September 30, 2022 and expect to connue to have net losses in the future. We expect to connue to incur signiﬁcant sales and markeng, research and development, regulatory and other expenses as we expand our commercializaon eﬀorts to increase adopon of our products, expand exisng relaonships with our customers, obtain regulatory clearances or approvals for our planned or future products, conduct clinical trials on our exisng and planned or future products, and develop new products or add new features to our exisng products. We expect to connue to incur losses in the future, which may ﬂuctuate signiﬁcantly from period to period. If our revenue declines or fails to grow at a rate faster than increases in our operang expenses, we will not be able to return to and maintain proﬁtability in future periods. We cannot ensure that we will return to proﬁtability or that, if we do become proﬁtable, we will be able to sustain proﬁtability. The loss of, or signiﬁcant reducon in business from, one or more of our major customers could signiﬁcantly reduce our revenue, earnings or other operang results. A signiﬁcant poron of our revenue is derived from a relavely small number of customers. Two of our customers each provided more than 10% of our revenue in ﬁscal 2022. Revenue from Medtronic and Abbo represented approximately 13% and 11%, respecvely, of our total revenue for ﬁscal 2022 and was generated from mulple products and ﬁelds of use. The loss of Medtronic, Abbo, or any of our other large customers, or reducons in business from them, could have a material adverse eﬀect on our business, ﬁnancial condion, results of operaons, and cash ﬂow. There can be no assurance that revenue from any customer will connue at their historical levels. If we cannot broaden our customer base, we will connue to depend on a small number of customers for a signiﬁcant poron of our revenue. The long-term success of our business may suﬀer if we are unable to maintain and expand our licensing base, including with customers who may perceive our vascular intervenon products as compeng with their products. We intend to connue pursuing a strategy of licensing our performance coang technologies that impart lubricity, pro-healing and biocompability characteriscs, as well as drug-delivery capabilies (together, “performance coangs” or “performance coang technologies”) to a diverse array of medical device companies, thereby expanding the commercializaon opportunies for our technologies. A signiﬁcant poron of our revenue is derived from customer devices used in connecon with procedures in cardiovascular, peripheral vascular, neurovascular, structural heart and other applicaons. As a result, our business is suscepble to adverse trends in procedures. We may also be subject to adverse trends in speciﬁc markets such as the cardiovascular industry, including declines in procedures using our customers’ products as well as declines in average selling prices from which we earn royales. Further, some of our performance coang technology customers may consider the vascular intervenon products that we sell directly to healthcare providers to be compeve with their products. Our success will depend, in part, on our ability to retain exisng performance coangs technology customers and to aract new licensees, to enter into agreements for addional applicaons with exisng licensees, and to develop technologies for use in new applicaons. There can be no assurance that we will be able to idenfy, develop and adapt our technologies for new applicaons in a mely and cost-eﬀecve manner; that new license agreements will be executed on terms favorable to us; that new applicaons will be accepted by customers in our target markets; or that products incorporang newly licensed technology, including new applicaons, will gain regulatory approval, be commercialized or gain market acceptance. Delays or failures in these eﬀorts could have an adverse eﬀect on our business, ﬁnancial condion and operang results. In addion, we cannot be sure that exisng or potenal customers will not avoid using our performance coang technologies because they perceive our vascular intervenon products to be a compeve threat, which could have an adverse eﬀect on our business, ﬁnancial condion and operang results. Our success depends on our ability to eﬀecvely develop and market our products against those of our competors. We operate in highly compeve and quickly evolving ﬁelds, and new developments are expected to connue at a rapid pace. Our success depends, in part, upon our ability to maintain compeve posions in the development of technologies and products in the ﬁelds of surface modiﬁcaon, device drug delivery, medical device products and diagnoscs. Our performance coang technologies compete with technologies developed by a number of other companies. In addion, many medical device manufacturers have developed, are engaged in eﬀorts to develop, or through common ownership are or may become aﬃliates of companies that have developed, performance coang technologies for use on their own or aﬃliates’ products, parcularly in the area of drug delivery. With respect to commercializaon of our vascular intervenon medical device products, we have faced, and expect to connue to face, compeve pressures, including pricing pressure, from larger OEM suppliers, as well as larger medical device companies that produce similar products. Some of our exisng and potenal competors (especially medical device manufacturers pursuing coang soluons through their own R&D eﬀorts) have greater ﬁnancial and technical resources, as well as producon and markeng capabilies, than us. Further, even if we are successful in our plans to develop new medical device products, the commercializaon of 21 TABLE OF CONTENTS these products may be dependent upon a commercial partner to eﬀecvely market and sell our products to end users. Competors may succeed in developing compeng technologies or obtaining governmental approval for products before us. Products incorporang our competors’ technologies may gain market acceptance more rapidly than products using our technologies. Furthermore, there can be no assurance that new products or technologies developed by others, or the emergence of new industry standards, will not render our products or technologies or licensees’ products incorporang our technologies uncompeve or obsolete. Any new technologies that make our performance coangs, medical device plaorms or In Vitro Diagnoscs technologies less compeve or obsolete would have a material adverse eﬀect on our business, ﬁnancial condion and results of operaons. Compeon in the diagnoscs market is highly fragmented, and in the product lines in which we compete, we face an array of competors ranging from large manufacturers with mulple business lines to small manufacturers that oﬀer a limited selecon of products. Some of our competors have substanally more capital resources, markeng experience, R&D resources and producon facilies than we do. We may not be successful in implemenng our vascular intervenon product development and commercializaon strategy. Since ﬁscal 2013, we have been focused on a key growth strategy to develop and commercialize vascular intervenon products. Our aim is to provide customers with highly diﬀerenated products that address unmet clinical needs. To date, we have commercialized our vascular intervenon products through collaboraons with other medical device companies and through our own direct sales channel in the United States. We may seek to expand the commercializaon of these products through exisng customers, third-party distributors, or other distribuon channels. Successfully implemenng our vascular intervenon product strategy places substanal demands on our resources and requires, among other things: • • • • • • • • maintenance and enhancement of our medical device R&D capabilies, including those needed to support the clinical evaluaon and regulatory approval for our vascular intervenon products; eﬀecve coordinaon and integraon of our research facilies and teams, parcularly those located in our product development facility in Minnesota and our Irish operaons; successful hiring, training, and retenon of personnel; eﬀecve management of a business geographically located both in the U.S. and Ireland; eﬀecve commercializaon of our products, including through strategic partnerships with our medical device customers, third-party distributors, and direct sales; commitment from our medical device customers to market our products eﬀecvely or to devote resources necessary to provide eﬀecve sales; suﬃcient liquidity to support substanal investments in working capital, R&D, and selling, general and administrave (“SG&A”) resources required to make our strategy successful; and increased sales, markeng, ﬁeld clinical support, and sales-related acvies. There is no assurance that we will be able to successfully implement our vascular intervenon product strategy, which could negavely impact our ability to realize an acceptable return on the investments we are making in connecon with this strategy and may result in an adverse impact on our business and ﬁnancial results. We ancipate that increased operang expenses related to the development and direct-sale commercializaon of medical device products will have an adverse impact on our near-term operang results and ﬁnancial posion, and they may not be eﬀecve. In ﬁscal 2022, we established a ﬁeld sales team to sell our radial access and thrombectomy medical device products directly to healthcare providers in the United States. Our SG&A expenses increased by 53% in ﬁscal 2022, over the prior year, primarily due to personnel and other investments in our direct sales iniaves. We currently expect SG&A expense to increase further in ﬁscal 2023 reﬂecng the full-year impact of direct-sales and support personnel who were hired throughout ﬁscal 2022. In addion, our R&D expense increased by 8% in ﬁscal 2022, over the prior year, parally due to increases in staﬃng levels and expenses related to our medical device products. Because we expect the increased operang expenses related to direct sales of our medical device products to exceed any related increases in revenues in ﬁscal 2023, we ancipate that the increased expenses will adversely impact our operang results and cash ﬂow during the year, which is likely to have an adverse eﬀect on our ﬁnancial posion. Accordingly, we may seek addional sources of funds, including addional borrowing against our credit facility, to fund our connued investment in the development and direct sale of our medical device products. Such funds may not be available on favorable terms, if at all. In addion to the operang expenses associated with product development and direct-sale commercializaon acvies, such acvies are subject to risks of failure that are inherent in the development and commercializaon of new medical technologies or products 22 TABLE OF CONTENTS and establishment of a new sales force. There can be no assurance that we will be successful in developing new technologies or products, or in commercializing any such technologies or products through direct sales, or otherwise. Even if we are successful in developing and commercializing new technologies or products, there can be no assurance that gross proﬁts from their sales will exceed our operang expenses related to their development and commercializaon. Our credit agreement contains covenants that restrict our business and ﬁnancing acvies. All of our assets secure our obligaons under the credit agreement and may be subject to foreclosure. On October 14, 2022, we entered into a secured revolving credit facility and secured term loan facilies pursuant to a Credit, Security and Guaranty Agreement (the “MidCap Credit Agreement”) with Mid Cap Funding IV Trust, as agent, and MidCap Financial Trust, as term loan servicer and the lenders from me to me party thereto (together “MidCap”). The MidCap Credit Agreement provides for availability under a secured revolving line of credit of up to $25 million, which may be drawn upon unl maturity, subject to a borrowing base, and up to $100 million ($25 million of which is at the sole discreon of MidCap) in term loans, which may be drawn upon in increments of at least $10 million unl December 31, 2024. The line of credit and term loans mature on October 1, 2027. We borrowed $30 million upon the closing of the credit facility, consisng of $5 million drawn on the line of credit and $25 million of term loans. The MidCap Credit Agreement contains covenants that limit our ability to engage in certain transacons. Subject to limited excepons, these covenants limit our ability to, among other things: • • • • • • • create, incur, assume or permit to exist any addional indebtedness, or create, incur, allow or permit to exist any addional liens; enter into any amendment or other modiﬁcaon of certain agreements; eﬀect certain changes in our business, ﬁscal year, management, enty name or business locaons; liquidate or dissolve, merge with or into, or consolidate with, any other company; pay cash dividends on, make any other distribuons in respect of, or redeem, rere or repurchase, any shares of our capital stock; make certain investments, other than limited permied acquisions; and enter into transacons with our aﬃliates. These provisions impose signiﬁcant operang and ﬁnancial restricons on us and may limit our ability to compete eﬀecvely, take advantage of new business opportunies, or take other acons that may be in our, or our shareholders’, best interests. In addion to the other covenants under the MidCap Credit Agreement, we must maintain minimum core net revenue levels tested quarterly if term loans exceed $25.0 million. The MidCap Credit Agreement contains customary indemniﬁcaon obligaons and customary events of default, including, among other things: • non-payment; • breach of warranty; • non-performance of covenants and obligaons; • default on other indebtedness; • certain judgments; • change of control; • bankruptcy and insolvency; • impairment of security; • regulatory maers; and • material adverse eﬀect. Our obligaons under the MidCap Credit Agreement are secured by all our exisng and future acquired assets, including intellectual property and real estate. Our inability to comply with any of the provisions of the MidCap Credit Agreement could result in a default under it. If such a default occurs, the lenders may elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable, and it would have the right to terminate any commitments to provide further funds. If we are unable to repay outstanding borrowings when due, the lender also has the right under the MidCap Credit Agreement to proceed against the collateral granted to it to secure the indebtedness under the MidCap Credit Agreement. The occurrence of any of these events could have a material adverse eﬀect on our business, ﬁnancial condion, results of operaons and liquidity. We expect our interest expense to increase, and we may draw on our term loan availability to preserve our access to capital, both of which may adversely impact our ﬁnancial results. In our ﬁscal 2022, we incurred approximately $0.6 million of interest expense on our outstanding debt of $10 million with our prior lender, based on a weighted average annual interest rate on the debt of 3.96% for the year. As of October 14, 2022, we borrowed $5 23 TABLE OF CONTENTS million on our revolving credit line with MidCap at an annual interest rate equal to 3.00% plus the greater of Term SOFR (as deﬁned in the MidCap Credit Agreement) or 1.50%, which represented an annual interest rate of 6.04% as of such date. We also borrowed $25 million of term loans with MidCap as of October 14, 2022. We entered into a ﬁve-year interest rate swap transacon on October 14, 2022 with Wells Fargo Bank, N.A. that ﬁxed the annual interest rate on the $25 million of term loans at 10.205%. The combinaon of greater outstanding debt and higher interest rates will cause our interest expense to increase in our ﬁscal 2023 and beyond, which will adversely impact our cash ﬂow and ﬁnancial results. Under the MidCap Credit Agreement, we may borrow up to an addional $75 million ($25 million of which is at the sole discreon of MidCap) in term loans, which may be drawn upon in increments of at least $10 million prior to December 31, 2024. Since we cannot draw upon the term loans between December 31, 2024 and when they mature on October 1, 2027, we may, in order to preserve our access to this source of capital, elect to draw upon the term loans prior to when we would need the proceeds to fund our operaons. Such borrowing may cause our interest expense to increase further and adversely impact our ﬁnancial results and cash ﬂow aer such borrowing. We may seek to prepay our borrowings under the MidCap Credit Agreement before its maturity, which would subject us to early terminaon fees and may lead us to raise capital on unfavorable terms. Subject to certain limitaons, the term loans under our MidCap Credit Agreement have a prepayment fee for payments made prior to the maturity date equal to 3.0% of the prepaid principal amount for the ﬁrst year following the closing date of the MidCap Credit Agreement, 2.0% of the prepaid principal amount for the second year following the closing date, and 1.0% of the prepaid principal amount for the third year following the closing date and thereaer. In addion, if the revolving credit facility under the MidCap Credit Agreement is terminated in whole or in part prior to the maturity date, we must pay a prepayment fee equal to 3.0% of the terminated commitment amount for the ﬁrst year following the closing date of the MidCap Credit Agreement, 2.0% of the terminated commitment amount for the second year following the closing date and 1.0% of the terminated commitment amount for the third year following the closing date and thereaer. We also are required to pay a full exit fee at the me of maturity or full prepayment equal to 2.5% of the aggregate principal amount of the term loans made pursuant to the MidCap Credit Agreement and a paral exit fee at the me of any paral prepayment event equal to 2.5% of the amount prepaid. To obtain more favorable interest rates or credit terms, or for other ﬁnancial or strategic reasons, we may seek to prepay our borrowings under the MidCap Credit Agreement. To do so, we may seek to raise addional capital through equity oﬀerings or debt ﬁnancings and such addional ﬁnancing may not be available to us on acceptable terms, or at all. Further, any addional equity or debt ﬁnancing transacon may contain terms that are not favorable to us or our shareholders. For example, if we raise funds by issuing equity or equity-linked securies, the issuance of such securies could result in diluon to our shareholders. Any equity securies issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. Further, the issuance of addional equity securies by us, or the possibility of such issuance, may cause the market price of our common stock to decline. In addion, the terms of debt securies issued or borrowings could impose signiﬁcant restricons on our operaons including restricve covenants, such as limitaons on our ability to, among other things, dispose of assets, eﬀect certain mergers, incur debt, grant liens, pay dividends and distribuons on capital stock, make investments and acquisions, and enter into transacons with aﬃliates, and other operang restricons that could adversely aﬀect our ability to conduct our business. If we enter into asset transacons, collaboraons or licensing arrangements to raise capital, we may be required to accept unfavorable terms, such as the relinquishment or licensing of certain technologies or products that we otherwise might seek to develop or commercialize ourselves, or reserve for future potenal arrangements when we might otherwise be able to achieve more favorable terms. Failure to successfully commercialize the Pounce™ venous thrombectomy product obtained in the acquision of Vetex Medical Limited may limit our growth and adversely impact our operang results, balance sheet, cash ﬂows and liquidity. On July 2, 2021, we completed the acquision of all outstanding shares of Vetex Medical Limited (“Vetex”). Vetex holds a Food and Drug Administraon 510(k) clearance, E.U. CE Mark, and porolio of patents related to the Pounce venous mechanical thrombectomy catheter product (the “Pounce Venous Thrombectomy Catheter”). However, Vetex had not iniated commercial producon or established commercializaon of the product prior to the acquision. We acquired Vetex with an upfront cash payment of $39.9 million and are obligated to pay addional installments totaling $3.5 million in ﬁscal 2024 through ﬁscal 2027. An addional $3.5 million in payments are conngent upon the achievement of certain product development and regulatory milestones within a conngency period ending in ﬁscal 2027. As of the acquision date, we recognized $28 million in intangible assets, $3 million in deferred tax liabilies and $19 million in goodwill related to the acquision. We began limited market evaluaons of the Pounce Venous Thrombectomy Catheter in June of 2022. For us to realize the ancipated beneﬁts of the Vetex acquision, we must successfully establish commercial manufacturing for the Pounce Venous Thrombectomy Catheter, and successfully develop and execute a commercializaon strategy for the product. If we are unsuccessful, or encounter delays or cost overruns, in establishing commercial manufacturing for the Pounce Venous Thrombectomy Catheter, or if potenal customers do not adopt the Pounce Venous Thrombectomy Catheter at suﬃcient levels to make it a commercial success, our operang 24 TABLE OF CONTENTS results, cash ﬂows and liquidity may be adversely impacted. Further, the goodwill and intangible assets that we recognized related to the acquision may become impaired if the ﬁnancial performance of the Pounce Venous Thrombectomy Catheter does not meet our expectaons, which could negavely aﬀect our balance sheet. Concerns over a study that reported a mortality signal associated with paclitaxel-coated products may adversely aﬀect market acceptance of our paclitaxel-coated DCB products and our potenal revenues from them. On March 15, 2019, the FDA issued a communicaon (the “FDA communicaon”) to healthcare providers about the potenal for increased long-term mortality aer use of paclitaxel-coated balloons and paclitaxel-elung stents (collecvely “paclitaxel-coated products”) to treat PAD in the femoropopliteal artery. The FDA communicaon updated a previous noﬁcaon from the FDA on the same topic, which was in response to meta-analysis of randomized trials published in the Journal of the American Heart Associaon in December 2018. Subsequently, in August 2019, the FDA issued an update on the use of paclitaxel devices to treat PAD that recommended that physicians discuss the risks and beneﬁts of all available treatment opons with their paents. The FDA communicaon and the potenal long-term mortality signal related to the use of paclitaxel-coated devices may adversely aﬀect market acceptance of our paclitaxel-coated DCB products and the revenue we may realize from the commercializaon of the SurVeil DCB if the FDA grants premarket approval (“PMA”) for the product. Failure to eﬀecvely ulize our limited ability to make acquisions, to accurately ﬁnancially model the impact of acquisions, or to integrate acquired businesses or technologies into our operaons successfully may limit our growth and adversely impact operang results, cash ﬂows and liquidity. The MidCap Credit Agreement deﬁnes acquisions broadly and limits our ability to pay for acquisions to (i) an aggregate of $10 million in cash consideraon over the ﬁve-year term of the MidCap Credit Agreement, and (ii) consideraon consisng of noncash equity interests. Acquisions of complementary businesses or technologies can be important potenal catalysts for our revenue growth. Our limited ability to make cash acquisions may prevent us from making acquisions that would enhance our business and revenues. It also may cause us to use equity interests as consideraon for larger acquisions, which would dilute the equity interest of our exisng shareholders. Our idenﬁcaon of suitable acquision candidates involves risks inherent in assessing the technology, value, strengths, weaknesses, overall risks and proﬁtability, if any, of acquision candidates. We may not be able to idenfy suitable acquision candidates, or we may be unable to execute acquisions due to compeon from buyers with more resources. Our ability to realize the ancipated beneﬁts of a potenal acquision depends, in part, on the accuracy of our ﬁnancial model of the ming and magnitude of cash ﬂows, expenses and revenues related to the acquired business. If the expectaons reﬂected in our ﬁnancial models for acquisions are not realized, our operang results, cash ﬂows and liquidity may be materially adversely aﬀected. The process of integrang acquired businesses into our operaons could pose numerous and signiﬁcant risks. In addion, future acquisions may cause large one-me expenses or create goodwill or other intangible assets that could result in future signiﬁcant asset impairment charges. In addion, if we acquire enes that have not yet commercialized products, but rather are developing technologies for future commercializaon, our earnings per share may ﬂuctuate as we expend signiﬁcant funds for connued R&D eﬀorts necessary to commercialize such acquired technology. Our failure to expand our management systems and controls to support ancipated growth or integrate acquisions could seriously harm our operang results and business. Our operaons are expanding, and we expect this trend to connue as we execute our business strategy. Execung our business strategy has placed signiﬁcant demands on management and our administrave, development, operaonal, informaon technology, manufacturing, ﬁnancial and personnel resources. Accordingly, our future operang results will depend on the ability of our oﬃcers and other key employees to connue to implement and improve our operaonal, development, customer support and ﬁnancial control systems, and eﬀecvely expand, train and manage our employee base. Otherwise, we may not be able to manage our growth successfully. Goodwill or other assets on our balance sheet may become impaired or require valuaon reserves, which could have a material adverse eﬀect on our operang results. As of September 30, 2022, we had $68.9 million of goodwill and intangible assets on our consolidated balance sheet. As required by the accounng guidance, we evaluate at least annually the potenal impairment of our goodwill. Tesng for impairment of goodwill involves the determinaon of the fair value of our reporng units. The esmaon of fair values involves a high degree of judgment and subjecvity in the assumpons used. We also evaluate other assets on our balance sheet, including deﬁnite-lived intangible assets, whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Our esmate of the fair value of the assets may be based on fair value appraisals or discounted cash ﬂow models using various inputs. Future impairment charges could materially adversely aﬀect our results of operaons. 25 TABLE OF CONTENTS In the fourth quarter of our ﬁscal 2022, we recognized $10.2 million of non-cash income tax expense related to the establishment of a full valuaon reserve against our U.S. deferred tax assets. While we do not have any unreserved U.S. deferred tax assets remaining on our balance sheet, we do have signiﬁcant amounts of goodwill and other intangible assets on our balance sheet, which could be subject to future impairment charges. The COVID-19 pandemic had adverse eﬀects on our business and results of operaons, and it or other global health concerns could seriously harm our business, results of operaons, and ﬁnancial condion. Early in the COVID-19 pandemic, U.S. healthcare providers limited non-emergent elecve medical procedures other than high acuity treatments in order to conserve personal protecve equipment and limit exposure to COVID-19. The reducon in elecve medical procedures resulted in reducons in the use of certain medical devices, which in turn reduced the licensing revenue that we recognized from impacted devices that incorporate our technologies. Throughout the pandemic, we incurred addional operang expenses to facilitate our employees working from home when possible, provide personal protecve equipment, enhance cleaning and sanitaon procedures, and modify workspaces to reduce the potenal for disease transmission. We also suspended operaons for limited periods in limited producon work areas when employees were idenﬁed as having COVID-19. We cannot predict the duraon or scope of the COVID-19 pandemic or whether or when other global health concerns may emerge. In response to COVID-19 resurgences or other global health concerns, we, governments, businesses, and healthcare providers may take acons that could have material adverse eﬀects on our business, results of operaons, cash ﬂows, ﬁnancial condion, and capital investments. Our business could be adversely aﬀected by global economic condions. Prolonged economic uncertaines or downturns could adversely aﬀect our business, ﬁnancial condion, and results of operaons. Negave condions in the general economy in either the United States or abroad, including condions resulng from ﬁnancial and credit market ﬂuctuaons, increased inﬂaon and interest rates, changes in economic policy, trade uncertainty, including changes in tariﬀs, sancons, internaonal treaes, and other trade restricons, the occurrence of a natural disaster or global public health crisis, such as the COVID-19 pandemic, or armed conﬂicts, such as between Russia and Ukraine, impact corporate spending in general and negavely aﬀect the growth of our business. These condions could make it diﬃcult for us and our customers to forecast and plan future business acvies accurately and could cause our customers to reevaluate or delay their decisions to license our technologies, purchase our products or enter into R&D arrangements with us. A substanal downturn aﬀecng our customers may cause them to react to worsening condions by reducing their capital expenditures in general or by speciﬁcally reducing their spending on medical devices and technologies. We cannot predict the ming, strength, or duraon of any economic slowdown, downturn, instability, or recovery, generally or within any parcular industry or geography. Any downturn of the general economy or industries in which we operate would adversely aﬀect our business, ﬁnancial condion, and results of operaons. We recognize revenue in accordance with complex accounng standards, and changes in circumstances or interpretaons may lead to accounng adjustments. Failure to implement these standards properly might impact the eﬀecveness of our internal control over ﬁnancial reporng or impact the reliability of our ﬁnancial reporng. Our revenue recognion policies involve applicaon of complex accounng standards, including the determinaon of when control is transferred to the customer and the allocaon of the transacon price to mulple performance obligaons. Our compliance with such accounng standards oen involves management’s judgment regarding whether the criteria set forth in the standards have been met such that we can recognize as revenue the amounts that we expect to receive as payment for our products or services. We base our judgments on assumpons that we believe to be reasonable under the circumstances. However, these judgments, or the assumpons underlying them, may change over me. In addion, the SEC or the Financial Accounng Standards Board (“FASB”) may issue new posions or revised guidance on the treatment of complex accounng maers. Changes in circumstances or third-party guidance could cause our judgments to change with respect to our interpretaons of these complex standards, and transacons recorded, including revenue recognized, for one or more prior reporng periods, could be adversely aﬀected. In addion, failure to implement these standards properly could impact the eﬀecveness of our internal control over ﬁnancial reporng or impact the reliability of our ﬁnancial reporng, which could cause investors to lose conﬁdence in our reported ﬁnancial informaon and have a negave eﬀect on the trading price of our stock. Our business includes foreign operaons, which exposes us to certain risks related to ﬂuctuaons in U.S. dollar and foreign currency exchange rates. We report our consolidated ﬁnancial statements in U.S. dollars. In a period where the U.S. dollar is strengthening or weakening relave to 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 otherwise constant currency exchange rate environment. As our foreign operaons expand, the eﬀects may become material to our consolidated ﬁnancial statements. 26 TABLE OF CONTENTS 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 could cause our gross proﬁt percentage to ﬂuctuate or decline in the future. These factors, together with the scale-up of our manufacturing operaons, parcularly in Ireland, adversely aﬀected our gross margin percentage for the last ﬁscal year and these factors will likely connue to aﬀect our gross proﬁt percentage in ﬁscal 2023 and beyond. RISKS RELATING TO OUR OPERATIONS AND RELIANCE ON THIRD PARTIES We rely on third pares to market, distribute and sell most products incorporang our coang and device technologies, as well as certain of our vascular intervenon products. A principal element of our business strategy is to enter into licensing arrangements with medical device and other companies that manufacture products incorporang our technologies. We derived 36%, 45%, and 43% of our revenue from royales and license fees (including related to our SurVeil DCB) under such licensing arrangements in ﬁscal 2022, 2021 and 2020, respecvely. The revenue that we derive from such arrangements depends upon our ability, or our licensees’ ability, to successfully develop, obtain regulatory approval for, manufacture (if applicable), market, and sell products incorporang our technologies. Many of these factors are outside of our control. Our failure, or the failure of our licensees, to meet these requirements could have a material adverse eﬀect on our business, ﬁnancial condion and results of operaons. Addionally, a licensee could modify their product in such a way that it no longer incorporates our technology. Moreover, under our standard license agreements, licensees can terminate the license for any reason upon 90 days’ prior wrien noce. Exisng and potenal licensees have no obligaon to deal exclusively with us and may pursue parallel development or licensing of compeng technologies on their own or with third pares. A decision by a licensee to terminate its relaonship with us could have a material adverse eﬀect on our business, ﬁnancial condion and results of operaons. In ﬁscal 2018, we entered into an agreement with Abbo whereby Abbo will have exclusive worldwide commercializaon rights for the SurVeil DCB. Upon receipt of U.S. regulatory approval for the SurVeil DCB, Abbo has the right to purchase commercial units from us and we will realize revenue from product sales to Abbo at an agreed-upon transfer price, as well as a share of net proﬁts resulng from third-party product sales by Abbo. Upon receipt of U.S. regulatory approval, we will rely on Abbo to eﬀecvely market and sell the SurVeil DCB. If Abbo is unable or unwilling to eﬀecvely market and sell the SurVeil DCB, it could have a have material adverse eﬀect on our business, ﬁnancial condion and results of operaons. We have not produced our SurVeil DCB on a commercial scale. If the FDA grants PMA for the product, we may encounter challenges in scaling up our producon of it, which could have an adverse impact on our operang results. If the FDA grants PMA of our SurVeil DCB, we expect Abbo to launch commercializaon of the product in the U.S. We will be responsible for manufacturing commercial quanes of the product. The SurVeil DCB is a highly complicated drug/device combinaon product that we have never manufactured on a commercial scale. It is not uncommon for there to be low yields, ineﬃciencies, or producon issues when the manufacturing processes for a complicated product are ramped up to commercial scale. Any producon issues related to our SurVeil DCB could have material adverse eﬀects on our revenues and operang results. A poron of our IVD business relies on distribuon agreements and relaonships with various third pares, and any adverse change in those relaonships 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 competors’ products. If they favor our competors’ products for any reason, they may fail to market our products as eﬀecvely or to devote resources necessary to provide signiﬁcant sales, which would cause our results to suﬀer. Addionally, we serve as the exclusive distributor in the U.S., Canada and Puerto Rico for DIARECT GmbH (Part of BBI Soluons) for its recombinant and nave angens. The success of these arrangements with these third pares depends, in part, on the connued adherence to the terms of our agreements with them. Any disrupon in these arrangements will adversely aﬀect our ﬁnancial condion and results of operaons. We rely on our customers to accurately report and make payments under our license agreements with them. We rely on our performance coangs technology customers to determine whether the products that they sell are royalty-bearing and, if so, to report and pay the amount of royales owed to us under our agreements with them. The majority of our performance coangs technology license agreements with our customers give us the right to audit their records to verify the accuracy of their reports to us. However, these audits can be expensive, me-consuming and possibly detrimental to our ongoing business relaonships with our customers. Inaccuracies in customer royalty reports have resulted in, and could result in, addional overpayments or underpayments of royales, which could have a material adverse eﬀect on our business, ﬁnancial condion and results of operaons. 27 TABLE OF CONTENTS We currently have limited or no redundancy in our manufacturing facilies for certain products, and we may lose revenue and be unable to maintain our customer relaonships if we lose our producon capacity. We manufacture all of our performance coang reagents (and provide coang manufacturing services for certain customers) and our IVD products at one of our Eden Prairie, Minnesota facilies. We also manufacture balloon catheter products at our facility in Ballinasloe, Ireland and catheter-based medical devices in limited quanes in one of our facilies in Eden Prairie, Minnesota. If we receive the necessary regulatory approvals, we plan to manufacture our SurVeil DCB both in our Ireland facility and in our manufacturing facility in Eden Prairie, Minnesota. If our exisng producon facilies become incapable of manufacturing products for any reason, we may be unable to meet producon requirements, we may lose revenue and we may not be able to maintain our relaonships with our customers, including certain of our licensees. In addion, because most of our customers use our performance coang reagents to manufacture their own products that generate royalty revenue for us, failure by us to supply these reagents could result in decreased royalty revenue, as well as decreased revenue from our performance coang product sales. Without our exisng producon facilies, we would have no other means of manufacturing products unl we were able to restore the manufacturing capability at these facilies or develop one or more alternave manufacturing facilies. Although we carry business interrupon insurance to cover lost revenue and proﬁts in an amount we consider adequate, this insurance does not cover all possible situaons. In addion, our business interrupon insurance would not compensate us for the loss of opportunity and potenal adverse impact on relaons with our exisng customers resulng from our inability to produce products for them. We may face product liability claims related to parcipaon in clinical trials or the use or misuse of our products. The development and sale of medical devices and component products involves inherent risks of product liability claims. For medical device products that incorporate our performance coang technologies, most of the licenses provide us with indemniﬁcaon against such claims. However, there can be no assurance that product liability claims will not be ﬁled against us for such products, or for medical device products that we manufacture as part of our vascular intervenon product strategy, that pares indemnifying us will have the ﬁnancial ability to honor their indemniﬁcaon obligaons, or that such manufacturers will not seek indemniﬁcaon or other relief from us for any such claims. Any product liability claims, with or without merit, could result in costly ligaon, reduced sales, signiﬁcant liabilies and diversion of our management’s me, aenon and resources. We have obtained a level of liability insurance coverage that we believe is appropriate to our acvies, however, we cannot be sure that our product liability insurance coverage is adequate or that it will connue to be available to us on acceptable 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 or devices incorporang our technologies because of alleged defects, whether such recall is instuted by us, by a customer, or is required by a regulatory agency. A product liability claim, recall or other claim with respect to uninsured liabilies, or for amounts in excess of insured liabilies, could have a material adverse eﬀect on our business, ﬁnancial condion and results of operaons. Our revenue will be harmed if we experience disrupons in our supply chain. Supply chains across many industries have experienced delays and disrupons due to a wide variety of factors including labor and materials shortages and a lack of transportaon capacity. A disrupon in the supply of even a minor competent of a product can have a major impact on the producon and delivery of that product. Further, we currently purchase some of the components we use to manufacture reagents from sole suppliers. If any of our suppliers becomes unwilling to supply components to us, experiences an interrupon in its producon, or is otherwise unable to provide us, on a mely basis or at all, with suﬃcient material to manufacture our reagents and other products, we will experience producon interrupons. If we lose our sole supplier of any parcular reagent component or are otherwise unable to procure all components required for our reagent manufacturing for an extended period of me, we may lose the ability to manufacture the reagents our customers require to commercialize products incorporang our technology. This could result in lost royales and product sales, which would harm our ﬁnancial results. Adding suppliers to our approved vendor list may require signiﬁcant me and resources. We rounely aempt to maintain mulple suppliers of each of our signiﬁcant materials, so we will have alternave suppliers, if necessary. However, if the number of suppliers of a material is reduced, or if we are otherwise unable to obtain our material requirements on a mely basis and on favorable terms, our operaons may be harmed. We depend upon key personnel and may not be able to aract or retain qualiﬁed personnel in the future. Our success depends upon our ability to retain and aract highly qualiﬁed management and technical personnel. We face intense compeon for such qualiﬁed personnel. We do not maintain key person insurance, and we generally do not enter into employment agreements, except with certain execuve oﬃcers. Although we have non-compete agreements with most employees, there can be no assurance that such agreements will be enforceable. The loss of the services of one or more key employees or the failure to aract and retain addional qualiﬁed personnel could have a material adverse eﬀect on our business, ﬁnancial condion and results of operaons. 28 TABLE OF CONTENTS Security breaches and other disrupons could compromise our informaon and expose us to liability, which would cause our business and reputaon to suﬀer. We collect and store sensive data, including intellectual property, our proprietary business informaon and that of our customers, suppliers and business partners, and personally idenﬁable informaon of our customers and employees, on our networks. The secure maintenance of this informaon is crical to our operaons and business strategy, and our customers expect that we will securely maintain their informaon. Despite our security measures, our informaon technology and infrastructure may be vulnerable to aacks by hackers resulng from employee error, malfeasance or other disrupons. Any informaon technology breach could compromise our networks and the informaon stored on them could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of informaon could result in legal claims or proceedings, liability under personal privacy laws and regulatory penales, disrupt our operaons and the services that we provide to our customers, damage our reputaon and cause a loss of conﬁdence in our products and services, any of which could adversely aﬀect our business and compeve posion. Our informaon systems, and those of third-party suppliers with whom we contract, require an ongoing commitment of signiﬁcant resources to maintain, protect and enhance exisng systems and develop new systems to keep pace with connuing changes in informaon technology, evolving systems and regulatory standards, and changing threats. These systems could be vulnerable to service interrupons or to security breaches from inadvertent or intenonal acons by our employees, third-party vendors and/or business partners, or from cyber-aacks by malicious third pares. We also are subject to other cyber- aacks, including state-sponsored cyber-aacks, industrial espionage, insider threats, computer denial-of-service aacks, computer viruses, ransomware and other malware, payment fraud or other cyber incidents. Any signiﬁcant breakdown, intrusion, breach, interrupon, corrupon or destrucon of these systems could have a material adverse eﬀect on our business and reputaon and could materially adversely aﬀect our results of operaons and ﬁnancial condion. RISKS RELATING TO OUR INTELLECTUAL PROPERTY We may not be able to obtain, maintain or protect proprietary rights necessary for the commercializaon of our technologies. Our success depends, in large part, on our ability to obtain and maintain patents and trade secrets. We have been granted U.S. and foreign patents and have U.S. and foreign patent applicaons pending related to our proprietary technologies. There can be no assurance that any pending patent applicaon will be approved, that we will develop addional proprietary technologies that are patentable, that any patents issued will provide us with compeve advantages or will not be challenged or invalidated by third pares, that the patents of others will not prevent the commercializaon of products incorporang our technologies, or that others will not independently develop similar technologies or design around our patents. Furthermore, because we generate a signiﬁcant amount of our revenue through licensing arrangements, the loss or expiraon of patent protecon for our licensed technologies will result in a reducon of the revenue derived from these arrangements, which may have a material adverse eﬀect on our business, cash ﬂow, results of operaons, ﬁnancial posion and prospects. We may become involved in expensive and unpredictable patent ligaon or other intellectual property proceedings which could result in liability for damages or impair our development and commercializaon eﬀorts. Our commercial success also will depend, in part, on our ability to avoid infringing patent or other intellectual property rights of third pares. There has been substanal ligaon regarding patent and other intellectual property rights in the medical device and pharmaceucal industries, and intellectual property ligaon may be used against us as a means of gaining a compeve advantage. Intellectual property ligaon is complex, me consuming and expensive, and the outcome of such ligaon is diﬃcult to 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 our products or processes, obtain licenses from others, which we may not be able to do on commercially reasonable terms, if at all, or cease commercializaon of our products and processes. Any of these outcomes could have a material adverse eﬀect on our business, ﬁnancial condion and results of operaons. Patent ligaon or certain other administrave proceedings may also be necessary to enforce our patents or to determine the scope and validity of third- party proprietary rights. These acvies could result in substanal cost to us, even if the eventual outcome is favorable to us. An adverse outcome from any such ligaon or interference proceeding could subject us to signiﬁcant liabilies to third pares, require disputed rights to be licensed from third pares or require us to cease using our technology. Any acon to defend or prosecute intellectual property would be costly and result in signiﬁcant diversion of the eﬀorts of our management and technical personnel, regardless of outcome, and could have a material adverse eﬀect on our business, ﬁnancial condion and results of operaons. If we are unable to keep our trade secrets conﬁdenal, our technology and proprietary informaon may be used by others to compete against us. We rely signiﬁcantly upon proprietary technology, informaon, processes and know-how that are not subject to patent protecon. We seek to protect this informaon through trade secret or conﬁdenality agreements with our employees, consultants, potenal licensees, or other pares as well as through other security measures. There can be no assurance that these agreements or any security 29 TABLE OF CONTENTS measure will provide meaningful protecon for our un-patented proprietary informaon. In addion, our trade secrets may otherwise become known or be independently developed by competors. If we determine that our proprietary rights have been misappropriated, we may seek to enforce our rights which would draw upon our ﬁnancial resources and divert the me and eﬀorts of our management, and could have a material adverse eﬀect on our business, ﬁnancial condion and results of operaons. If we are unable to convince our customers to adopt our advanced generaon of hydrophilic coang technologies, our royalty revenue may decrease, and the expiraon of the patent family protecng this technology has and will connue to result in a reducon of the royalty revenue associated with exisng license agreements. In our Medical Device segment, we have licensed our PhotoLink hydrophilic technology to a number of our customers for use in a variety of medical device surface applicaons. We have several U.S. and internaonal issued patents and pending U.S. and internaonal patent applicaons protecng various aspects of these technologies, including composions, methods of manufacture, and methods of coang devices. The ancipated expiraon dates of the patents range from ﬁscal 2026 to 2039. These patents and patent applicaons represent disnct families, with each family generally covering a successive generaon of the technology, including improvements that enhance coang performance, manufacturability, or other important features desired by our customers. Our fourth-generaon PhotoLink technology was protected by a family of patents that expired in the ﬁrst quarter of ﬁscal 2020 in all countries where patent coverage existed for the technology, except in Japan, where the relevant patent expired in the ﬁrst quarter of ﬁscal 2021. Of the license agreements using our fourth-generaon technologies, most connue to generate royalty revenue beyond patent expiraon, but at a reduced royalty rate. While we are acvely working to encourage and support our customers’ adopon of our advanced generaons of our hydrophilic coang technology, there can be no assurance that they will do so, or that those customers that have adopted, or will adopt, our hydrophilic coang technology will sell products ulizing 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 of important 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 our business. In exchange for the rights granted to us under these agreements, we have agreed to meet certain research, development, commercializaon, sublicensing, royalty, indemniﬁcaon, insurance or other obligaons. If we or one of our licensees fails to comply with these obligaons set forth in the relevant agreement through which we have acquired rights, we may be unable to eﬀecvely use, license, or otherwise exploit the relevant intellectual property rights and may be deprived of current or future revenue that is associated with such intellectual property. RISKS RELATING TO CLINICAL AND REGULATORY MATTERS The FDA has requested addional data, and may connue to make such requests, in its review of the premarket approval applicaon for our SurVeil DCB, which may delay FDA acon on the applicaon and have an adverse impact on our operang results and cash ﬂows. In June 2021, we submied the fourth and ﬁnal module of the PMA applicaon to the FDA related to our SurVeil DCB. In its subsequent comments on the PMA applicaon, the FDA requested addional tesng data in order to evaluate the product and its unique technologies. In October 2022, we submied a complete response, including addional tesng data, to the FDA’s comments on our PMA applicaon for the SurVeil DCB. The FDA may request addional informaon, including test data, related to our most recent submission in support of the PMA applicaon. As we previously have disclosed, we expect to receive a $27 million milestone payment under the Abbo Agreement following FDA approval of our PMA applicaon, if it ulmately is granted. Further, we expect Abbo to begin commercializaon of the SurVeil DCB following such approval, if granted. There can be no assurance that the SurVeil DCB will receive FDA approval. If FDA approval of the SurVeil DCB is delayed or denied, our operang results and cash ﬂows may be materially adversely impacted. The development of new products and enhancement of exisng products requires signiﬁcant research and development and regulatory approvals, which may require clinical trials, all of which may be very expensive and me-consuming and may not result in commercially viable products. The development of new products and enhancement of exisng products requires signiﬁcant investment in research and development and regulatory approvals. Regulators may require successful clinical trials prior to granng approvals for new or enhanced products. There can be no assurance that any products now in development, or that we may seek to develop or reﬁne 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 to successfully compete in the markets in which we parcipate may be materially adversely impacted. A delay in the development or approval of new products and technologies may also adversely impact the ming of when these products contribute to our future revenue and earnings growth. 30 TABLE OF CONTENTS Delays in clinical studies are common and have many causes, and any signiﬁcant delay in clinical studies being conducted by us could result in delays in obtaining regulatory approvals and jeopardize the ability to proceed to commercializaon of our products. We have conducted clinical studies on DCB products, some of which are ongoing. We may conduct addional clinical studies on our DCB or other products. There are risks involved in such clinical studies, including that they may fail to enroll a suﬃcient number of paents for a variety of reasons or fail to be completed on schedule, if at all. Clinical studies for any of our products could be delayed or terminated for a variety of reasons, including, but not limited to: • • • • delays in reaching agreement with applicable regulatory authories on a clinical study design; issuance of publicaons or communicaons relang to the safety of certain medical devices, including studies and communicaons regarding the evaluaon of risks associated with paclitaxel-coated products, which resulted in a temporary pause in enrollment in our TRANSCEND clinical study in ﬁscal 2019; suspension or terminaon of a clinical study by us, the FDA or foreign regulatory authories due to adverse events or safety concerns relang to our product; and delays in recruing suitable paents willing to parcipate in a study, or delays in having paents complete parcipaon or return for post-treatment follow-up. If the iniaon or compleon of any of the ongoing or planned clinical studies for our products is delayed for any of the above or other reasons, the regulatory approval process would be delayed and the ability to commercialize and commence sales of our products could be materially harmed. Addionally, clinical study delays may allow our competors to bring products to market before we do, which could impair our ability to successfully commercialize our product candidates. Any of these events could have a material adverse eﬀect on our business, ﬁnancial condion and results of operaons. We cannot be sure that clinical studies of our products will be successful, or that their results will be adequate to obtain or maintain regulatory approvals. We cannot be sure that the endpoints or safety proﬁle of any clinical trial will be met. In addion, we cannot be sure that any clinical trial that is successful will support regulatory approval of the product subject to the trial. We may expend signiﬁcant ﬁnancial and human capital resources on clinical trials. If they fail to achieve their endpoints, or support regulatory approvals, it could have a material adverse eﬀect on our business, ﬁnancial condion and results of operaons. Healthcare policy changes may have a material adverse eﬀect on us. Healthcare costs have risen signiﬁcantly during the past decade. There have been and connue to be proposals by legislators, regulators and third-party payers to reduce healthcare expenditures. Certain proposals, if implemented, would impose limitaons on the prices our customers will be able to charge for our products, or the amounts of reimbursement available for their products from governmental agencies or third-party payers, or otherwise negavely impact pricing and reimbursement. Because a signiﬁcant poron of our revenue is currently derived from royales on products that constute a percentage of our customer’s product’s selling price, these limitaons could have an adverse eﬀect on our revenue. Healthcare reform connues to be a prominent polical topic. We cannot predict what healthcare programs and regulaons may ulmately be implemented at the federal or state level or the eﬀect of any future legislaon or regulaon in the U.S. or internaonally may have on our business. Vascular intervenon medical devices and other products incorporang our technologies are subject to increasing scruny and regulaons, including extensive approval/clearance processes and manufacturing requirements. Any adverse regulatory and/or enforcement acon (for us or our licensees) may materially aﬀect our ﬁnancial condion and business operaons. Our products and our business acvies are subject to complex regulatory regimes both in the U.S. and internaonally. Addionally, certain state governments and the federal government have enacted legislaon aimed at increasing transparency of industry interacons with healthcare providers. Any failure to comply with these legal and regulatory requirements could impact our business. In addion, we will connue to devote substanal human capital and ﬁnancial resources to further developing and implemenng policies, systems and processes to comply with enhanced legal and regulatory requirements, which may impact our business and results of operaons. We ancipate that governmental authories will connue to scrunize our industry closely, and that addional regulaon may increase compliance and legal costs, exposure to ligaon, and other adverse eﬀects to our operaons. To varying degrees, the FDA and comparable agencies outside the U.S. require us to comply with laws and regulaons governing the development, tesng, manufacturing, labeling, markeng and distribuon of our products. Our compliance with these laws and regulaons takes signiﬁcant human capital and ﬁnancial resources; involves stringent tesng and surveillance; involves aenon to any needed product improvements (such as modiﬁcaons, repairs, or replacements); and may include signiﬁcant limitaons of the uses of our products. 31 TABLE OF CONTENTS Changes in exisng regulaons or adopon of new governmental regulaons or policies could prevent or delay regulatory approval of products incorporang our technologies or subject us to addional regulaon. Failure or delay by us or our licensees in obtaining FDA, E.U., and other necessary regulatory approval or clearance, or the loss of previously obtained approvals, could have a material adverse eﬀect on our business, ﬁnancial condion and results of operaons. RISKS RELATING TO OUR SECURITIES Our stock price has been volale and may connue to be volale. The trading price of our common stock has been, and may connue to be, highly volale, in large part aributable to developments and circumstances related to factors idenﬁed in “Forward-looking Statements” and “Risk Factors.” Our common stock price may rise or fall sharply at any me based on announcement regarding regulatory acons, our operaons or our ﬁnancial performance; as a result of sales executed by signiﬁcant holders of our stock; because of short posions taken by investors from me to me in our stock; or due to factors unrelated to our performance, including industry-speciﬁc or general economic condions. In addion, in the past, stockholders have instuted securies class acon ligaon following periods of market volality. If we were to become involved in securies ligaon, it could subject us to substanal costs, divert resources and the aenon of management from our business and harm our business, results of operaons, ﬁnancial condion and reputaon. These factors may materially and adversely aﬀect the market price of our common stock. ITEM 1B. UNRESOLVED STAFF COMMENTS. None. ITEM 2. PROPERTIES. Our principal operaons are located in Eden Prairie, a suburb of Minneapolis, Minnesota, where we own a building that has approximately 64,000 square feet of space ulized by our Corporate, Medical Device and IVD reportable segments. We also own a 45,000 square foot building in Ballinasloe, Ireland dedicated to our Medical Device segment. We lease a warehouse in Eden Prairie through December 2025. We lease a 90,000 square foot facility in Eden Prairie through April 2028, which is primarily used by our Medical Device segment for operaons, R&D, and redundant manufacturing capacity. We lease oﬃce space in Galway, Ireland through April 2024 dedicated to our Medical Device segment. We own an undeveloped parcel of land adjacent to our principal facility in Eden Prairie, which we may use to accommodate our growth needs. The Midcap Credit Agreement requires that all of our owned real property, including the properes set forth above, be subject to mortgages securing our obligaons under the Midcap Credit Agreement. ITEM 3. LEGAL PROCEEDINGS. See the discussion of “Ligaon” in Note 2 to the consolidated ﬁnancial statements in “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference. ITEM 4. MINE SAFETY DISCLOSURES. Not Applicable. 32 TABLE OF CONTENTS PART II ITEM 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 Soluons, Inc. P.O. Box 1342 Brentwood, NY 11717 1-877-830-4936 According to the records of our transfer agent, as of November 18, 2022, there were 269 holders of record of our common stock. We have never declared or paid any dividends on our common stock. We currently intend to retain future earnings, if any, for the operaon and expansion of our business and to repurchase shares of our common stock under the repurchase authorizaon described below, if appropriate, and therefore we do not ancipate declaring or paying cash dividends in the foreseeable future. The declaraon and payment by Surmodics of future dividends, if any, on our common stock will be at the sole discreon of the Board of Directors and will depend on our ancipated earnings, ﬁnancial condion, capital requirements and other factors that the Board of Directors deems relevant. In addion, the MidCap Credit Agreement restricts our ability to pay dividends. On November 6, 2015, the Company’s Board of Directors authorized it to repurchase up to an addional $20.0 million (“ﬁscal 2016 authorizaon”) of the Company’s outstanding common stock in open-market purchases, privately negoated transacons, block trades, accelerated share repurchase (“ASR”) transacons, tender oﬀers or by any combinaon of such methods. The share repurchase program does not have a ﬁxed expiraon date. On November 5, 2014, the Company’s Board of Directors authorized it to repurchase up to $30.0 million (“ﬁscal 2015 authorizaon”) of the Company’s outstanding common stock in open-market purchases, privately negoated transacons, block trades, ASR transacons, tender oﬀers or by any combinaon of such methods. An aggregate of $20.0 million of the ﬁscal 2015 authorizaon was ulized in ﬁscal 2015, with an addional $4.7 million ulized in ﬁscal 2017. The share repurchase program does not have a ﬁxed expiraon date. The Company has an aggregate of $25.3 million available for future common stock purchases under the current authorizaons. The MidCap Credit Agreement restricts our ability to purchase our common stock. Issuer Repurchases of Equity Securies The following table presents the informaon with respect to purchases made by or on behalf of Surmodics, Inc. or any “aﬃliated purchaser” (as deﬁned in Rule 10b-18(a)(3) under the Securies Exchange Act of 1934), of our common stock during the fourth quarter of ﬁscal 2022: Total Number of Shares Purchased (1) Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Programs Maximum Dollar Value of Shares that May Yet Be Purchased Under the Programs Period: July 1 – 31, 2022 August 1 – 31, 2022 September 1 – 30, 2022 Total 188 $ — 343 531 28.00 — 29.62 29.04 — $ — — — 25,300,000 25,300,000 25,300,000 (1) All shares reported were delivered by employees in connecon with the sasfacon of tax withholding obligaons related to the vesng of shares of restricted stock. 33 TABLE OF CONTENTS Stock Performance Chart The following chart compares the cumulave total shareholder return on the Company’s Common Stock with the cumulave total return on the Nasdaq US Benchmark Total Return Index (our broad equity market index) and the Nasdaq Medical Supplies Total Return Index (our published industry index). The comparisons assume $100 was invested on September 30, 2017 and assume reinvestment of dividends. $100 investment in stock or index Surmodics Nasdaq US Benchmark Total Return Index Nasdaq Medical Supplies Total Return Index ITEM 6. [RESERVED]. Ticker SRDX NQUSBT 9/30/2017 9/30/2018 9/30/2019 9/30/2020 9/30/2021 9/30/2022 $ 100.00 $ 240.81 $ 147.55 $ 125.52 $ 179.35 $ 98.06 100.00 117.79 121.29 140.05 184.89 151.60 NQUSB20102015T 100.00 136.45 137.57 161.28 216.78 139.08 34 TABLE OF CONTENTS ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis provide informaon management believes is useful in understanding the operang results, cash ﬂows and ﬁnancial condion of Surmodics. The following discussion should be read together with our audited consolidated ﬁnancial statements and related notes appearing elsewhere in this report. Any discussion and analysis regarding our future ﬁnancial condion and results of operaons are forward-looking statements that involve risks, uncertaines and assumpons, as more fully idenﬁed in “Forward-looking Statements” and “Risk Factors.” Our actual future ﬁnancial condion and results of operaons may diﬀer materially from those ancipated in the forward-looking statements. Overview Surmodics, Inc. (referred to as “Surmodics,” the “Company,” “we,” “us,” “our” and other like terms) is a leading provider of performance coang technologies for intravascular medical devices and chemical and biological components for in vitro diagnosc (“IVD”) immunoassay tests and microarrays. Surmodics develops and commercializes highly diﬀerenated vascular intervenon medical devices that are designed to address unmet clinical needs and engineered to the most demanding requirements. This key growth strategy leverages the combinaon of the Company’s experse in proprietary surface modiﬁcaon and drug-delivery coang technologies, along with its device design, development and manufacturing capabilies. The Company’s mission is to improve the detecon and treatment of disease. Surmodics is headquartered in Eden Prairie, Minnesota. Vascular Intervenon Medical Device Plaorms Within our Medical Device segment, we develop and manufacture our own proprietary vascular intervenon medical device products, which leverage our experse in performance coang technologies, product design and engineering capabilies. We believe our strategy of developing our own medical device products has increased, and will connue to increase, our relevance in the medical device industry. This strategy is key to our future growth and proﬁtability, providing us with the opportunity to capture more revenue and operang margin with vascular intervenon device products than we would by licensing our device-enabling technologies. Highlighted below are select medical device products within our development pipeline that are a focus for development and commercializaon eﬀorts. For both our thrombectomy and radial access plaorms, we are pursuing commercializaon via a direct sales strategy leveraging a small team of experienced sales professionals and clinical specialists. Beginning in ﬁscal 2022, we began to see modest, but meaningful and growing revenue associated with the adopon, ulizaon and sales of our Pounce™ and Sublime™ plaorm products. Pounce Thrombectomy Plaorm We have successfully developed, internally and through acquisions, two U.S. Food and Drug Administraon ("FDA" or the “Agency”) 510(k)-cleared mechanical thrombectomy devices for the non-surgical removal of thrombi and emboli (clots) from the peripheral vasculature (legs). In addion to FDA clearance, our Pounce Venous Thrombectomy System has received the Conformité Européenne Mark (“CE Mark”) approval prerequisite for commercializaon in the European Union (”E.U.”). We believe that the ease of use, intuive design and eﬃcient performance of our thrombectomy products make these devices viable ﬁrst-line treatment opons for intervenonalists. These devices include: • • Pounce Arterial Thrombectomy System for removal of clots from arteries in the legs associated with peripheral arterial disease (“PAD”). Commercial sales began in the ﬁrst quarter of ﬁscal 2022. Pounce Venous Thrombectomy System for removal of clots from veins in the legs generally associated with venous thromboembolism (”VTE”). Limited market evaluaons are planned for ﬁscal 2023 to obtain physician feedback across a variety of cases and clinical condions. Sublime Radial Access Plaorm We have successfully developed and secured FDA 510(k) regulatory clearance for a suite of devices that enable vascular intervenon via radial (wrist) access for which commercial sales began in the ﬁrst quarter of ﬁscal 2022. These devices include: • • • Sublime guide sheath to provide the conduit for peripheral intervenon with an access point at the wrist that enables treatment all the way to the pedal loop of the foot; Sublime .014 RX PTA dilataon catheter for treatment of lesions in arteries below the knee all the way to the paent’s foot and around the pedal loop; and Sublime .018 RX PTA dilataon catheter for treatment of lesions in arteries above and below the knee. 35 TABLE OF CONTENTS Drug-coated Balloon Plaorm Surmodics’ drug-coated balloons (“DCBs”) are designed for vascular intervenons to treat PAD, a condion that causes a narrowing of the blood vessels supplying the extremies. • • SurVeilTM DCB is a paclitaxel-coated DCB to treat PAD in the upper leg (superﬁcial femoral artery). In ﬁscal 2018, we entered into an agreement (the “Abbo Agreement”) with Abbo Vascular, Inc. (“Abbo”) that provides Abbo with exclusive worldwide commercializaon rights to the SurVeil DCB product. Our SurVeil DCB ulizes a proprietary paclitaxel drug-excipient formulaon for a durable balloon coang and is manufactured using an innovave process to improve coang uniformity. The SurVeil DCB has the necessary regulatory approval for commercializaon in the E.U., and ming of commercializaon in the E.U. is at the discreon of our exclusive distribuon partner, Abbo. In ﬁscal 2021, the TRANSCEND pivotal clinical trial of our SurVeil DCB met both the primary safety and primary eﬃcacy endpoints and was found to be non-inferior to the control device in those endpoints. In June 2021, we submied the fourth and ﬁnal module of our applicaon to the FDA for premarket approval (“PMA”) of our SurVeil DCB, including certain long-term vital status data required by the FDA. The Agency provided us with comments on our PMA applicaon and requested certain addional tesng data. In October 2022, we submied a complete response, including addional tesng data, to the Agency’s comments on the PMA. The FDA may request addional informaon, including tesng data, related to our most recent submission in support of the PMA applicaon. Receipt of PMA from the FDA, if granted, would be expected to fulﬁll the requirements for a $30 million milestone payment pursuant to the Abbo Agreement (if PMA received by December 31, 2022), $27 million (if PMA received aer December 31, 2022, but before June 30, 2023), or $24 million (if PMA received on or aer June 30, 2023). SundanceTM DCB is a sirolimus-coated DCB used for the treatment of below-the-knee PAD, including crical limb ischemia (“CLI”). Our SWING ﬁrst-in- human, 35-paent, 36-month clinical study was designed to evaluate the safety and performance of our Sundance DCB when used to treat occlusive disease of the infra-popliteal arteries. The inial study data have demonstrated an excellent safety proﬁle, with no major amputaons and low rates of major adverse events. There were no clinically driven target lesion revascularizaons in study parcipants between six and 12 months post procedure. The study also shows promising signals of potenal performance of the device, with target lesion patency maintained at 12 months in 80% of per protocol paents. We are in the process of idenfying and evaluang potenal partnership opportunies for the clinical development and future commercializaon of the Sundance DCB. For more informaon regarding our product development and commercializaon strategy, see Part I, Item 1 of this Annual Report on Form 10-K. CARES Act Employee Retenon Credit In ﬁscal 2021, a beneﬁt of $3.6 million was recorded to reduce operang costs and expenses as a result of our eligibility for the employee retenon credit under the provisions of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") enacted in March 2020. This $3.6 million beneﬁt in ﬁscal 2021 reﬂects ancipated reimbursement of personnel expenses we incurred in ﬁscal 2021 and 2020 and provided a $0.5 million beneﬁt to product costs, a $2.2 million beneﬁt to research and development (“R&D”) expense, and a $0.9 million beneﬁt to selling, general and administrave (“SG&A”) expense. 36 TABLE OF CONTENTS Results of Operaons Revenue. Fiscal 2022 revenue was $100.0 million, a $5.2 million or 5% decrease from ﬁscal 2021 revenue. Fiscal 2021 revenue was $105.1 million, a $10.3 million or 11% increase from ﬁscal 2020 revenue. The following is a summary of revenue streams within each reportable segment. Fiscal Years Ended September 30, 2022, 2021 and 2020 (Dollars in thousands) Medical Device Product sales Royales License fees Research, development and other Medical Device Revenue In Vitro Diagnoscs Product sales Research, development and other In Vitro Diagnoscs Revenue Total Revenue 2022 Fiscal Year 2021 2020 Increase/(Decrease) 2022 vs. 2021 Increase/(Decrease) 2021 vs. 2020 $ 27,930 $ 21,777 $ 21,608 $ 28,614 30,267 12,020 5,981 9,159 8,211 71,401 30,781 16,275 9,420 78,253 72,389 26,691 871 24,701 2,182 27,562 26,883 $ 99,951 $ 105,136 22,709 754 23,463 $ 94,864 $ 6,153 (514 ) (10,294 ) (1,209 ) (5,864 ) 1,990 (1,311 ) 679 (5,185 ) 28 % $ (2 )% (63 )% (13 )% (7 )% 8 % (60 )% 3 % (5 )% $ 169 2,167 4,255 261 6,852 1,992 1,428 3,420 10,272 1 % 8 % 35 % 3 % 10 % 9 % 189 % 15 % 11 % Medical Device. Revenue in our Medical Device segment was $72.4 million in ﬁscal 2022, a 7% decrease from $78.3 million in ﬁscal 2021, primarily driven by lower license fees revenue, partly oﬀset by broad-based product sales growth. • • • • Medical Device product revenue increased 28% to $27.9 million in ﬁscal 2022, compared to $21.8 million in ﬁscal 2021. Broad-based sales growth across our porolio of device and performance coang reagent products drove the increase in revenue year-over-year. Contribung to the growth in device sales were contract-manufactured balloon catheters, Pounce thrombectomy and Sublime radial access products commercialized in ﬁscal 2022, and proprietary specialty catheters distributed by strategic partners. Medical Device performance coangs royales revenue decreased 2% to $30.3 million in ﬁscal 2022, compared to $30.8 million in ﬁscal 2021. In ﬁscal 2022, royales revenue connued to beneﬁt from solid growth from customers ulizing our Serene™ coang. This was more than oﬀset by several macroeconomic factors, including pressure on procedure volumes from hospital capacity constraints and customer supply chain disrupons, as well as by customer devices maturing through their product life cycles. License fee revenue from the Abbo Agreement for our SurVeil DCB decreased to $5.7 million in ﬁscal 2022, compared to $16.0 million in ﬁscal 2021, primarily due to the prior-year receipt of a milestone payment. In ﬁscal 2021, a $15.0 million milestone payment was received, on which $1.4 million and $11.3 million in revenue was recognized in ﬁscal 2022 and 2021, respecvely. Abbo Agreement license fee revenue is recognized as costs are incurred on a proporonal basis to total expected costs for the TRANSCEND pivotal clinical trial. The percentage of costs incurred relave to total esmated costs for the TRANSCEND pivotal clinical trial of our SurVeil DCB was approximately 85%, 76% and 65% as of September 30, 2022, 2021 and 2020, respecvely. We esmate this percentage will be approximately 92% by the end of ﬁscal 2023, with the remaining 8% of costs incurred and revenue recognized over the subsequent ﬁnal two years of the TRANSCEND trial follow- up and clinical reporng period. Future license fee revenue related to the Abbo Agreement will depend primarily on whether and when we receive the ﬁnal milestone payment associated with receipt of the PMA for the SurVeil DCB. Receipt of PMA from the FDA, if granted, would be expected to fulﬁll the requirements for a milestone payment of up to $30 million. The milestone payment is reduced to $27 million if PMA is received aer December 31, 2022 but before June 30, 2023, and to $24 million if PMA is received on or aer June 30, 2023, pursuant to the terms of the Abbo Agreement. The potenal revenue during ﬁscal 2023 associated with the $30 million, $27 million or $24 million milestone payment would be approximately $27 million, $25 million or $22 million, respecvely. Medical Device R&D and other revenue decreased 13% to $8.2 million in ﬁscal 2022, compared to $9.4 million in ﬁscal 2021, driven by lower coang services volume from supply chain challenges related to customer-supplied components. In ﬁscal 2021, revenue in our Medical Device segment was $78.3 million, a 10% increase from $71.4 million in ﬁscal 2020, primarily driven by increased royales and license fees revenue. • Medical Device product revenue of $21.8 million in ﬁscal 2021 was essenally ﬂat compared to ﬁscal 2020. Growth from sales of performance coang reagents and from sales of specialty catheter products ﬁrst commercialized in ﬁscal 2020 was largely oﬀset by a decline in sales of legacy, contract- manufactured balloon catheters. 37 TABLE OF CONTENTS • • • Medical Device performance coangs royales revenue increased 8% to $30.8 million in ﬁscal 2021, compared to $28.6 million in ﬁscal 2020. Fiscal 2021 royales revenue beneﬁted from broad-based, year-over-year growth, most notably from our latest generaon Serene coang customers, which more than oﬀset the approximately $1.2 million tail-end impact to ﬁscal 2021 from the expiraon of our fourth-generaon hydrophilic patents. Royales revenue from our latest generaon Serene coang grew 38% year-over-year in ﬁscal 2021 and comprised 26% of total ﬁscal 2021 royales revenue, compared to 20% of total royales revenue in ﬁscal 2020. With respect to COVID-19, ﬁscal 2020 provides a favorable comparison due to the relave decline in magnitude of impacts to royales revenue from reduced procedure volumes in ﬁscal 2021 compared to ﬁscal 2020. License fee revenue from the Abbo Agreement for our SurVeil DCB increased to $16.0 million in ﬁscal 2021, compared to $12.0 million in ﬁscal 2020, primarily due to the receipt of milestone payments. In ﬁscal 2021, Abbo Agreement license fee revenue included $11.3 million in revenue recognized on a $15.0 million milestone payment received during the period. In ﬁscal 2020, Abbo Agreement license fee revenue included $7.0 million in revenue recognized on a $10.8 million milestone payment received during the period. Medical Device R&D and other revenue increased 3% to $9.4 million in ﬁscal 2021, compared to $9.2 million in ﬁscal 2020, driven by commercial development projects with several of our performance coang customers. This increase was partly oﬀset by a decline in coang services revenue due to lifecycle arion for certain customer products. In Vitro Diagnoscs. Revenue in our IVD segment was $27.6 million in ﬁscal 2022, a 3% increase from $26.9 million in ﬁscal 2021, driven primarily by broad- based product sales growth, partly oﬀset by lower R&D and other revenue. • • IVD product revenue increased 8% or $2.0 million in ﬁscal 2022, compared to ﬁscal 2021. Sales growth year-over-year was broad-based, with increased sales across our porolio of protein stabilizaon, distributed angen, colorimetric substrate, and microarray slide/surface products. IVD R&D and other revenue was $0.9 million in ﬁscal 2022, a decrease of $1.3 million compared to $2.2 million in ﬁscal 2021, driven by the compleon of a customer development program. In ﬁscal 2021, revenue in our IVD segment was $26.9 million, a 15% increase from $23.5 million in ﬁscal 2020, driven primarily by increased sales volume of our distributed angen products and customer development projects. • • IVD product revenue increased 9% or $2.0 million in ﬁscal 2021, compared to ﬁscal 2020. In ﬁscal 2021, we saw sustained growth of our distributed angen products used in autoimmune diagnosc tesng. Revenue growth in ﬁscal 2021 was also driven by steady growth in sales of our protein stabilizaon and colorimetric substrate products, partly oﬀset by a decline in sales volume of our microarray slide/surface products. With respect to COVID-19, the ﬁscal 2020 period provides a favorable comparison as we observed modest COVID-related impacts to revenue in the second half of ﬁscal 2020. IVD R&D and other revenue was $2.2 million in ﬁscal 2021, an increase of $1.4 million compared to $0.8 million in ﬁscal 2020, driven by customer development projects ulizing our microarray slide/surface products. The IVD business culvates new product revenue opportunies by partnering with customers on their tesng and development of new or improved diagnosc test products that ulize our enabling technology. Product sales, product costs, product gross proﬁt, product gross margin, and operang costs and expenses were as follows: (Dollars in thousands) Product sales Product costs Product gross proﬁt (1) % Product gross margin (2) Research and development % Total revenue 2022 Fiscal Year 2021 $ 54,621 $ 46,478 $ 20,342 34,279 17,177 29,301 62.8 % 63.0 % 50,609 46,734 2020 44,317 $ 15,317 29,000 65.4 % 50,188 51 % 45 % 53 % Selling, general and administrave 46,935 30,677 % Total revenue Acquired intangible asset amorzaon Acquision transacon, integraon and other costs Conngent consideraon expense 47 % 29 % 4,150 2,793 — 12 1,049 3 28,392 30 % 2,218 — — 38 Increase/(Decrease) 2022 vs. 2021 Increase/(Decrease) 2021 vs. 2020 8,143 3,165 4,978 (0.2 ) ppt 3,875 18 % $ 18 % 17 % 2,161 1,860 301 (2.4 ) ppt 5 % 12 % 1 % 8 % (3,454 ) (7 )% 16,258 53 % 2,285 8 % 1,357 49 % 575 26 % (1,049 ) 9 1,049 3 TABLE OF CONTENTS (1) (2) Product gross proﬁt is deﬁned as product sales less related product costs. Product gross margin is deﬁned as product gross proﬁt as a percentage of product sales. Product gross margins. Product gross margins were 62.8%, 63.0% and 65.4% in ﬁscal 2022, 2021 and 2020, respecvely. • • Fiscal 2022 gross margin of 62.8% was comparable to the prior year. The beneﬁt to ﬁscal 2022 product gross margin from leverage on higher sales volume was oﬀset by the adverse mix impact from recent product introducons, which have lower product gross margins due to low producon volumes. Product gross margins may connue to be impacted by the shi in revenue mix towards sales of medical devices at relavely lower margins, parcularly during the scale-up phase aer inial commercializaon. Fiscal 2021 product gross margin was unfavorably impacted by a product replacement maer for one of the contract-manufactured products in our Medical Device business, which resulted in $0.7 million in product cost charges and a modest year-over-year decline in revenue. Fiscal 2021 product gross margin was also unfavorably impacted by a shi in product mix within the IVD business due to sales growth from relavely lower margin products. These decreases in ﬁscal 2021 product gross margin were oﬀset, in part, by the $0.5 million beneﬁt associated with the employee retenon credit under the CARES Act. Research and development expense. R&D expense was $50.6 million, $46.7 million and $50.2 million in ﬁscal 2022, 2021 and 2020, respecvely. • • Fiscal 2022 R&D expense increased by $3.9 million year-over-year and was 51% of revenue, compared to 45% of revenue in ﬁscal 2021. Fiscal 2021 R&D expense included a beneﬁt of $2.2 million associated with the employee retenon credit under the CARES Act. The fourth quarter ﬁscal 2021 Vetex acquision added $1.2 million in R&D expense in ﬁscal 2022, compared to the prior year. R&D expense for ﬁscal 2022 was primarily related to medical device product development, including support for commercializaon of our Pounce and Sublime product plaorms. Fiscal 2021 R&D expense decreased by $3.5 million year-over-year and was 45% of revenue, compared to 53% of revenue in ﬁscal 2020. Fiscal 2021 R&D expense included a beneﬁt of $2.2 million associated with the employee retenon credit under the CARES Act. Clinical trial spending and other costs related to our SurVeil DCB declined in ﬁscal 2021, compared to ﬁscal 2020, with the progression of the TRANSCEND pivotal clinical trial from paent follow up in ﬁscal 2020 to preparaon of the clinical report and submission of the ﬁnal PMA modules in ﬁscal 2021. Selling, general and administrave expense. SG&A expense was $46.9 million, $30.7 million and $28.4 million in ﬁscal 2022, 2021 and 2020, respecvely. • • Fiscal 2022 SG&A expense increased by $16.3 million year-over-year and was 47% of revenue, compared to 29% of revenue in ﬁscal 2021. In ﬁscal 2022, we established a medical device direct salesforce to support the ﬁscal 2022 commercializaon of our Pounce and Sublime product plaorms. We expect SG&A expense to increase between $12.0 million and $13.5 million in ﬁscal 2023, compared to ﬁscal 2022, primarily due to a full year of expense for ﬁscal 2022 headcount addions. Fiscal 2021 SG&A expense increased by $2.3 million year-over-year and was 29% of revenue, compared to 30% of revenue in ﬁscal 2020. The increase in SG&A expense in ﬁscal 2021 was primarily driven by personnel and other investments to support product development and strategic iniaves. These increases were oﬀset, in part, by a beneﬁt of $0.9 million recorded to SG&A expense in ﬁscal 2021 associated with the employee retenon credit under the CARES Act. Acquired intangible asset amorzaon. We have previously acquired certain intangible assets through business combinaons, which are amorzed over periods ranging from six to 14 years. The year-over-year increase in expense from amorzaon of the Vetex developed technology acquired in the fourth quarter of ﬁscal 2021 was $1.5 million and $0.5 million in ﬁscal 2022 and ﬁscal 2021, respecvely. Acquision transacon, integraon and other costs. In ﬁscal 2021, we incurred $1.0 million in legal, accounng and other due diligence costs speciﬁcally related to the acquision of Vetex. Conngent consideraon expense. We have conngent consideraon obligaons related to business combinaons. Expense (gain) recognized is related to changes in the probability and ming of achieving certain contractual milestones, as well as accreon expense for the passage of me. In ﬁscal 2022 and 2021, conngent consideraon expense consisted of accreon for liabilies associated with the ﬁscal 2021 Vetex acquision. 39 TABLE OF CONTENTS Other expense. Major classiﬁcaons of other expense were as follows: (In thousands) Interest expense Foreign exchange gain (loss) Investment income, net Loss on strategic investments and other Other expense 2022 Fiscal Year 2021 2020 (598 ) $ 103 99 — (396 ) $ (310 ) $ (170 ) 123 — (357 ) $ (133 ) (248 ) 656 (478 ) (203 ) $ $ Interest expense increased in ﬁscal 2022 and 2021 relave to the respecve prior year due to rising interest rates and ulizaon of our revolving credit facility. Refer to “Liquidity and Capital Resources” for further discussion of ﬁnancing arrangements and expectaons for ﬁscal 2023 interest expense. Foreign currency exchange gains (losses) result primarily from the impact of U.S. dollar to Euro exchange rate ﬂuctuaons on certain intercompany transacons and balances. Investment income, net declined in ﬁscal 2022 and 2021 relave to the respecve prior year due to the decline in the balance of available-for-sale investments. In ﬁscal 2020, we recognized a $0.5 million impairment loss on our strategic investment in ViaCyte, Inc. to reduce the carrying value to zero. Income tax (expense) beneﬁt. We reported income tax expense of $(4.8) million in ﬁscal 2022, income tax expense of $(2.1) million in ﬁscal 2021, and income tax beneﬁt of $2.6 million in ﬁscal 2020. Our eﬀecve tax rate was (21)%, 33% and 177% in ﬁscal 2022, 2021 and 2020, respecvely. Recurring items cause our eﬀecve tax rate to diﬀer from the U.S. federal statutory rate of 21%, including U.S. federal and Irish R&D credits, Irish and U.S. state tax rates, and excess tax beneﬁts associated with stock-based compensaon. In addion, the following items had a signiﬁcant impact on reported tax (expense) beneﬁt: • • In ﬁscal 2022, we recorded a non-cash charge to income tax expense of $10.2 million that resulted from the establishment of a full valuaon allowance against U.S. net deferred tax assets as of September 30, 2022. A valuaon allowance is required to be recognized against deferred tax assets if, based on the available evidence, it is more likely than not (deﬁned as a likelihood of more than 50%) that all or a poron of such assets will not be realized. The relevant guidance weighs available evidence such as historical cumulave taxable losses more heavily than future proﬁtability. The valuaon allowance has no impact on the availability of U.S. net deferred tax assets to oﬀset future tax liabilies. In ﬁscal 2021 and 2020, our eﬀecve tax rate in ﬁscal 2021 diﬀered from the U.S. federal statutory rate due to the remeasurement of deferred tax assets and liabilies associated with the CARES Act. Under the temporary provisions of CARES Act, net operang loss (“NOL”) carryforwards and carrybacks may oﬀset 100% of taxable income for taxable years beginning before 2021. In addion, NOLs arising in 2018, 2019 and 2020 taxable years may be carried back to each of the preceding ﬁve years to generate a refund. In ﬁscal 2020, we recorded a discrete tax beneﬁt of $1.7 million that resulted from our ability under the CARES Act to carry back NOLs incurred to periods when the statutory tax rate was 35% versus our current tax rate of 21%. Segment Operang Results Operang results for each of our reportable segments were as follows: (In thousands) Operang (loss) income: Medical Device In Vitro Diagnoscs Total segment operang (loss) income Corporate Total operang (loss) income 2022 Fiscal Year 2021 2020 2022 vs. 2021 2021 vs. 2020 Increase/(Decrease) $ $ (22,923 ) $ 13,073 (9,850 ) (12,247 ) (22,097 ) $ 4,683 $ 13,770 18,453 (11,750 ) 6,703 $ (3,246 ) $ 11,771 8,525 (9,776 ) (1,251 ) $ (27,606 ) $ (697 ) (28,303 ) (497 ) (28,800 ) $ 7,929 1,999 9,928 (1,974 ) 7,954 40 TABLE OF CONTENTS Medical Device. Our Medical Device business reported an operang loss of $(22.9) million in ﬁscal 2022, compared to operang income of $4.7 million in ﬁscal 2021, represenng (32)% and 6% of Medical Device revenue in ﬁscal 2022 and 2021, respecvely. • • • Medical Device operang expenses, excluding product costs, increased $19.5 million year-over-year in ﬁscal 2022. SG&A expense in the Medical Device business increased $14.8 million year-over-year in ﬁscal 2022 as we established a medical device direct salesforce to support the ﬁscal 2022 commercializaon of our Pounce and Sublime product plaorms. The ﬁscal 2021 Vetex acquision added $2.7 million in R&D expense and acquired intangible asset amorzaon in ﬁscal 2022. In addion, the prior ﬁscal 2021 period included a beneﬁt of $2.4 million to operang expenses, excluding product costs, associated with the employee retenon credit under the CARES Act. Royales and license fee revenue decreased $10.8 million in ﬁscal 2022, compared to the prior year, and contributed to the ﬁscal 2022 operang loss. License fee revenue decreased $10.3 million in ﬁscal 2022, compared to the prior year, as a result of the $15.0 million milestone payment received in ﬁscal 2021. Royales revenue decreased $0.5 million in ﬁscal 2022, compared to the prior year. Medical Device product gross proﬁt increased $3.9 million year-over-year in ﬁscal 2022, and product gross margins were 59.2% and 58.0% for ﬁscal 2022 and 2021, respecvely. Fiscal 2021 provides a favorable comparison due to $0.7 million in product cost charges in ﬁscal 2021 related to a product replacement maer. The beneﬁt to ﬁscal 2022 product gross margin from leverage on higher sales volume was oﬀset by the adverse mix impact from recent product introducons, which have lower product gross margins due to low producon volumes. In ﬁscal 2021, our Medical Device business reported operang income of $4.7 million, compared to an operang loss of $(3.2) million in ﬁscal 2020, represenng 6% and (5)% of Medical Device revenue in ﬁscal 2021 and 2020, respecvely. • • • • Royales and license fee revenue increased $6.4 million in ﬁscal 2021, compared to the prior year, and contributed to the ﬁscal 2021 operang income. License fee revenue reﬂects the ming of Abbo milestone payments received and increased $4.3 million in ﬁscal 2021, compared to the prior year, as a result of the $15.0 million milestone payment received in ﬁscal 2021 and the $10.8 million milestone payment received in ﬁscal 2020. Royales revenue increased $2.2 million in ﬁscal 2021, compared to the prior year, driven by broad-based growth and signiﬁcant prior-year COVID-19 impacts. In ﬁscal 2021, Medical Device operang income includes a $2.6 million beneﬁt associated with the employee retenon credit under the CARES Act. Medical Device product gross proﬁt declined $0.6 million year-over-year in ﬁscal 2021, and product gross margins were 58.0% and 61.3% for ﬁscal 2021 and 2020, respecvely. Product gross margins were unfavorably impacted by both a product replacement maer for one of our contract-manufactured products in ﬁscal 2021, which resulted in $0.7 million in product cost charges, and by unfavorable overhead absorpon due to lower volume from the COVID-related decline in performance coang reagent sales in the ﬁrst half of ﬁscal 2021. These impacts were oﬀset, in part, by a $0.2 million beneﬁt in ﬁscal 2021 associated with the employee retenon credit under the CARES Act. Medical Device operang expenses, excluding product costs, declined $(1.9) million year-over-year in ﬁscal 2021. Fiscal 2021 Medical Device operang costs and expenses, excluding product costs, include a beneﬁt of $2.4 million associated with the employee retenon credit under the CARES Act. SG&A expense in our Medical Device business increased $1.3 million year-over-year in ﬁscal 2021, which is net of a $0.6 million beneﬁt associated with the employee retenon credit, as we invested in sales and markeng personnel and infrastructure to execute our long-term growth strategy. The ﬁscal 2021 Vetex acquision added $1.1 million in R&D expense and acquired intangible asset amorzaon. These increases were oﬀset, in part, by a year-over-year decline in R&D expenditures associated with the TRANSCEND pivotal clinical trial. In Vitro Diagnoscs. Our IVD business reported operang income of $13.1 million in ﬁscal 2022, a decrease of 5% or $0.7 million compared to ﬁscal 2021. IVD operang income was 47% and 51% of revenue in ﬁscal 2022 and 2021, respecvely. In ﬁscal 2022, R&D and other revenue decreased $1.3 million year-over- year due to the compleon of a customer development program. In ﬁscal 2021, IVD operang income included a $0.5 million beneﬁt associated with the employee retenon credit under the CARES Act. These decreases were partly oﬀset by a $1.1 million year-over-year increase in IVD product gross proﬁt in ﬁscal 2022. IVD product gross margins were 66.5% and 67.5% for ﬁscal 2022 and 2021, respecvely. The prior year product gross proﬁt includes a $0.2 million beneﬁt associated with the employee retenon credit under the CARES Act. Fiscal 2022 gross margin was unfavorably impacted by a shi in revenue mix towards distributed angen products with relavely lower gross margins, partly oﬀset by the favorable impact of leverage on revenue growth. 41 TABLE OF CONTENTS In ﬁscal 2021, our IVD business reported operang income of $13.8 million in ﬁscal 2021, an increase of 17% or $2.0 million compared to ﬁscal 2020. IVD operang income was 51% and 50% of revenue in ﬁscal 2021 and 2020, respecvely. R&D and other revenue increased $1.4 million year-over-year in ﬁscal 2021 from customer development project opportunies. In ﬁscal 2021, IVD operang income included a $0.5 million beneﬁt associated with the employee retenon credit under the CARES Act. IVD product gross proﬁt increased $0.9 million year-over-year in ﬁscal 2021, and product gross margins were 67.5% and 69.4% for ﬁscal 2021 and 2020, respecvely. Fiscal 2021 product gross margins were favorably impacted by leverage on revenue growth and a $0.2 million beneﬁt associated with the employee retenon credit under the CARES Act. This was more than oﬀset by a shi in revenue mix towards distributed angen products with relavely lower gross margins. Corporate. The Corporate category includes expenses for administrave corporate funcons, such as execuve management, corporate accounng, legal, informaon technology, human resources and Board of Directors related fees and expenses, which we do not fully allocate to the Medical Device and IVD segments. Corporate also includes expenses, such as acquision-related costs and ligaon, which are not speciﬁc to a segment and thus not allocated to our reportable segments. The unallocated Corporate expense operang loss was $(12.2) million, $(11.8) million and $(9.8) million in ﬁscal 2022, 2021 and 2020, respecvely. The year-over-year increase in Corporate expense in ﬁscal 2022 of $0.5 million, or 4%, was primarily related to compensaon and facilies expenses. In ﬁscal 2021, the year-over-year increase in Corporate expense of $2.0 million, or 20%, was primarily driven by $1.0 million in Vetex acquision transacon, integraon and other costs and increased compensaon expenses, partly oﬀset by a $0.5 million beneﬁt associated with the ﬁscal 2021 employee retenon credit. Cash Flow Operang Results The following is a summary of cash ﬂow results: (In thousands) Cash (used in) provided by: Operang acvies Invesng acvies Financing acvies Eﬀect of exchange rates on changes in cash and cash equivalents Net change in cash and cash equivalents 2022 Fiscal Year 2021 2020 $ $ (17,223 ) $ 6,230 (375 ) (787 ) (12,155 ) $ 15,389 $ (25,238 ) 10,227 (10 ) 368 $ 14,010 (9,066 ) (4,648 ) 128 424 Operang Acvies. Cash (used in) provided by operang acvies totaled $(17.2) million, $15.4 million and $14.0 million in ﬁscal 2022, 2021 and 2020, respecvely. During ﬁscal 2022, 2021 and 2020, we reported net (loss) income of $(27.3) million, $4.2 million and $1.1 million, respecvely. Net changes in operang assets and liabilies (reduced) increased cash ﬂows from operang acvies by $(12.3) million, $(4.9) million and $1.1 million in ﬁscal 2022, 2021 and 2020, respecvely. Signiﬁcant changes in operang assets and liabilies aﬀecng cash ﬂows during ﬁscal 2022, 2021 and 2020 included: • • • • Cash used in deferred revenue was $(5.7) million, $(1.0) million and $(1.2) million in ﬁscal 2022, 2021 and 2020, respecvely. This was driven by the ming of the receipt of SurVeil DCB upfront and milestone payments from Abbo which totaled $15.0 million and $10.8 million in ﬁscal 2021 and 2020, respecvely, oﬀset by related license fee revenue recognion of $5.7 million, $16.0 million and $12.0 million in ﬁscal 2022, 2021 and 2020, respecvely. Cash used in inventories was $(5.1) million, $(0.8) million and $(1.4) million in ﬁscal 2022, 2021 and 2020, respecvely. Fiscal 2022 cash used in inventories was primarily driven by the commercializaon of Pounce and Sublime product plaorms in our Medical Device business, as well as prudent management of safety stock to migate supply chain risks. Cash (used in) provided by prepaids and other was $(0.7) million, $(2.4) million and $0.4 million in ﬁscal 2022, 2021 and 2020, respecvely. Cash used in ﬁscal 2022 was primarily driven by soware expenditures. In ﬁscal 2021, cash used was primarily driven by a $3.6 million receivable recorded at the end of the period associated with the employee retenon credit under the provisions of the CARES Act. Cash provided in ﬁscal 2020 was primarily related to a decrease in reimbursable Irish R&D expenses. Cash (used in) provided by accounts receivable and contract assets was $(1.5) million, $(2.5) million and $3.5 million in ﬁscal 2022, 2021 and 2020, respecvely. Fiscal 2022 cash used was primarily driven by higher accounts receivable related to product sales growth. Fiscal 2021 cash used was primarily driven by higher accounts receivable related to ming ﬂuctuaons and by an increase in royales receivable from customers (contract asset) from year-over-year growth in performance coangs royales revenue. In ﬁscal 2020, cash provided was driven by a decline in accounts receivable on lower sales at the end of the period and by a decline in royales receivable subsequent to the expiraon of our fourth-generaon hydrophilic coangs patents and as a result of the impact of COVID-19. 42 TABLE OF CONTENTS Invesng Acvies. Cash provided by (used in) invesng acvies was $6.2 million, $(25.2) million and $(9.1) million in ﬁscal 2022, 2021 and 2020, respecvely. • In ﬁscal 2021, we invested $39.6 million in the acquision of Vetex, which represented the upfront cash payment of $39.9 million net of acquired cash. • We invested $3.4 million, $5.3 million and $3.7 million in property and equipment in ﬁscal 2022, 2021 and 2020, respecvely. • Net purchases and maturies of available-for-sale investments were a source (use) of cash totaling $9.6 million, $20.6 million and $(5.4) million in ﬁscal 2022, 2021 and 2020, respecvely. Financing Acvies. Cash (used in) provided by ﬁnancing acvies totaled $(0.4) million, $10.2 million and $(4.6) million in ﬁscal 2022, 2021 and 2020, respecvely. • • • • In ﬁscal 2021, we funded the Vetex acquision, in part, from $10 million in borrowings on the $25 million revolving credit facility we had in place during the period. In ﬁscal 2022, 2021 and 2020, we paid $1.1 million, $2.8 million and $2.5 million, respecvely, to purchase common stock to pay employee taxes resulng from the exercise of stock opons and vesng of other stock awards. In ﬁscal 2022, 2021 and 2020, we generated $1.2 million, $3.1 million and $1.6 million, respecvely, from the sale of common stock related to our stock- based compensaon plans. In ﬁscal 2020, we paid conngent consideraon of $3.2 million related to the acquision of NorMedix, Inc., with $0.6 million and $2.6 million classiﬁed as cash used in operang and ﬁnancing acvies, respecvely. Liquidity and Capital Resources As of September 30, 2022, working capital totaled $25.5 million, a decrease of $14.9 million from September 30, 2021. We deﬁne working capital as current assets minus current liabilies. Cash and cash equivalents and available-for-sale investments totaled $19.0 million as of September 30, 2022, a decrease of $21.9 million from $40.9 million as of September 30, 2021. Subject to the terms of the Abbo Agreement, the Company is to receive a milestone payment under the Abbo Agreement if the SurVeil DCB receives PMA. The amount of the milestone payment is $30 million upon PMA of our SurVeil DCB (if PMA is received prior to December 31, 2022), $27 million (if PMA is received aer December 31, 2022 but prior to June 30, 2023), or $24 million (if PMA is received on or aer June 30, 2023), pursuant to the terms of the Abbo Agreement. The Company proacvely manages its access to capital to support liquidity and connued growth. On October 14, 2022, Surmodics entered into a new, ﬁve- year secured credit agreement with MidCap Funding IV Trust, as agent, and MidCap Financial Trust, as term loan servicer and the lenders from me to me party thereto (together “MidCap”), comprised of up to $100 million in term loans ($25 million of which is at the sole discreon of MidCap) and a $25 million revolving credit facility. The Company drew $25 million on the term loan and $5 million on the revolving credit facility at close. These proceeds were parally used to rere the Company’s exisng $25 million revolving credit facility with Bridgewater Bank, of which $10 million was outstanding. Upon closing, the Company’s cash balance increased by $19.5 million. Addional draws on the term loan may be made in increments of at least $10 million, up to a total of $50 million through December 31, 2024. A second tranche of up to $25 million may be available through December 31, 2024 at MidCap’s sole discreon. Availability to draw on the ﬁve-year, $25 million revolving credit facility is based on a borrowing base consisng primarily of the Company’s inventory and receivable balances. The credit agreement calls for interest-only payments on the term loan over the ﬁrst four years, which can be extended to ﬁve years if certain criteria are met. The revolving credit facility matures in ﬁve years. The Company has also entered into an interest rate swap arrangement with Wells Fargo, whereby the inial borrowing on term loan’s variable base rate was ﬁxed at 10.205% per annum for the ﬁve-year loan term. The revolving credit facility has an annual interest rate equal to 3.00% plus the greater of Term SOFR (as deﬁned in the credit agreement) or 1.50%. The Company expects total interest expense under the credit agreement to be approximately $3.4 million in ﬁscal 2023. As of September 30, 2022, the Company’s shelf registraon statement with the SEC allows the Company to oﬀer potenally up to $200 million in debt securies, common stock, preferred stock, warrants, and other securies or any such combinaon of such securies in amounts, at prices, and on terms announced if and when the securies are ever oﬀered. 43 TABLE OF CONTENTS In ﬁscal 2023, we ancipate an increase in SG&A expenditures of between $12.0 million and $13.5 million, as well as an increase in capital expenditures. We expect that increasing SG&A expenditures in ﬁscal 2023 will exceed any associated increases in revenues, and therefore will reduce our cash ﬂow from operaons. We also ancipate R&D expenses will connue to be signiﬁcant in ﬁscal 2023, primarily related to medical device product development, including connued investment in our Pounce and Sublime product plaorms. We believe that our exisng cash and cash equivalents and available-for-sale investments, which totaled $19.0 million as of September 30, 2022, together with cash ﬂow from operaons and our revolving credit facility and term loans, will provide liquidity suﬃcient to meet our cash needs and fund our operaons and planned capital expenditures for ﬁscal 2023. There can be no assurance, however, that our business will connue to generate cash ﬂows at historic levels. Beyond ﬁscal 2023, our cash requirements will depend extensively on the ming of market introducon and extent of market acceptance of products in our medical device product porolio, including our SurVeil DCB if PMA is received. Our long-term cash requirements also will be signiﬁcantly impacted by the level of our investment in commercializaon of our vascular intervenon device products and whether we make future corporate transacons. We cannot accurately predict our long-term cash requirements at this me. We may seek addional sources of liquidity and capital resources, including through borrowing, debt or equity ﬁnancing or corporate transacons to generate cashﬂow. There can be no assurance that such transacons will be available to us on favorable terms, if at all. Below is a summary of short-term and long-term ancipated cash requirements under contractual obligaons exisng as of September 30, 2022. (In thousands) Operang leases (1) Asset acquision & business combinaon obligaons (2) Clinical trial CRO obligaons (3) Total gross value September 30, 2022 Total Fiscal 2023 Aer Fiscal 2023 $ $ 6,438 $ 5,500 4,497 16,435 $ 1,172 $ 1,000 2,135 4,307 $ 5,266 4,500 2,362 12,128 (1) The Company leases facilies for research, oﬃce, manufacturing and warehousing. (2) Asset acquision obligaons consist of the gross value of payments to be made in connecon with a ﬁscal 2019 asset acquision, excluding amounts that are conngent upon unmet regulatory or commercial milestones. Business combinaon obligaons consist of the gross value of guaranteed milestone payments to be made in associaon with the ﬁscal 2021 Vetex acquision, excluding amounts that are conngent upon unmet product development and regulatory milestones. (3) Clinical Research Organizaon (“CRO”) obligaons represent contractual periodic payments for services performed and milestone payments to third- party CROs for services related to our ongoing clinical trials. The ming of payments and recognion of expenses under these contracts is dependent on paent follow-up for our ongoing clinical trial and may be diﬀerent from the amounts presented. For addional informaon regarding the above obligaons, see Notes 2, 11 and 12 to the consolidated ﬁnancial statements in “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K. As of September 30, 2022, we did not have any oﬀ-balance sheet arrangements that have, or are reasonably likely to have, a current or future eﬀect on our ﬁnancial condion, changes in ﬁnancial condion, revenue or expenses, results of operaons, liquidity, capital expenditures, or capital resources that is material to investors. Share Purchase Acvity Our Board of Directors has authorized the repurchase of up to an addional $25.3 million of the Company’s outstanding common stock in open-market purchases, privately negoated transacons, block trades, accelerated share repurchase transacons, tender oﬀers or by any combinaon of such methods. The authorizaon has no ﬁxed expiraon date. However, our credit agreement with MidCap prohibits us from acquiring outstanding shares of the Company’s common stock. 44 TABLE OF CONTENTS Customer Concentraons Revenue from customers that equaled or exceeded 10% of total revenue was as follows: Abbo Medtronic Fiscal Year 2021 2022 11 % 13 % 21 % 13 % 2020 19 % 14 % Our licensed technologies provide royales and license fee revenue. We have agreements with a diverse base of customers, and certain customers have mulple products using our technology. Abbo and Medtronic plc (“Medtronic”) are our largest customers. Abbo has several separately licensed products, including the SurVeil DCB license, which generate royales and license fee revenue for Surmodics. Revenue from the SurVeil DCB license represented 6%, 15% and 13% of total revenue for ﬁscal 2022, 2021 and 2020, respecvely. Apart from the SurVeil DCB license, Abbo has several separately licensed products which generate revenue for Surmodics, none of which represented more than 3% of total revenue for ﬁscal 2022. Medtronic has several separately licensed products that generate royales revenue for Surmodics, none of which represented more than 5% of our total revenue for ﬁscal 2022. Our licensing agreements with many of our customers, including most of our signiﬁcant customers, cover many licensed products that each separately generates royales revenue. This structure reduces the potenal risk to our operaons that may result from reduced sales (or the terminaon of a license) of a single product for any speciﬁc customer. New Accounng Pronouncements Informaon regarding new accounng pronouncements is included in Note 2 to the consolidated ﬁnancial statements in “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K. Crical Accounng Esmates The discussion and analysis of our ﬁnancial condion and results of operaons is based upon our consolidated ﬁnancial statements, which have been prepared in accordance with accounng principles generally accepted in the U.S. (“GAAP”). The preparaon of these consolidated ﬁnancial statements is based in part on the applicaon of signiﬁcant accounng policies, many of which require management to make esmates and assumpons; see Notes 1 and 2 to the consolidated ﬁnancial statements in “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K. Actual results may diﬀer from these esmates and such diﬀerences could materially impact our ﬁnancial condion and results of operaons. Crical accounng esmates are those that involve a signiﬁcant level of esmaon uncertainty and have had or are reasonably likely to have a material impact on our ﬁnancial condion and results of operaons. They require the applicaon of management’s most challenging subjecve or complex judgment, oen as a result of the need to make esmates about the eﬀect of maers that are inherently uncertain and may change in subsequent periods. Crical accounng esmates involve judgments and uncertaines that are suﬃciently likely to result in materially diﬀerent results under diﬀerent assumpons and condions. We believe the following are crical areas in the applicaon of our accounng esmates that currently aﬀect our ﬁnancial condion and results of operaons. Revenue Recognion We license technology to medical device manufacturers (third pares) and collect royales based on the greater of the contractual percentage of a customer’s sales of products incorporang our licensed technologies or minimum contractual royales. Sales-based royales revenue is recognized as our license customers sell products containing our technologies, which is generally reported to us a quarter aer those sales occur. This requires us to esmate the revenue earned on these arrangements and record it prior to our customers reporng the underlying sales to us. Sales-based royales are esmated using the most-likely amount method based on historical sales informaon, adjusted for known changes, such as product launches and patent expiraons. We also consider macroeconomic factors aﬀecng the medical device market. These inputs require signiﬁcant management judgement and are updated quarterly. Minimum royalty fees are recognized through the non-cancellable period, which is generally 90 days, but can be up to one year. Revenue related to conngent milestones is recognized upon the achievement of the milestone, provided collectability is assured. Customer advances are accounted for as a liability (deferred revenue) unl all criteria for revenue recognion have been met. 45 TABLE OF CONTENTS Revenue associated with our license and development agreement with Abbo is recognized as the clinical and regulatory acvies are performed and control is transferred which is measured based on actual costs incurred relave to the expected total cost of the underlying acvies, which consist of the TRANSCEND clinical trial. A signiﬁcant component of the cost of this trial is the cost of our outsourced clinical trial CRO consultants, which are esmated based on executed statements of work, project budgets, and paent enrollment and follow-up ming, among other things. Costs related to the clinical and regulatory acvies are expensed in the period incurred. A signiﬁcant change to the Company’s esmate of the costs to complete the TRANSCEND clinical trial could have a material eﬀect on the Company’s results of operaons. The total expected cost of the trial is a signiﬁcant management esmate and is reviewed and assessed each reporng period. The current poron of deferred revenue on the consolidated balance sheet represents the amount of deferred revenue that is expected to be recognized over the next year, based on esmated costs to be incurred. The esmate of future revenue from the Abbo Agreement will connue to be monitored and adjusted based on esmates in eﬀect each period-end. For further disclosures related to revenue recognion, see Notes 2, 3 and 4 to the consolidated ﬁnancial statements in “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K. Goodwill and Deﬁnite-lived Intangible Assets Our esmates associated with the annual test of goodwill for impairment, as well as the as-needed assessment of the recoverability of deﬁnite-lived intangible assets, are considered crical due to the amount of these assets recorded on our consolidated balance sheets and the judgment required. We record all assets and liabilies acquired in business acquisions at fair value, including goodwill and other intangible assets. The inial recognion of goodwill and other intangible assets requires management to make subjecve judgments concerning esmates of how the acquired assets will perform in the future using valuaon methods including discounted cash ﬂow analysis. Goodwill represents the excess of the purchase price of an acquired business over the fair value assigned to the assets purchased and liabilies assumed. Goodwill is not amorzed but is subject, at a minimum, to annual tests for impairment in accordance with accounng guidance for goodwill. The carrying amount of goodwill is evaluated annually, and between annual evaluaons if events occur or circumstances change indicang that it is more likely than not that the fair value of a reporng unit is less than its carrying amount. Our reporng units are the Medical Device and In Vitro Diagnoscs reportable segments. Inherent in the determinaon of fair value of the reporng units are certain esmates and judgments, including the interpretaon of current economic indicators and market valuaons, as well as management’s strategic plans with regard to its operaons. When ulizing a quantave assessment, we determine fair value at the reporng unit level based on a combinaon of an income approach and market approach. The income approach is based on esmated future cash ﬂows, discounted at a rate that approximates the cost of capital of a market parcipant, while the market approach is based on sales and/or earnings mulples of similar companies. These approaches use signiﬁcant esmates and assumpons, including projected future cash ﬂows and the ming of those cash ﬂows, discount rates reﬂecng risks inherent in future cash ﬂows, perpetual growth rates, and determinaon of appropriate market comparables. We perform our annual assessment of goodwill for impairment as of July 1st of each ﬁscal year. Goodwill was not impaired in either reporng unit based on the outcome of the ﬁscal 2022 annual impairment test, which ulized a quantave assessment. No goodwill impairment charges were recorded in ﬁscal 2022, 2021 and 2020. With respect to deﬁnite-lived intangible assets, we periodically evaluate whether events and circumstances have occurred that may aﬀect the esmated useful life or the recoverability of the remaining balance of such assets. If such events or circumstances indicate that the carrying amount of these assets may not be recoverable, management would esmate the future cash ﬂows expected to result from the use of the assets and their eventual disposion. If the sum of the expected future cash ﬂows (undiscounted and without interest charges) were less than the carrying amount of the assets, we would recognize an impairment charge to reduce such assets to their fair value. In ﬁscal 2022, 2021 and 2020, no impairment charges were recorded related to our deﬁnite-lived intangible assets. 46 TABLE OF CONTENTS Income Taxes Signiﬁcant judgment is required in evaluang our tax posions and in determining income tax expense (beneﬁt), deferred tax assets and liabilies, and any valuaon allowance recorded against our deferred tax assets. We evaluate the recoverability of deferred tax assets based on available evidence. This process involves signiﬁcant management judgment about assumpons that are subject to change from period to period based on changes in tax laws or variances between future projected operang performance and actual results. Under GAAP, we establish a valuaon allowance for deferred tax assets if we determine, based on available evidence at the me the determinaon is made, that it is more likely than not (deﬁned as a likelihood of more than 50%) that all or a poron of the deferred tax assets will not be realized. In making this determinaon, we evaluate all posive and negave evidence as of the end of each reporng period. Future adjustments (either increases or decreases) to the deferred tax asset valuaon allowance are determined based upon changes in the expected realizaon of the net deferred tax assets. In ﬁscal 2022, we recorded a non-cash charge to income tax expense of $10.2 million that resulted from the establishment of a full valuaon allowance against U.S. net deferred tax assets as of September 30, 2022. The realizaon of the deferred tax assets ulmately depends on the existence of suﬃcient taxable income or tax liability in either the carry-back or carry-forward periods under the tax law. Due to signiﬁcant esmates used to establish the valuaon allowance and the potenal for changes in facts and circumstances, it is reasonably possible that we will be required to record addional adjustments to the valuaon allowance in future reporng periods that could have a material eﬀect on our results of operaons. We establish reserves for uncertain tax posions when, despite our belief that our tax return posions are fully supportable, we believe that certain posions are likely to be challenged and that we may or may not prevail. Under GAAP, if we determine that a tax posion is more likely than not of being sustained upon audit, based solely on the technical merits of the posion, we recognize the beneﬁt. We measure the beneﬁt by determining the amount that is greater than 50% likely of being realized upon selement. We presume that all tax posions will be examined by a taxing authority with full knowledge of all relevant informaon. The calculaon of our tax liabilies involves dealing with uncertaines in the applicaon of complex tax regulaons. We regularly monitor our tax posions and tax liabilies. We reevaluate the technical merits of our tax posions and recognize an uncertain tax beneﬁt, or derecognize a previously recorded tax beneﬁt, when there is: (i) a compleon of a tax audit, (ii) eﬀecve selement of an issue, (iii) a change in applicable tax law including a tax case or legislave guidance, or (iv) the expiraon of the applicable statute of limitaons. Signiﬁcant judgment is required in accounng for tax reserves. Although we believe that we have adequately provided for liabilies resulng from tax assessments by taxing authories, posions taken by these tax authories could have a material impact on our results of operaons. Business Acquisions We account for acquired businesses using the acquision method of accounng which requires that the assets acquired and liabilies assumed be recorded at the date of acquision at their respecve fair values. The judgments made in determining the esmated fair value assigned to each class of assets acquired and liabilies assumed, as well as asset lives, can materially impact our results of operaons. Accordingly, for signiﬁcant items, we typically engage a third- party valuaon ﬁrm. There are several methods that can be used to determine the fair value of assets acquired and liabilies assumed in a business combinaon. For intangible assets, we historically have ulized the income method. The income method starts with a forecast of all of the expected future net cash ﬂows aributable to the subject intangible asset. These cash ﬂows are then adjusted to present value by applying an appropriate discount rate that reﬂects the risk factors associated with the cash ﬂow streams. Some of the more signiﬁcant esmates and assumpons inherent in the income method (or other methods) include the projected future cash ﬂows (including ming) and the discount rate reﬂecng the risks inherent in the future cash ﬂows. Esmang the useful life of an intangible asset also requires judgment. For example, diﬀerent types of intangible assets will have diﬀerent useful lives, inﬂuenced by the nature of the asset, compeve environment and rate of change in the industry. All of these judgments and esmates can signiﬁcantly impact the determinaon of the amorzaon period of the intangible asset, and thus net income. Conngent consideraon liabilies are remeasured to fair value each reporng period using discount rates, probabilies of payment and projected payment dates. Increases or decreases in the fair value of the conngent consideraon liability can result from changes in the ming or likelihood of achieving value-enhancing milestones and changes in discount periods and rates. Projected conngent payment amounts are discounted back to the current period using a discount cash ﬂow model. For further disclosures related to acquisions and conngent consideraon, see Notes 2, 5 and 12 to the consolidated ﬁnancial statements in “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K. 47 TABLE OF CONTENTS 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 investments consist principally of interest-bearing corporate debt securies with varying maturity dates, which generally are less than one year. Because of the credit criteria of our investment policies, the primary market risk associated with these investments is interest rate risk. As of September 30, 2022, we did not hold any available-for-sale debt securies. Therefore, interest rate ﬂuctuaons relang to investments would have an insigniﬁcant impact on our results of operaons or cash ﬂows. Our policy also allows the Company to hold a substanal poron of funds in cash and cash equivalents, which are deﬁned as ﬁnancial instruments with original maturies of three months or less and may include money market instruments, cerﬁcates of deposit, repurchase agreements and commercial paper instruments. Loans under the Midcap credit agreement bear interest at ﬂoang rates ed to Term SOFR. As a result, changes in Term SOFR can aﬀect our results of operaon and cash ﬂows to the extent we do not have eﬀecve interest rate swap arrangements in place. On October 14, 2022, we entered into a ﬁve-year interest rate swap transacon with Wells Fargo Bank, N.A. with respect to $25.0 million of noonal value of the term loans funded under the MidCap credit agreement. The interest rate swap transacon ﬁxes at 4.455% the one-month Term SOFR poron of interest rate under the $25.0 million inial Term Loan funded such that the interest rate on the inial Term Loan will be 10.205% through its maturity. We have no other swap arrangements in place for any other loans under the Midcap credit agreement. Management believes that a reasonable change in raw material prices would not have a material impact on future earnings or cash ﬂows because the Company’s inventory exposure is not material. We are exposed to increasing Euro currency risk with respect to our manufacturing operaons in Ireland. In a period where the U.S. dollar is strengthening or weakening relave to the Euro, our revenue and expenses denominated in Euro currency are translated into U.S. dollars at a lower or higher value than they would be in an otherwise constant currency exchange rate environment. All sales transacons are denominated in U.S. dollars or Euros. We generate royales revenue from the sale of customer products in foreign jurisdicons. Royales generated in foreign jurisdicons by customers are converted and paid in U.S. dollars per contractual terms. Substanally all of our purchasing transacons are denominated in U.S. dollars or Euros. To date, we have not entered into any foreign currency forward exchange contracts or other derivave ﬁnancial instruments to hedge the eﬀects of adverse ﬂuctuaons in foreign currency exchange rates. 48 TABLE OF CONTENTS ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. TABLE OF CONTENTS Reports of Independent Registered Public Accounng Firm (PCAOB ID No. 34) Consolidated Balance Sheets Consolidated Statements of Operaons Consolidated Statements of Comprehensive (Loss) Income Consolidated Statements of Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 49 Page (s) 50 to 52 53 54 55 56 57 to 58 59 to 82 TABLE OF CONTENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Surmodics, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Surmodics, Inc. and subsidiaries (the "Company") as of September 30, 2022 and 2021, the related consolidated statements of operaons, comprehensive (loss) income, shareholders' equity, and cash ﬂows, for each of the three years in the period ended September 30, 2022, and the related notes and the ﬁnancial statement schedule listed in the Table of Contents at Item 15 (collecvely referred to as the "ﬁnancial statements"). In our opinion, the ﬁnancial statements present fairly, in all material respects, the ﬁnancial posion of the Company as of September 30, 2022 and 2021, and the results of its operaons and its cash ﬂows for each of the three years in the period ended September 30, 2022, in conformity with accounng principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounng Oversight Board (United States) (PCAOB), the Company's internal control over ﬁnancial reporng as of September 30, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Commiee of Sponsoring Organizaons of the Treadway Commission and our report dated November 23, 2022, expressed an unqualiﬁed opinion on the Company's internal control over ﬁnancial reporng. Basis for Opinion These ﬁnancial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's ﬁnancial statements based on our audits. We are a public accounng ﬁrm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securies laws and the applicable rules and regulaons of the Securies 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 reasonable assurance about whether the ﬁnancial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to 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 included evaluang the accounng principles used and signiﬁcant esmates made by management, as well as evaluang the overall presentaon of the ﬁnancial statements. We believe that our audits provide a reasonable basis for our opinion. Crical Audit Maer The crical audit maer communicated below is a maer arising from the current-period audit of the ﬁnancial statements that was communicated or required to be communicated to the audit commiee and that (1) relates to accounts or disclosures that are material to the ﬁnancial statements and (2) involved our especially challenging, subjecve, or complex judgments. The communicaon of crical audit maers does not alter in any way our opinion on the ﬁnancial statements, taken as a whole, and we are not, by communicang the crical audit maer below, providing a separate opinion on the crical audit maer or on the accounts or disclosures to which it relates. Royales and license fees – Sales-based Royalty Esmates — Refer to Note 2 of the ﬁnancial statements Crical Audit Maer Descripon Royalty revenue consists of sales-based royales earned under licenses of performance coang technologies. Performance obligaons under these licenses, which consist of the right to use the Company’s proprietary technology, are sasﬁed at a point in me corresponding with delivery of the underlying technology rights to the customer, which is generally upon transfer of the licensed technology to the customer. Sales-based royalty revenue represents variable consideraon under the license agreements and is recognized in the period a customer sells products incorporang the Company’s licensed technologies. The Company esmates sales-based royalty revenue earned but unpaid at each reporng period using the expected value method based on historical sales informaon, adjusted for known changes such as product launches and patent expiraons. The Company also considers macroeconomic factors aﬀecng the medical device market. These inputs require signiﬁcant management judgment. 50 TABLE OF CONTENTS Given the signiﬁcant judgments made by management relang to the inputs used in the expected value method to esmate the sales-based royales earned under licenses of performance coang technologies, auding such inputs required an increased extent of audit eﬀort and a high degree of auditor judgment when performing audit procedures and evaluang the results of those procedures. How the Crical Audit Maer Was Addressed in the Audit Our audit procedures related to the sales-based royalty esmates under licenses of performance coang technologies included the following, among others: • We tested the eﬀecveness of controls over the sales-based royalty esmates. • We tested management’s process through inquiries of management and inspecon of the inputs used in the expected value method to understand how management developed the quarterly sales-based royales earned esmates under licenses of performance coang technologies. • We evaluated and tested the expected value method inputs including historical sales informaon, adjustments for product launches, patent expiraons, and macroeconomic factors in the sales-based royales earned esmates and compared prior period management esmates to actual royalty revenue reported by customers. • We tested select license agreements between the Company and customers, which included inspecon of quarterly reporng from customers, to evaluate the accuracy and completeness of the historical informaon included within the sales-based royales earned esmates. • We tested the mathemacal accuracy of the sales-based royales earned esmates used for revenue recognion. /s/ DELOITTE & TOUCHE LLP Minneapolis, Minnesota November 23, 2022 We have served as the Company's auditor since 2002. 51 TABLE OF CONTENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Surmodics, Inc. Opinion on Internal Control over Financial Reporng We have audited the internal control over ﬁnancial reporng of Surmodics, Inc. and subsidiaries (the “Company”) as of September 30, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Commiee of Sponsoring Organizaons of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, eﬀecve internal control over ﬁnancial reporng as of September 30, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounng Oversight Board (United States) (PCAOB), the consolidated ﬁnancial statements as of and for the year ended September 30, 2022, of the Company and our report dated November 23, 2022, expressed an unqualiﬁed opinion on those ﬁnancial statements. Basis for Opinion The Company’s management is responsible for maintaining eﬀecve internal control over ﬁnancial reporng and for its assessment of the eﬀecveness of internal control over ﬁnancial reporng, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporng. Our responsibility is to express an opinion on the Company’s internal control over ﬁnancial reporng based on our audit. We are a public accounng ﬁrm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securies laws and the applicable rules and regulaons of the Securies 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 reasonable assurance about whether eﬀecve internal control over ﬁnancial reporng was maintained in all material respects. Our audit included obtaining an understanding of internal control over ﬁnancial reporng, assessing the risk that a material weakness exists, tesng and evaluang the design and operang eﬀecveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Deﬁnion and Limitaons of Internal Control over Financial Reporng A company’s internal control over ﬁnancial reporng is a process designed to provide reasonable assurance regarding the reliability of ﬁnancial reporng and the preparaon of ﬁnancial statements for external purposes in accordance with generally accepted accounng principles. A company’s internal control over ﬁnancial reporng includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reﬂect the transacons and disposions of the assets of the company; (2) provide reasonable assurance that transacons are recorded as necessary to permit preparaon of ﬁnancial statements in accordance with generally accepted accounng principles, and that receipts and expenditures of the company are being made only in accordance with authorizaons of management and directors of the company; and (3) provide reasonable assurance regarding prevenon or mely detecon of unauthorized acquision, use, or disposion of the company’s assets that could have a material eﬀect on the ﬁnancial statements. Because of its inherent limitaons, internal control over ﬁnancial reporng may not prevent or detect misstatements. Also, projecons of any evaluaon of eﬀecveness to future periods are subject to the risk that controls may become inadequate because of changes in condions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP Minneapolis, Minnesota November 23, 2022 52 TABLE OF CONTENTS Surmodics, Inc. and Subsidiaries Consolidated Balance Sheets As of September 30, (In thousands, except per share data) Current Assets: ASSETS Cash and cash equivalents Available-for-sale securies Accounts receivable, net of allowances of $81 and $119 as of September 30, 2022 and 2021, respecvely Contract assets — royales and license fees Inventories, net Income tax receivable Prepaids and other Total Current Assets Property and equipment, net Available-for-sale securies Deferred income taxes Intangible assets, net Goodwill Other assets Total Assets Current Liabilies: Accounts payable Accrued liabilies: Compensaon Accrued other Short-term borrowings Deferred revenue Total Current Liabilies LIABILITIES AND STOCKHOLDERS’ EQUITY Deferred revenue, less current poron Deferred income taxes Other long-term liabilies Total Liabilies Commitments and Conngencies (Note 11) Stockholders’ Equity: Series A preferred stock — $.05 par value, 450 shares authorized; no shares issued and outstanding Common stock — $.05 par value, 45,000 shares authorized; 14,029 and 13,899 shares issued and outstanding, as of September 30, 2022 and 2021, respecvely Addional paid-in capital Accumulated other comprehensive (loss) income Retained earnings Total Stockholders’ Equity Total Liabilies and Stockholders’ Equity The accompanying notes are an integral part of these consolidated ﬁnancial statements. 53 2022 2021 18,998 $ — 10,452 7,116 11,819 2,438 6,764 57,587 27,148 — — 28,145 40,710 4,769 158,359 $ 3,136 $ 8,929 5,854 10,000 4,160 32,079 5,088 2,027 10,773 49,967 — 701 28,774 (9,874 ) 88,791 108,392 158,359 $ 31,153 7,717 9,169 7,091 6,760 1,912 6,453 70,255 30,090 2,002 5,867 37,054 45,606 3,718 194,592 1,783 8,480 4,905 10,000 4,647 29,815 10,301 2,742 11,649 54,507 — 695 21,598 1,727 116,065 140,085 194,592 $ $ $ $ TABLE OF CONTENTS (In thousands, except per share data) Revenue: Product sales Royales and license fees Research, development and other Total revenue Operang costs and expenses: Product costs Research and development Selling, general and administrave Acquired intangible asset amorzaon Acquision transacon, integraon and other costs Conngent consideraon expense Total operang costs and expenses Operang (loss) income Other expense: Interest expense Foreign exchange gain (loss) Investment income, net Loss on strategic investments and other Other expense (Loss) income before income taxes Income tax (expense) beneﬁt Net (loss) income Basic net (loss) income per share Diluted net (loss) income per share Weighted average number of shares outstanding: Basic Diluted Surmodics, Inc. and Subsidiaries Consolidated Statements of Operaons For the Fiscal Year Ended September 30, $ $ $ $ 2022 2021 2020 54,621 $ 36,248 9,082 99,951 46,478 $ 47,056 11,602 105,136 20,342 50,609 46,935 4,150 — 12 122,048 (22,097 ) (598 ) 103 99 — (396 ) (22,493 ) (4,781 ) (27,274 ) $ (1.96 ) $ (1.96 ) $ 17,177 46,734 30,677 2,793 1,049 3 98,433 6,703 (310 ) (170 ) 123 — (357 ) 6,346 (2,109 ) 4,237 $ 0.31 $ 0.30 $ 13,916 13,916 13,765 13,989 44,317 40,634 9,913 94,864 15,317 50,188 28,392 2,218 — — 96,115 (1,251 ) (133 ) (248 ) 656 (478 ) (203 ) (1,454 ) 2,577 1,123 0.08 0.08 13,552 13,812 The accompanying notes are an integral part of these consolidated ﬁnancial statements. 54 TABLE OF CONTENTS Surmodics, Inc. and Subsidiaries Consolidated Statements of Comprehensive (Loss) Income For the Fiscal Year Ended September 30, (In thousands) Net (loss) income Other comprehensive (loss) income: Net changes related to available-for-sale securies, net of tax Foreign currency translaon adjustments Other comprehensive (loss) income Comprehensive (loss) income 2022 2021 2020 (27,274 ) $ 4,237 $ 1,123 (1 ) (11,600 ) (11,601 ) (38,875 ) $ 1 (1,448 ) (1,447 ) 2,790 $ (10 ) 2,788 2,778 3,901 $ $ The accompanying notes are an integral part of these consolidated ﬁnancial statements. 55 TABLE OF CONTENTS (In thousands) Balance at September 30, 2019 Net income Other comprehensive income Issuance of common stock Common stock opons exercised, net Purchase of common stock to pay employee taxes Stock-based compensaon Balance at September 30, 2020 Net income Other comprehensive loss Issuance of common stock Common stock opons exercised, net Purchase of common stock to pay employee taxes Stock-based compensaon Balance at September 30, 2021 Net loss Other comprehensive loss Issuance of common stock Common stock opons exercised, net Purchase of common stock to pay employee taxes Stock-based compensaon Balance at September 30, 2022 Surmodics, Inc. and Subsidiaries Consolidated Statements of Stockholders’ Equity For the Fiscal Years Ended September 30, 2022, 2021 and 2020 Common Stock Shares Amount Addional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Stockholders’ 13,504 $ — — 149 64 (45 ) — 13,672 — — 100 146 (19 ) — 13,899 — — 124 27 675 $ — — 8 3 (2 ) — 684 — — 5 7 (1 ) — 695 — — 6 1 10,740 $ — — 492 1,112 (2,428 ) 5,453 15,369 — — 614 2,502 (2,750 ) 5,863 21,598 — — 826 413 396 $ — 2,778 — — 110,705 $ 1,123 — — — — — 3,174 — (1,447 ) — — — — 1,727 — (11,601 ) — — — — 111,828 4,237 — — — — — 116,065 (27,274 ) — — — (21 ) — 14,029 $ (1 ) — 701 $ (1,120 ) 7,057 28,774 $ — — (9,874 ) $ — — 88,791 $ Equity 122,516 1,123 2,778 500 1,115 (2,430 ) 5,453 131,055 4,237 (1,447 ) 619 2,509 (2,751 ) 5,863 140,085 (27,274 ) (11,601 ) 832 414 (1,121 ) 7,057 108,392 The accompanying notes are an integral part of these consolidated ﬁnancial statements. 56 TABLE OF CONTENTS Surmodics, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Fiscal Year Ended September 30, (In thousands) Operang Acvies: Net (loss) income Adjustments to reconcile net (loss) income to net cash (used in) provided by operang acvies: $ 2022 2021 2020 (27,274 ) $ 4,237 $ 1,123 Depreciaon and amorzaon Stock-based compensaon Noncash lease expense Provision for credit losses Deferred taxes Payment of conngent consideraon obligaons in excess of acquision-date value Loss on strategic investment Other Change in operang assets and liabilies: Accounts receivable and contract assets Inventories Prepaids and other Accounts payable Accrued liabilies Income taxes Deferred revenue Net cash (used in) provided by operang acvies Invesng Acvies: Purchases of property and equipment Payment for acquision of intangible assets Purchases of available-for-sale securies Sales and maturies of available-for-sale securies Purchase of business, net of acquired cash Net cash provided by (used in) invesng acvies Financing Acvies: Proceeds from short-term borrowings Issuance of common stock Payments for taxes related to net share selement of equity awards Payment of deferred ﬁnancing costs Payments for acquision of in-process research and development Payment of conngent consideraon obligaons Net cash (used in) provided by ﬁnancing acvies Eﬀect of exchange rate changes on cash Net change in cash and cash equivalents Cash and Cash Equivalents: Beginning of year End of year The accompanying notes are an integral part of these consolidated ﬁnancial statements. 57 9,142 7,057 529 5 5,268 — — 326 (1,522 ) (5,060 ) (665 ) 1,608 132 (1,069 ) (5,700 ) (17,223 ) (3,370 ) — — 9,600 — 6,230 — 1,246 (1,121 ) — (500 ) — (375 ) (787 ) (12,155 ) 8,017 5,863 308 (11 ) 1,651 — — 181 (2,480 ) (818 ) (2,391 ) 264 1,406 210 (1,048 ) 15,389 (5,279 ) (1,000 ) (22,723 ) 43,317 (39,553 ) (25,238 ) 10,000 3,128 (2,751 ) — (150 ) — 10,227 (10 ) 368 $ 31,153 18,998 $ 30,785 31,153 $ 7,263 5,453 246 73 (1,139 ) (608 ) 479 5 3,461 (1,377 ) 410 (483 ) 1,847 (1,558 ) (1,185 ) 14,010 (3,671 ) — (59,917 ) 54,522 — (9,066 ) — 1,615 (2,534 ) (137 ) (1,000 ) (2,592 ) (4,648 ) 128 424 30,361 30,785 TABLE OF CONTENTS (In thousands) Supplemental Informaon: Cash paid for income taxes Cash paid for interest Noncash ﬁnancing and invesng acvies: Surmodics, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Connued) For the Fiscal Year Ended September 30, 2022 2021 2020 $ $ 416 415 160 $ 74 Acquision of property and equipment and intangible assets, net of refundable credits in other current assets and liabilies Right-of-use assets and property and equipment obtained in exchange for new operang lease liabilies Deferred and conngent consideraon assumed in business acquision 70 1,725 — 211 234 4,071 The accompanying notes are an integral part of these consolidated ﬁnancial statements. 58 30 — 1,306 1,181 — TABLE OF CONTENTS 1. Organizaon Descripon of Business Surmodics, Inc. and Subsidiaries Notes to Consolidated Financial Statements Surmodics, Inc. and subsidiaries (referred to as “Surmodics,” the “Company,” “we,” “us,” “our” and other like terms) is a leading provider of performance coang technologies for intravascular medical devices and chemical and biological components for in vitro diagnosc (“IVD”) immunoassay tests and microarrays. Surmodics develops and commercializes highly diﬀerenated vascular intervenon medical devices that are designed to address unmet clinical needs and engineered to the most demanding requirements. This key growth strategy leverages the combinaon of the Company’s experse in proprietary surface modiﬁcaon and drug-delivery coang technologies, along with its device design, development and manufacturing capabilies. The Company’s mission is to improve the detecon and treatment of disease. Surmodics is headquartered in Eden Prairie, Minnesota. Basis of Presentaon and Principles of Consolidaon The consolidated ﬁnancial statements include all accounts and wholly-owned subsidiaries and have been prepared in accordance with accounng principles generally accepted in the U.S. (“GAAP”). All intercompany transacons have been eliminated. The Company operates on a ﬁscal year ending on September 30. Use of Esmates The preparaon of consolidated ﬁnancial statements in conformity with GAAP requires management to make esmates and assumpons that aﬀect the reported amounts of assets and liabilies, the disclosure of conngent liabilies at the date of the consolidated ﬁnancial statements and the reported amounts of revenue and expenses during the reporng period. Ulmate results could diﬀer from those esmates. 2. Summary of Signiﬁcant Accounng Policies and Select Balance Sheet Informaon Cash and Cash Equivalents Cash and cash equivalents consist of ﬁnancial instruments with maturies of three months or less at the Company’s acquision date of the security and are stated at cost which approximates fair value and may include money market instruments, cerﬁcates of deposit, repurchase agreements and commercial paper instruments. Accounts Receivable, Net We grant credit to customers in the normal course of business and maintain an allowance for credit losses. The allowance for credit losses reﬂects the current esmate of credit losses expected to be incurred over the life of the accounts receivable. We consider various factors in establishing, monitoring and adjusng the allowance for credit losses including the aging of accounts and aging trends, the historical level of charge-oﬀs, and speciﬁc exposures related to parcular customers. We base our esmates of credit loss reserves on historical experience and adjust, as necessary, to reﬂect current condions using reasonable and supportable forecasts not already reﬂected in the historical loss informaon. Investments As of September 30, 2022 and 2021, investments in available-for-sale debt securies totaled zero and $9.7 million, respecvely, on the consolidated balance sheets. As of September 30, 2021, investments consisted of commercial paper and corporate bond securies, were classiﬁed as available-for-sale, and were reported at fair value. Interest earned on debt securies, including amorzaon of premiums and accreon of discounts, is included in investment income, net within other expense. Realized gains and losses from the sales of debt securies, which are included in other expense, are determined using the speciﬁc idenﬁcaon method. Investment purchases are accounted for on the date the trade is executed, which may not be the same as the date the transacon is cash seled. Unrealized gains and losses, net of tax, are excluded from the consolidated statements of operaons and reported on the consolidated statements of comprehensive (loss) income as well as a separate component of stockholders’ equity on the consolidated balance sheets. For investments in an unrealized loss posion, we make the following assessments. If it is more likely than not we will sell the investment before recovery of its amorzed cost basis, we write down the security’s amorzed cost basis to fair value and reclassify the net unrealized loss from accumulated other comprehensive (loss) income to other expense. If the decline in fair value is deemed to be due to a credit loss, we recognize an allowance for the expected credit loss to reduce the cost basis to fair value, with a corresponding adjustment to other expense. 59 TABLE OF CONTENTS There were no available-for-sale securies as of September 30, 2022. As of September 30, 2021, the amorzed cost, unrealized holding gains and losses, and fair value of available-for-sale securies were as follows: (In thousands) Commercial paper and corporate bonds Total September 30, 2021 Valuaon Amorzed Cost Unrealized Gains Unrealized Losses Fair Value Balance Sheet Classiﬁcaon Current Assets Noncurrent Assets $ $ 9,718 $ 9,718 $ 2 $ 2 $ (1 ) $ (1 ) $ 9,719 $ 9,719 $ 7,717 $ 7,717 $ 2,002 2,002 There were no held-to-maturity debt securies as of September 30, 2022 and 2021. There were no realized gains or losses on sales of available-for-sale securies for ﬁscal 2022, 2021 or 2020. Inventories Inventories are principally stated at the lower of cost or net realizable value using the speciﬁc idenﬁcaon method and include direct labor, materials and overhead, with cost of product sales determined on a ﬁrst-in, ﬁrst-out basis. Inventories consisted of the following components: (In thousands) Raw materials Work-in process Finished products Total Prepaids and Other Assets, Current Prepaids and other current assets consisted of the following: (In thousands) Prepaid expenses Irish research and development credits receivable CARES Act employee retenon credit receivable Prepaids and other September 30, 2022 2021 6,102 $ 1,595 4,122 11,819 $ September 30, 2022 2021 2,570 $ 753 3,441 6,764 $ 4,165 1,295 1,300 6,760 1,712 1,164 3,577 6,453 $ $ $ $ In ﬁscal 2021, a beneﬁt of $3.6 million was recorded to reduce operang costs and expenses as a result of our eligibility for the employee retenon credit under the provisions of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") enacted in March 2020. This beneﬁt and corresponding receivable reﬂected ancipated reimbursement of personnel expenses we incurred in ﬁscal 2021 and 2020. Property and Equipment Property and equipment are stated at cost, less any impairment, and are depreciated using the straight-line method over the esmated useful lives of the assets. The Company recorded depreciaon expense of $4.7 million, $4.9 million and $4.8 million in ﬁscal 2022, 2021 and 2020, respecvely. The September 30, 2022 and 2021 balances in construcon-in-progress include the cost of equipment and building improvements not yet placed in service. As assets are placed in service, construcon-in-progress is transferred to the speciﬁc property and equipment categories and depreciated over the esmated useful lives of the assets. Leasehold improvements are amorzed over the shorter of the term of the lease or the esmated useful life of the asset. Expenditures for maintenance and repairs and minor renewals and beerments that do not extend or improve the life of the respecve assets are expensed as incurred. 60 TABLE OF CONTENTS Property and equipment consisted of the following components: (Dollars in thousands) Land Laboratory ﬁxtures and equipment Buildings and improvements Leasehold improvements Oﬃce furniture and equipment Construcon-in-progress Less: Accumulated depreciaon Property and equipment, net Useful Life (Years) N/A 3 to 10 3 to 20 5 to 10 3 to 10 September 30, 2022 2021 $ $ 4,409 $ 28,810 26,373 6,499 9,205 3,175 (51,323 ) 27,148 $ 4,419 29,482 26,573 6,499 8,713 2,120 (47,716 ) 30,090 Intangible Assets Intangible assets consisted of the following: (Dollars in thousands) Deﬁnite-lived intangible assets: Customer lists and relaonships Developed technology Patents and other Total deﬁnite-lived intangible assets Unamorzed intangible assets: Trademarks and trade names Total intangible assets (Dollars in thousands) Deﬁnite-lived intangible assets: Customer lists and relaonships Developed technology Patents and other Total deﬁnite-lived intangible assets Unamorzed intangible assets: Trademarks and trade names Total intangible assets Weighted Average Original Life (Years) Gross Carrying Amount Accumulated Amorzaon Net September 30, 2022 8.9 11.9 14.1 $ $ 11,354 $ 31,943 3,551 46,848 580 47,428 $ September 30, 2021 (8,827 ) $ (7,994 ) (2,462 ) (19,283 ) — (19,283 ) $ Weighted Average Original Life (Years) Gross Carrying Amount Accumulated Amorzaon Net 8.9 11.9 14.1 $ $ 13,216 $ 36,531 3,551 53,298 580 53,878 $ (8,878 ) $ (5,652 ) (2,294 ) (16,824 ) — (16,824 ) $ 2,527 23,949 1,089 27,565 580 28,145 4,338 30,879 1,257 36,474 580 37,054 The Company recorded amorzaon expense of $4.4 million, $3.1 million and $2.5 million in ﬁscal 2022, 2021 and 2020, respecvely. Based on the intangible assets in service as of September 30, 2022, esmated amorzaon expense for future ﬁscal years is as follows: (In thousands) 2023 2024 2025 2026 2027 Thereaer Deﬁnite-lived intangible assets $ $ 3,549 3,471 3,439 2,618 2,384 12,104 27,565 Future amorzaon amounts presented above are esmates. Actual future amorzaon expense may be diﬀerent as a result of future acquisions, impairments, changes in amorzaon periods, foreign currency exchange rates or other factors. 61 TABLE OF CONTENTS The Company deﬁnes in-process research and development (“IPR&D”) as the value of technology acquired for which the related projects have substance and are incomplete. IPR&D acquired in a business combinaon is recognized at fair value and is capitalized as an indeﬁnite-lived intangible asset unl compleon or abandonment of the IPR&D project. Upon compleon of the development project (generally when regulatory approval to market the product is obtained), an impairment assessment is performed prior to amorzing the asset over its esmated useful life. In cases where the IPR&D projects are abandoned, the related IPR&D assets are wrien oﬀ. The Company assesses indeﬁnite-lived assets for impairment annually in the fourth quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Similar to the goodwill impairment assessment, the indeﬁnite-lived assets impairment assessment requires the Company to make several esmates about fair value, most of which are based on projected future cash ﬂows. The Company performs its annual assessment of indeﬁnite-lived intangible assets for impairment as of July 1st of each ﬁscal year. No impairment charges were recorded in ﬁscal 2022, 2021 and 2020. Goodwill Goodwill in the Medical Device reporng unit represents the gross value from the ﬁscal 2021 acquision of Vetex Medical Limited (“Vetex”) and the ﬁscal 2016 acquisions of Creagh Medical, Ltd. (“Creagh Medical”) and NorMedix, Inc. (“NorMedix”). Goodwill in the In Vitro Diagnoscs reporng unit represents the gross value from the acquision of BioFX Laboratories, Inc. in 2007. Refer to Note 12 Acquisions for further disclosures for Vetex. Changes in the carrying amount of goodwill by segment were as follows: (In thousands) Goodwill as of September 30, 2020 Acquision of Vetex Medical Limited Foreign currency translaon adjustment Goodwill as of September 30, 2021 Foreign currency translaon adjustment Measurement period adjustments (1) Goodwill as of September 30, 2022 In Vitro Diagnoscs Medical Device Total 8,010 $ — — 8,010 — — 8,010 $ 19,175 $ 19,089 (668 ) 37,596 (5,173 ) 277 32,700 $ 27,185 19,089 (668 ) 45,606 (5,173 ) 277 40,710 $ $ (1) In ﬁscal 2022, measurement period adjustments were recorded to ﬁnalize the allocaon of purchase consideraon for the ﬁscal 2021 Vetex acquision (Note 12). Goodwill represents the excess of the purchase price of an acquired business over the fair value assigned to the assets purchased and liabilies assumed. Goodwill is not amorzed but is subject, at a minimum, to annual tests for impairment. The carrying amount of goodwill is evaluated annually, and between annual evaluaons if events occur or circumstances change indicang that it is more likely than not that the fair value of a reporng unit is less than its carrying amount. The Company’s reporng units are the Medical Device and In Vitro Diagnoscs reportable segments. Inherent in the determinaon of fair value of the reporng units are certain esmates and judgments, including the interpretaon of current economic indicators and market valuaons, as well as the Company’s strategic plans with regard to its operaons. When ulizing a quantave assessment, the Company determines fair value at the reporng unit level based on a combinaon of an income approach and market approach. The income approach is based on esmated future cash ﬂows, discounted at a rate that approximates the cost of capital of a market parcipant, while the market approach is based on sales and/or earnings mulples of similar companies. These approaches use signiﬁcant esmates and assumpons, including projected future cash ﬂows and the ming of those cash ﬂows, discount rates reﬂecng risks inherent in future cash ﬂows, perpetual growth rates, and determinaon of appropriate market comparables. The Company performs its annual assessment of goodwill for impairment as of July 1st of each ﬁscal year. Goodwill was not impaired in either reporng unit based on the outcome of the ﬁscal 2022 annual impairment test, which ulized a quantave assessment. No goodwill impairment charges were recorded in ﬁscal 2022, 2021 and 2020. 62 TABLE OF CONTENTS Other Assets, Noncurrent Other noncurrent assets consisted of the following: (In thousands) Operang lease right-of-use assets Other Other assets, noncurrent Valuaon of Long-lived Assets September 30, 2022 2021 $ $ 3,633 $ 1,136 4,769 $ 2,435 1,283 3,718 The Company periodically evaluates whether events and circumstances have occurred that may aﬀect the esmated useful life or the recoverability of the remaining balance of long-lived assets, such as property and equipment, right-of-use assets, and deﬁnite-lived intangible assets. If such events or circumstances were to indicate that the carrying amount of these assets may not be recoverable, the Company would esmate the future cash ﬂows expected to result from the use of the assets and their eventual disposion. If the sum of the expected future cash ﬂows (undiscounted and without interest charges) were less than the carrying amount of the assets, the Company would recognize an impairment charge to reduce such assets to their fair value. In ﬁscal 2022, 2021 and 2020, no impairment charges were recorded related to the Company’s long-lived assets. Accrued Other Liabilies Accrued other liabilies consisted of the following: (In thousands) Accrued professional fees Accrued clinical study expense Accrued purchases Acquision of in-process research and development (1) Operang lease liability, current poron Other Total accrued other liabilies September 30, 2022 2021 $ $ 279 $ 1,425 1,655 981 963 551 5,854 $ 489 1,667 1,195 494 518 542 4,905 (1) Acquision of in-process research and development consists of the present value of guaranteed payments to be made (current poron) in connecon with an asset acquision in ﬁscal 2018 (Note 11). Other Long-term Liabilies Other long-term liabilies consisted of the following: (In thousands) Deferred consideraon (1) Conngent consideraon (2) Unrecognized tax beneﬁts (3) Operang lease liabilies (4) Other long-term liabilies September 30, 2022 2021 $ $ 4,260 $ 829 1,841 3,843 10,773 $ 5,106 817 2,538 3,188 11,649 (1) Deferred consideraon consisted primarily of the present value of guaranteed payments to be made in connecon with the ﬁscal 2021 Vetex acquision (Note 12) and with an asset acquision in ﬁscal 2019 (Note 11). (2) Conngent consideraon consisted of the fair value of conngent consideraon liabilies associated with the ﬁscal 2021 Vetex acquision (Note 5 and Note 12). (3) Unrecognized tax beneﬁts (Note 9) included accrued interest and penales, if applicable. (4) Operang lease liabilies consisted of the non-current poron of the net present value of future minimum lease payments, reduced by the discounted value of leasehold improvement incenves paid or payable to the Company. 63 TABLE OF CONTENTS Revenue Recognion Revenue is recognized when control of the promised goods or services is transferred to our customers in an amount that reﬂects the consideraon we expect to be entled to receive in exchange for those goods or services. The Company primarily sells or licenses its products, technologies and services to other medical device and diagnoscs companies. Revenue is recorded net of taxes collected from customers, and taxes collected are recorded as current liabilies unl remied to the relevant government authority. The amount of foreign taxes imposed on speciﬁc revenue producing transacons that is the responsibility of the Company is expensed as incurred and reported in income tax expense on the consolidated statements of operaons. For contracts that have an original duraon of one year or less, the Company uses the praccal expedient applicable to such contracts and does not adjust the transacon price for the me value of money. Performance Obligaons We derive our revenue from three primary sources: Product Sales Royales and License Fees Research, Development and Other IVD chemical and biological components, including: protein stabilizers, substrates, surface coangs and angens to the diagnosc and biomedical research markets (IVD segment) Performance coang royales from licensing of Commercial development feasibility services and our proprietary performance coang technologies to medical device manufacturers (Medical Device segment) contract coang services (Medical Device segment) Performance coang reagents, the chemicals used in performance coangs by licensees (Medical Device segment) SurVeil™ DCB license fees associated with the Abbo Agreement (Medical Device segment) Commercial development services (IVD segment) Vascular intervenon medical devices and related products to original equipment manufacturer suppliers and distributors, as well as directly to healthcare providers (Medical Device segment) The Company recognizes revenue when control is transferred to the customer. The transfer of control varies by revenue classiﬁcaon and is described below. If a contract contains more than one disnct performance obligaon, the transacon price is allocated to each performance obligaon based on relave standalone selling price. Product Sales. Revenue from product sales is recognized at the point in me control of the products is transferred, generally upon shipment based upon the standard contract terms. Shipping and handling acvies are considered to be fulﬁllment acvies rather than promised services and are not, therefore, considered to be separate performance obligaons. The Company’s sales terms provide no right of return outside of a standard warranty policy, and returns are generally not signiﬁcant. Payment terms for product sales are generally set at 30-45 days aer shipment. Royales. Royales revenue consists of sales-based and recurring minimum royales earned under licenses of our performance coang technologies. Performance obligaons under these licenses, which consist of the right to use the Company’s proprietary technology, are sasﬁed at a point in me corresponding with delivery of the underlying technology rights to the customer, which is generally upon transfer of the licensed technology to the customer. Sales-based royales revenue represents variable consideraon under the license agreements and is recognized in the period a customer sells products incorporang the Company’s licensed technologies. The Company esmates sales-based royales revenue earned but unpaid at each reporng period using the expected value method based on historical sales informaon, adjusted for known changes such as product launches and patent expiraons. The Company also considers macroeconomic factors aﬀecng the medical device market. The Company's license arrangements also oen provide for recurring fees (minimum royales), which the Company recognizes at the later of the sasfacon of the underlying performance obligaon or upon renewal of the contract, which generally occurs on a quarterly basis. Sales-based and minimum royales are generally due within 45 days aer the end of each quarter. 64 TABLE OF CONTENTS License Fees. For disnct license performance obligaons, upfront license fees are recognized when the Company sasﬁes the underlying performance obligaon. This generally occurs upon transfer of the right to use the Company’s licensed technology to the customer, with the excepon of the license of the Company’s SurVeil™ drug-coated balloon (the “SurVeil DCB”) disclosed below. Certain license arrangements include conngent milestone payments, which are due following achievement by our customers of speciﬁed sales or regulatory milestones. Conngent milestone payment terms vary by contract. The Company has generally fulﬁlled its performance obligaon prior to achievement of these milestones. However, because of the uncertainty of the milestone achievement, and/or the dependence on sales of our customers, variable consideraon for conngent milestones is fully constrained and excluded from the contract price unl the milestone is achieved by our customer, to the extent collectability is reasonably certain. The Company has a collaborave arrangement contract with Abbo Vascular, Inc. (“Abbo”) disclosed in Note 4 Collaborave Arrangement (the “Abbo Agreement”). As of September 30, 2022, the Company has received payments totaling $60.8 million under the Abbo Agreement and may receive an addional conngent milestone payment upon PMA of our SurVeil DCB of $30 million (if PMA is received prior to December 31, 2022) or $27 million (if PMA is received aer December 31, 2022 but prior to June 30, 2023), or $24 million (if PMA is received on or aer June 30, 2023), pursuant to the terms of the Abbo Agreement. The performance obligaon idenﬁed in the Abbo Agreement includes delivery of our licensed technology and compleon of research and development acvies, primarily clinical trial acvies (together, “R&D and Clinical Acvies”). These promises are not disnct performance obligaons because the product necessary for compleon of the R&D and Clinical Acvies is currently only able to be manufactured by the Company due to the exclusive proprietary know-how and certain regulatory requirements associated with the manufacture of the product. The customer, Abbo, simultaneously receives and consumes the beneﬁts of the R&D and Clinical Acvies as study data are generated to support regulatory approval submissions. Control is eﬀecvely transferred over me as we complete the TRANSCEND clinical study of the SurVeil DCB and related regulatory acvies. License fee revenue related to this contract is recognized using the cost-to-cost method which measures progress based on costs incurred to date relave to the expected total cost of the services, as the Company believes this represents a faithful depicon of the sasfacon of its performance obligaon. Use of the cost-to-cost method requires signiﬁcant esmates, including the total cost of the TRANSCEND study, which is expected to be completed over the next three years. Revenue is recorded based on the cost-to-cost compleon esmate relave to the transacon price, which is equal to the total upfront fee plus the expected value of the clinical and regulatory milestones. Revenue from the upfront fee and conngent clinical and regulatory milestone payments, once the underlying conngencies are achieved, is recognized within royales and license fees on the consolidated statements of operaons as the clinical and regulatory acvies are performed on a proporonal performance basis. Performance is measured based on actual costs incurred relave to the expected total cost of the underlying acvies, most notably the compleon of the TRANSCEND clinical trial. A signiﬁcant component of the cost of this trial is the cost of the Company’s outsourced clinical trial clinical research organizaon (“CRO”) consultants, which is esmated based on executed statements of work, project budgets, and paent enrollment ming, among other factors. A signiﬁcant change to the Company’s esmate of the costs to complete the TRANSCEND clinical trial could have a material eﬀect on the Company’s results of operaons. Signiﬁcant judgment is used to esmate total revenue and cost at compleon for this contract. To account for the Abbo Agreement, the Company applied the guidance in ASC Topic 808 (Collaborave Arrangements) as the pares are acve parcipants and are exposed to signiﬁcant risks and rewards dependent on commercial success of the collaborave acvity. See Note 4 Collaborave Arrangement for further disclosures related to the Abbo Agreement. Research and Development. The Company performs research and development (“R&D”) acvies as a service to customers, which are typically charged to customers on a me-and-materials basis. Generally, revenue for R&D services is recorded over me as the services are provided to the customer in the amount to which the Company has the right to invoice. These services are generally charged to the customer as they are provided. Payment terms for R&D services are generally set at 30-45 days. Contract Assets, Deferred Revenue and Remaining Performance Obligaons Contract assets are generally short in duraon given the nature of products produced and services provided by the Company. Contract assets consist of sales- based and minimum royales revenue earned for which uncondional right to payment does not exist as of the balance sheet date. These assets are comprised of esmated sales-based royales earned, but not yet reported by the Company’s customers, minimum royales on non-cancellable contracts, and conngent milestones earned, but not yet billable based on the terms of the contract. See Note 3 Revenue for further contract asset disclosures. The Company records a contract liability, or deferred revenue, when there is an obligaon to provide a product or service to the customer, and payment is received or due in advance of performance, or when payment is received for a period outside the contract term. See Note 4 Collaborave Arrangement for further deferred revenue disclosures. 65 TABLE OF CONTENTS Remaining performance obligaons include deferred revenue and amounts the Company expects to receive for goods and services that have not yet been delivered or provided under exisng, noncancellable contracts. For contracts that have an original duraon of one year or less, the Company has elected the praccal expedient applicable to such contracts and does not disclose the transacon price for remaining performance obligaons at the end of each reporng period or the expecng ming of recognion of related revenue. See Note 4 Collaborave Arrangement for further performance obligaon disclosures. Leases The Company leases facilies for research, oﬃce, manufacturing and warehousing. The Company determines whether a contract is a lease or contains a lease at incepon date. Upon commencement, the Company recognizes a right-of-use asset and lease liability based on the net present value of the future minimum lease payments over the lease term at the commencement date. The net present value of future minimum lease payments recorded upon lease commencement is reduced by the discounted value of any leasehold improvement incenves payable to the Company considered to be in-substance ﬁxed payments. The unamorzed balance of leasehold improvement incenves in the form of tenant allowances represents the primary diﬀerence between the balance of the right-of-use assets and operang lease liabilies. As the Company’s leases typically do not provide an implicit rate, the Company’s lease liabilies are measured on a discounted basis using the Company's incremental borrowing rate. Lease terms used in the recognion of right-of-use assets and lease liabilies include only opons to extend the lease that are reasonably certain to be exercised. The consolidated balance sheets do not include recognized assets or liabilies for leases that, at the commencement date, have a term of twelve months or less and do not include an opon to purchase the underlying asset that is reasonably certain to be exercised. The Company recognizes such leases on the consolidated statements of operaons on a straight- line basis over the lease term. The Company’s leases include one or more opons to renew and extend the lease term at the Company’s discreon. These renewal opons are not included in right-of-use assets and lease liabilies as they are not reasonably certain of exercise. The Company regularly evaluates renewal opons, and when they are reasonably certain to be exercised, the renewal period is included in the lease term. As of September 30, 2022, operang lease maturies were as follows: (In thousands) 2023 2024 2025 2026 2027 Thereaer Total expected operang lease payments Less: Imputed interest Total operang lease liabilies $ $ 1,172 1,210 1,214 1,132 1,135 575 6,438 (1,632 ) 4,806 Operang lease cost was $1.1 million, $0.8 million and $0.6 million for ﬁscal 2022, 2021 and 2020, respecvely. Cash paid for operang lease liabilies approximated operang lease cost for ﬁscal 2022, 2021 and 2020. As of September 30, 2022, the weighted average remaining lease term for operang leases was 5.3 years, and the weighted average discount rate used to determine operang lease liabilies was 3.9%. Stock-based Compensaon We measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. Share-based payments are expensed based on their grant-date fair values on a straight-line basis over the requisite service period of the total award, less esmated forfeitures based on historical experience. Shares awarded under the Company’s stock-based compensaon plans, with the excepon of restricted stock awards, are not considered issued or outstanding common stock of the Company unl they vest and the shares are released. New awards and forfeitures of unvested restricted stock result in an increase (decrease), respecvely, in common stock issued and outstanding. 66 TABLE OF CONTENTS Research and Development R&D expenses include costs associated with the design, development, tesng, enhancement and regulatory approval of the Company’s products. R&D expenses include employee compensaon (including stock-based compensaon), internal and external costs associated with our regulatory compliance and quality assurance funcons, the costs of product used in development and clinical trials, consulng expenses, and facilies overhead. The Company also incurs signiﬁcant R&D expenses to operate clinical trials. R&D costs are expensed as incurred. Certain R&D costs are related to customer contracts, and the related revenue is recognized as described in “Revenue Recognion” in this Note 2. Costs associated with customer-related R&D include speciﬁc project direct labor and materials expenses, as well as an allocaon of overhead costs based on direct labor costs. Clinical Trial Costs. The Company sponsors clinical trials intended to obtain the necessary clinical data required to obtain approval from various regulatory agencies to market medical devices developed by the Company. Costs associated with clinical trials include trial design and management expenses, clinical site reimbursements and third-party fees, among other costs. The Company’s clinical trials are administered by third-party CROs. These CROs generally bill monthly for certain services performed, as well as upon achievement of certain milestones. The Company monitors paent enrollment, the progress of clinical studies, and related acvies through internal reviews of data reported to the Company by the CROs and correspondence with the CROs. We periodically evaluate our esmates to determine if adjustments are necessary or appropriate based on informaon received. These esmates oen require signiﬁcant judgement on the part of the Company’s management. Government Funding. In prior ﬁscal years, the Company has been eligible to receive reimbursement for certain qualifying R&D expenditures under a grant from the Industrial Development Agency of Ireland (“IDA”). Reimbursements are recognized as a reducon of R&D expense when there is reasonable assurance that the funding will be received and condions associated with the funding are met. In ﬁscal 2020, the Company recorded $0.8 million in reimbursements from IDA grants as a reducon of R&D expense. Ligaon From me to me, the Company may become involved in various legal acons involving its operaons, products and technologies, including intellectual property and employment disputes. The outcomes of these legal acons are not within the Company’s complete control and may not be known for prolonged periods of me. In some acons, the claimants may seek damages as well as other relief, including injuncons barring the sale of products that are the subject of the lawsuit, which if granted, could require signiﬁcant expenditures or result in lost revenue. The Company records a liability on the consolidated ﬁnancial statements for these acons when a loss is known or considered probable and the amount can be reasonably esmated. If the reasonable esmate of a known or probable loss is a range, and no amount within the range is a beer esmate, the minimum amount of the range is accrued. If a loss is possible but not known or probable, and can be reasonably esmated, the esmated loss or range of loss is disclosed. In most cases, signiﬁcant judgment is required to esmate the amount and ming of a loss to be recorded. Income Taxes We record a tax (expense) beneﬁt for the ancipated tax consequences of the reported results of operaons. Deferred tax assets and liabilies are recognized for the future tax consequences aributable to diﬀerences between the ﬁnancial statement carrying amounts of exisng assets and liabilies and their respecve tax bases. Deferred tax assets and liabilies are measured using the enacted tax rates expected to apply to taxable income (loss) in the years in which those temporary diﬀerences are expected to be recovered or seled. The eﬀect on deferred tax assets and liabilies of a change in tax rates is recognized in earnings in the period that includes the enactment date of such change. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise from net operang losses and tax credits and are primarily a result of temporary diﬀerences between the ﬁnancial reporng and tax bases of assets and liabilies. We evaluate the recoverability of deferred tax assets by assessing all available evidence, both posive and negave, to determine whether, based on the weight of that evidence, a valuaon allowance for deferred tax assets is needed. A valuaon allowance is established if it is more likely than not (deﬁned as a likelihood of more than 50%) that all or a poron of deferred tax assets will not be realized. The determinaon of whether a valuaon allowance should be established, as well as the amount of such allowance, requires signiﬁcant judgment and esmates, including esmates of future earnings. 67 TABLE OF CONTENTS In evaluang the realizability of our net deferred tax assets, we perform an assessment each reporng period of both posive and negave evidence, including (i) the existence of three-year cumulave U.S. pre-tax losses adjusted for permanent adjustments; (ii) our forecast of future earnings; and (iii) future reversal of taxable temporary diﬀerences and carryforwards. We apply judgment to consider the relave impact of negave and posive evidence, and the weight given to negave and posive evidence is commensurate with the extent to which such evidence can be objecvely veriﬁed. Objecve historical evidence, such as cumulave three-year pre-tax losses adjusted for permanent adjustments, is given greater weight than subjecve posive evidence such as forecasts of future earnings. The more objecve negave evidence that exists limits our ability to consider other, potenally posive, subjecve evidence, such as our future earnings projecons. Due to signiﬁcant esmates used to establish the valuaon allowance and the potenal for changes in facts and circumstances, it is reasonably possible that we will be required to record adjustments to the valuaon allowance in future reporng periods that could have a material eﬀect on our results of operaons. Net (Loss) Income Per Share Data Basic net (loss) income per common share is calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per common share is computed by dividing net (loss) income by the weighted average number of common and common equivalent shares outstanding during the period. The Company’s potenally diluve common shares are those that result from diluve common stock opons and non-vested stock relang to restricted stock awards and restricted stock units. However, these items have been excluded from the calculaon of diluted net loss per share for ﬁscal 2022 as their eﬀect was an-diluve as a result of the net loss incurred for this period. Therefore, diluted weighted average number of shares outstanding and diluted net loss per share were the same as basic weighted average number of shares outstanding and basic net loss per share for ﬁscal 2022. The following table presents the denominator for the computaon of diluted weighted average shares outstanding: (In thousands) Basic weighted average shares outstanding Diluve eﬀect of outstanding stock opons, non-vested restricted stock, and non-vested restricted stock units Diluted weighted average shares outstanding 2022 Fiscal Year 2021 2020 13,916 13,765 13,552 — 13,916 224 13,989 260 13,812 The calculaon of weighted average diluted shares outstanding excluded outstanding common stock opons associated with the right to purchase less than 0.1 million shares for both ﬁscal 2021 and 2020 as their inclusion would have had an andiluve eﬀect on diluted net income per share for those periods. Business Combinaons For acquisions accounted for as business combinaons, we record assets and liabilies acquired at their respecve fair values as of the acquision date. Conngent consideraon is recognized at fair value as of the acquision date, and changes in fair value are recognized in earnings unl selement. Acquision-related transacon costs are expensed as incurred. Currency Translaon The Company’s reporng currency is the U.S. dollar. Assets and liabilies of non-U.S. dollar funconal 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 of these translaon adjustments on the consolidated ﬁnancial statements is recorded as a foreign currency translaon adjustment, a component of accumulated other comprehensive (loss) income on the consolidated balance sheets. Realized foreign currency transacon gains and losses are included in other expense on the consolidated statements of operaons. 68 TABLE OF CONTENTS New Accounng Pronouncements Accounng Standards Recently Adopted Credit Losses. In June 2016, the Financial Accounng Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments – Credit Losses, Measurement of Credit Losses on Financial Statements. This ASU requires a ﬁnancial asset (or a group of ﬁnancial assets) measured at an amorzed cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuaon account that is deducted from the amorzed cost basis of the ﬁnancial asset(s) to present the net carrying value at the amount expected to be collected on the ﬁnancial asset. Eﬀecve in ﬁscal 2021 (October 1, 2020), we adopted this guidance using the modiﬁed retrospecve method. The adopon of this guidance did not have a material impact on the Company’s consolidated ﬁnancial statements. Income Taxes. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounng for Income Taxes, which eliminates certain excepons related to the approach for intraperiod tax allocaon and to the methodology for calculang taxes during the quarters, as well as clariﬁes the accounng for enacted changes in tax laws. Eﬀecve in ﬁscal 2021 (October 1, 2020), we adopted this guidance using a prospecve approach. The adopon of this guidance did not have a material impact on the Company’s consolidated ﬁnancial statements. No other new accounng pronouncement issued or eﬀecve has had, or is expected to have, a material impact on the Company’s consolidated ﬁnancial statements. 3. Revenue The following is a disaggregaon of revenue within each reportable segment: (In thousands) Medical Device Product sales Royales License fees Research, development and other Medical Device revenue In Vitro Diagnoscs Product sales Research, development and other In Vitro Diagnoscs revenue Total Revenue 2022 Fiscal Year 2021 2020 $ $ 27,930 $ 30,267 5,981 8,211 72,389 26,691 871 27,562 99,951 $ 21,777 $ 30,781 16,275 9,420 78,253 24,701 2,182 26,883 105,136 $ 21,608 28,614 12,020 9,159 71,401 22,709 754 23,463 94,864 Contract assets totaled $7.1 million as of each of September 30, 2022 and 2021 on the consolidated balance sheets. Fluctuaons in the balance of contract assets result primarily from changes in sales-based and minimum royales earned, but not collected at each balance sheet date due to payment ming and contractual changes in the normal course of business. For discussion of contract liability (deferred revenue) balances and remaining performance obligaons, see Note 4 Collaborave Arrangement. Revenue from customers that equaled or exceeded 10% of total revenue was as follows: Abbo Medtronic 4. Collaborave Arrangement Fiscal Year 2021 2022 11 % 13 % 21 % 13 % 2020 19 % 14 % On February 26, 2018, the Company entered into an agreement with Abbo whereby Abbo has exclusive worldwide commercializaon rights for Surmodics' SurVeil DCB to treat the superﬁcial femoral artery (the “Abbo Agreement”). A premarket approval (“PMA”) applicaon for the SurVeil DCB was being evaluated by the U.S. Food and Drug Administraon (“FDA”) as of September 30, 2022. 69 TABLE OF CONTENTS Surmodics is responsible for conducng all necessary clinical trials and other acvies required to achieve U.S. regulatory clearance for the SurVeil DCB, including compleon of the ongoing TRANSCEND pivotal clinical trial. Abbo and Surmodics parcipate on a joint development commiee charged with providing guidance on the Company’s clinical and regulatory acvies with regard to the SurVeil DCB product. Upon receipt of U.S. regulatory approval for our SurVeil DCB, Abbo will have the right to purchase commercial units from the Company, and Surmodics will realize revenue from product sales to Abbo at an agreed-upon transfer price, as well as a share of net proﬁts resulng from third-party product sales by Abbo. As of September 30, 2022, the Company has received payments totaling $60.8 million under the Abbo Agreement, which consist of the following: (i) $25 million upfront fee in ﬁscal 2018, (ii) $10 million milestone payment in ﬁscal 2019 upon compleon of enrollment in the TRANSCEND clinical trial, (iii) $10.8 million milestone payment in ﬁscal 2020 upon receipt of Conformité Européenne Mark (“CE Mark”) approval prerequisite for commercializaon of the SurVeil DCB in the European Union, and (iv) $15 million milestone payment in ﬁscal 2021 upon receipt by Abbo of the clinical study report and related materials from the TRANSCEND pivotal trial that demonstrated the primary safety and primary clinical endpoints were non-inferior to the control device. As of September 30, 2022, the Company may receive an addional conngent milestone payment of up to $30 million upon PMA of our SurVeil DCB. The milestone payment is reduced to $27 million (if PMA is received aer December 31, 2022 but before June 30, 2023), and to $24 million (if PMA is received on or aer June 30, 2023), pursuant to the terms of the Abbo Agreement. As of September 30, 2022, consideraon from this potenal regulatory milestone was fully excluded from the contract price (i.e., deemed fully constrained) due to the high level of uncertainty of achievement as of September 30, 2022. Revenue recognized from the Abbo Agreement totaled $5.7 million, $16.0 million and $12.0 million in ﬁscal 2022, 2021 and 2020, respecvely. As of September 30, 2022, the Company had recognized total license fee revenue of $51.6 million from the Abbo Agreement. Revenue recognized from the Abbo Agreement, which was included in the respecve beginning of ﬁscal year balances of deferred revenue on the consolidated balance sheets, totaled $5.7 million, $4.7 million and $5.0 million for ﬁscal 2022, 2021 and 2020, respecvely. As of September 30, 2022 and 2021, total deferred revenue from the upfront and milestone payments received of $9.2 million and $14.9 million, respecvely, was recorded on the consolidated balance sheets. As of September 30, 2022, the esmated revenue expected to be recognized in future periods totaled approximately $9.2 million related to performance obligaons that are unsasﬁed for executed contracts with an original duraon of one year or more. These remaining performance obligaons relate to the Abbo Agreement, exclude the potenal conngent milestone payment under the Abbo Agreement, and are expected to be recognized over the next three years as the services, which are primarily comprised of the R&D and Clinical Acvies performance obligaon in the Abbo Agreement, are completed. As of September 30, 2022, we expect to recognize approximately $4.1 million of these remaining performance obligaons as revenue within one year, with the remaining $5.1 million over the subsequent, ﬁnal two years of the TRANSCEND trial follow-up and clinical reporng period. See Note 2 for further informaon regarding revenue recognion for the Abbo Agreement. 5. Fair Value Measurements In determining the fair value of ﬁnancial assets and liabilies, we ulize market data or other assumpons that we believe market parcipants would use in pricing the asset or liability in the principal or most advantageous market and adjust for non-performance and/or other risk associated with the company as well as counterpares, as appropriate. When considering market parcipant assumpons in fair value measurements, the following fair value hierarchy disnguishes between observable and unobservable inputs, which are categorized in one of the following levels: Level 1 — Quoted (unadjusted) prices in acve markets for idencal assets or liabilies. Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilies in acve markets; quoted prices for idencal or similar assets or liabilies in markets that are not acve; or other inputs that are observable or can be corroborated by observable market data for substanally the full term of the asset or liability. Level 3 — Unobservable inputs to the valuaon methodology that are supported by lile or no market acvity and that are signiﬁcant to the measurement of the fair value of the assets or liabilies. Level 3 assets and liabilies include those with fair value measurements that are determined using pricing models, discounted cash ﬂow methodologies or similar valuaon techniques, as well as signiﬁcant management judgment or esmaon. In valuing Level 3 assets and liabilies, we are required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The hierarchy gives the highest priority to Level 1, as this level provides the most reliable measure of fair value, while giving the lowest priority to Level 3. 70 TABLE OF CONTENTS Assets and Liabilies Measured at Fair Value on a Recurring Basis Assets and liabilies measured at fair value on a recurring basis by level of the fair value hierarchy were as follows: (In thousands) Assets Cash equivalents (1) Total assets Liabilies Conngent consideraon (2) Total liabilies (In thousands) Assets Cash equivalents (1) Available-for-sale investments (1) Total assets Liabilies Conngent consideraon (2) Total liabilies $ $ $ $ $ $ $ $ Quoted Prices in Acve Markets for Idencal Instruments (Level 1) September 30, 2022 Signiﬁcant Other Observable Inputs (Level 2) Signiﬁcant Unobservable Inputs (Level 3) Quoted Prices in Acve Markets for Idencal Instruments (Level 1) — $ — $ — $ $ — — $ — — $ — $ $ — 2,035 $ $ 2,035 — $ $ — September 30, 2021 Signiﬁcant Other Observable Inputs (Level 2) Signiﬁcant Unobservable Inputs (Level 3) 5,308 $ 9,719 15,027 $ — $ $ — Total Fair Value 2,035 2,035 829 829 Total Fair Value 5,308 9,719 15,027 817 817 — $ $ — 829 $ $ 829 — $ — — $ 817 $ $ 817 (1) (2) Fair value of cash equivalents (money market funds) and available-for-sale investments (commercial paper and corporate bond securies) was based on quoted vendor prices and broker pricing where all signiﬁcant inputs were observable. Fair value of conngent consideraon liabilies was determined based on discounted cash ﬂow analyses that included probability and ming of development and regulatory milestone achievements and a discount rate, which were considered signiﬁcant unobservable inputs. Conngent consideraon liabilies are remeasured to fair value each reporng period using discount rates, probabilies of payment and projected payment dates. Increases or decreases in the fair value of the conngent consideraon liability can result from changes in the ming or likelihood of achieving milestones and changes in discount periods and rates. Projected conngent payment amounts are discounted back to the current period using a discount cash ﬂow model. Interest accreon and fair value adjustments associated with conngent consideraon liabilies are reported in conngent consideraon expense (gain) on the consolidated statements of operaons. 71 TABLE OF CONTENTS Changes in the conngent consideraon liabilies measured at fair value using Level 3 inputs were as follows: (In thousands) Conngent consideraon liability at September 30, 2020 Addions Fair value adjustments Selements Interest accreon Foreign currency translaon Conngent consideraon liability at September 30, 2021 Addions Fair value adjustments Selements Interest accreon Foreign currency translaon Conngent consideraon liability at September 30, 2022 Assets and Liabilies Measured at Fair Value on a Non-recurring Basis $ $ — 814 — — 3 — 817 — — — 12 — 829 We measure certain assets at fair value on a non-recurring basis, primarily goodwill, intangible assets, and long-lived assets. These assets were inially measured and recognized at amounts equal to the fair value determined as of the date of acquision or purchase and are subject to changes in value only for foreign currency translaon and impairment. See Note 2 for addional informaon on impairment assessments and related Level 3 inputs for goodwill, indeﬁnite-lived intangible assets and long-lived assets. Assets and Liabilies Not Measured at Fair Value Certain ﬁnancial instruments are not measured at fair value but are recorded at carrying amounts approximang fair value based on their short-term nature. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilies approximated fair value as of September 30, 2022 and 2021. 6. Debt On September 14, 2020, the Company entered into a secured revolving credit facility pursuant to a Loan and Security Agreement, which was amended by a First Amendment on July 2, 2021 and by a Second Amendment on March 7, 2022 (as amended, the "Loan Agreement") with Bridgewater Bank (“Bridgewater”). The Loan Agreement provided for availability under a secured revolving line of credit of up to $25 million (the "Bridgewater Revolving Credit Facility"). The outstanding balance on the Bridgewater Revolving Credit Facility was $10.0 million as of each of September 30, 2022 and 2021. As of September 30, 2022, the Bridgewater Revolving Credit Facility was scheduled to mature on September 14, 2023. The Company's obligaons under the Loan Agreement were secured by substanally all of the Company’s and its material subsidiaries' assets, other than intellectual property, real estate and foreign assets, including equity in foreign subsidiaries. The Company also pledged the stock of certain of its subsidiaries to secure such obligaons. Interest under the Loan Agreement accrued at a rate per annum equal to the greater of (i) 3.25% and (ii) the 90-day interest rate yield for U.S. Government Treasury Securies plus 2.75%. A facility fee was payable on unused commitments at a rate of 0.075% quarterly. As of September 30, 2022 and 2021, the weighted average interest rate on outstanding borrowings on the Bridgewater Revolving Credit Facility was 6.1% and 3.3%, respecvely. The Loan Agreement contained aﬃrmave and negave covenants customary for a facility of its type which, among other things, required the Company to meet certain ﬁnancial tests, including (i) minimum liquidity, (ii) minimum current rao, (iii) minimum quarterly revenue, and (iv) minimum tangible net worth. The Loan Agreement also contained covenants which, among other things, limited the Company's ability to incur addional debt, make certain investments, create or permit certain liens, create or permit restricons on the ability of subsidiaries to pay dividends or make other distribuons, consolidate or merge, and engage in other acvies customarily restricted in such agreements, in each case subject to excepons permied by the Loan Agreement. The Loan Agreement also contained customary events of default, the occurrence of which would permit Bridgewater to terminate its commitment and accelerate the Bridgewater Revolving Credit Facility. See Note 14 Subsequent Events for informaon on ﬁnancing arrangements subsequent to September 30, 2022. 72 TABLE OF CONTENTS 7. Stockholders’ Equity Repurchase of Common Stock Shares are repurchased from me to me to support the Company’s stock-based compensaon programs and to return capital to stockholders, and depend upon many factors, including the Company’s results of operaons, ﬁnancial condion, capital requirements and contractual restricons. The Company accounts for repurchases of common stock using the par value method. On November 6, 2015, and on November 5, 2014, the Company’s Board of Directors authorized the repurchase of up to $20.0 million and $30.0 million, respecvely, of the Company’s outstanding common stock in open-market purchases, privately negoated transacons, block trades, accelerated share repurchase transacons, tender oﬀers or by any combinaon of such methods. The authorizaons have no ﬁxed expiraon date. As of September 30, 2022, $25.3 million remained available to the Company for the purchase of its common stock under outstanding authorizaons. 8. Stock-based Compensaon Plans The Company has stock-based compensaon plans under which it grants stock opons, restricted stock awards, restricted stock units and deferred stock units. Stock-based compensaon expense was reported as follows on the consolidated statements of operaons: (In thousands) Product costs Research and development Selling, general and administrave Total stock-based compensaon expense 2022 Fiscal Year 2021 2020 $ $ 234 $ 1,424 5,399 7,057 $ 122 $ 1,298 4,443 5,863 $ 119 896 4,438 5,453 As of September 30, 2022, approximately $10.5 million of total unrecognized compensaon costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 2.3 years. Under the amended 2019 Equity Incenve Plan (“2019 Plan”), the Company is authorized to issue 1,900,000 shares, plus the number of shares pursuant to any awards granted under the 2009 Equity Incenve Plan (“2009 Plan”) that were outstanding on the eﬀecve date of the 2019 Plan that expire, are cancelled or forfeited, or are seled for cash. As of September 30, 2022, there were approximately 845,000 shares available for future equity awards under the 2019 Plan, including stock opons, restricted stock, restricted stock units and deferred stock units. Stock Opon Awards The Company grants non-qualiﬁed stock opons at fair market value on the grant date to certain key employees and members of the Board. The Company uses the Black-Scholes opon pricing model to determine the fair value of stock opons as of the date of each grant. Weighted average stock opon fair value assumpons and the weighted average grant date fair value of stock opons granted were as follows: Stock opon fair value assumpons: Risk-free interest rate Expected life (years) Expected volality Dividend yield Weighted average grant date fair value of stock opons granted $ 2022 Fiscal Year 2021 2020 1.49 % 4.6 43 % — % 15.96 $ 0.40 % 4.6 43 % — % 14.71 $ 1.41 % 4.6 39 % — % 14.13 The risk-free interest rate assumpon is based on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturies similar to those of the expected term of the awards. The expected life of opons granted is determined based on the Company’s experience. Expected volality is based on the Company’s stock price movement over a period approximang the expected term. Based on management’s judgment, dividend yields are expected to be zero for the expected life of the opons. 73 TABLE OF CONTENTS With respect to members of the Board, non-qualiﬁed stock opons generally become exercisable on a monthly pro-rata basis within the one-year period following the date of grant. With respect to employees, non-qualiﬁed stock opons generally become exercisable at a 25% rate on each of the ﬁrst four anniversaries following the grant date. Non-qualiﬁed stock opons generally expire in seven years or upon, or shortly aer terminaon of employment or service as a Board member. The stock-based compensaon expense table above includes stock opon expenses recognized related to these awards, which totaled $3.4 million, $2.8 million and $2.5 million in ﬁscal 2022, 2021 and 2020, respecvely. As of September 30, 2022, the aggregate intrinsic value of the opon shares outstanding was $0.6 million, and the aggregate intrinsic value of opon shares exercisable was $0.6 million. As of September 30, 2022, the weighted average remaining contractual life of opons outstanding and opons exercisable was 4.5 years and 3.2 years, respecvely. The total pre-tax intrinsic value of opons exercised was $1.0 million, $7.1 million and $2.0 million in ﬁscal 2022, 2021 and 2020, respecvely. 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 of the respecve ﬁscal year end. Stock opon acvity was as follows: (In thousands, except per share data) Opons outstanding at September 30, 2019 Granted Exercised Forfeited and expired Opons outstanding at September 30, 2020 Granted Exercised Forfeited and expired Opons outstanding at September 30, 2021 Granted Exercised Forfeited and expired Opons outstanding at September 30, 2022 Opons vested and exercisable at September 30, 2022 Number of Shares Weighted Average Exercise Price 871 $ 299 (125 ) (105 ) 940 274 (248 ) (44 ) 922 342 (45 ) (58 ) 1,161 546 $ 32.18 41.06 22.89 41.69 35.18 40.95 24.22 44.58 39.39 42.10 21.24 43.99 40.66 39.44 Restricted Stock Awards The Company has entered into restricted stock agreements with certain key employees, covering the issuance of common stock (“Restricted Stock”). Restricted Stock generally vests at a 33% rate on each of the ﬁrst three anniversaries following the grant date. Restricted Stock is released to employees if they are employed by the Company at the end of the vesng period. Restricted Stock is valued based on the market value of the shares as of the date of grant with the value allocated to expense evenly over the vesng period. The stock-based compensaon expense table above includes Restricted Stock expenses recognized related to these awards, which totaled $2.7 million, $2.2 million and $2.0 million in ﬁscal 2022, 2021 and 2020, respecvely. 74 TABLE OF CONTENTS Restricted Stock acvity was as follows: (In thousands, except per share data) Unvested restricted stock awards at September 30, 2019 Granted Vested Forfeited Unvested restricted stock awards at September 30, 2020 Granted Vested Forfeited Unvested restricted stock awards at September 30, 2021 Granted Vested Forfeited Unvested restricted stock awards at September 30, 2022 Restricted Stock Units and Deferred Stock Units Number of Shares Weighted Average Grant Date Fair Value 90 $ 67 (43 ) (14 ) 100 71 (48 ) (4 ) 119 99 (55 ) (5 ) 158 $ 43.69 41.40 38.74 44.76 44.16 38.83 44.07 40.45 41.14 42.35 42.98 41.83 41.24 The Company has entered into restricted stock unit agreements with certain key employees in foreign jurisdicons and members of the Board, covering the issuance of common stock (“RSUs”). With respect to employees, RSUs generally vest at a 33% rate on each of the ﬁrst three anniversaries following the grant date, and RSUs are seled in shares and issued to the employees if they are employed by the Company at the end of the vesng period. With respect to members of the Board, RSUs vest on a monthly pro-rata basis within the one-year period following the date of grant, and RSUs are seled in shares and generally issued upon terminaon of service as a Board member. RSUs are valued based on the market value of the shares as of the date of grant with the value allocated to expense evenly over the vesng period. The Company awarded approximately 14,000, 17,000 and 18,000 RSUs in ﬁscal 2022, 2021 and 2020, respecvely. As of September 30, 2022 and 2021, outstanding RSUs (including unvested units and vested units not yet seled) totaled approximately 65,000 and 61,000 units, respecvely, with a weighted average grant date fair value per unit of $33.14 and $33.45, respecvely. The stock-based compensaon table above includes RSU expenses recognized related to these awards, which totaled $0.5 million, $0.5 million and $0.6 million in ﬁscal 2022, 2021 and 2020, respecvely. Directors may elect to receive their annual fees for services to the Board in deferred stock units (“DSUs”). DSUs are fully vested and expensed upon grant at the market value of the shares on the grant date. DSUs are seled in shares and issued to the Director upon terminaon of service as a Board member. As of September 30, 2022 and 2021, outstanding, fully vested DSUs totaled approximately 36,000 and 34,000 units, respecvely, with a weighted average grant date fair value per unit of $30.97 and $30.32, respecvely. The stock-based compensaon expense table above includes DSU expenses recognized related to these awards, which totaled $0.1 million per year in each of ﬁscal 2022, 2021 and 2020. 1999 Employee Stock Purchase Plan Under the amended 1999 Employee Stock Purchase Plan (“ESPP”), the Company is authorized to issue up to 600,000 shares of common stock. All full-me and part-me U.S. employees can elect to have up to 10% of their annual compensaon withheld, with an annual limit of $25,000, to purchase the Company’s common stock at purchase prices deﬁned within the provisions of the ESPP. ESPP share awards are valued based on the value of the discount feature plus the fair value of the oponal features as of the date of grant using the Black-Scholes valuaon model. The value of these share awards is allocated to expense evenly over each six-month purchase period. Employee contribuons to the ESPP included in accrued liabilies on the consolidated balance sheets totaled $0.1 million as of both September 30, 2022 and 2021. The stock-based compensaon expense table above includes expenses recognized related to the ESPP, which totaled $0.3 million, $0.2 million and $0.2 million for ﬁscal 2022, 2021 and 2020, respecvely. 75 TABLE OF CONTENTS 9. Income Taxes Income taxes on the consolidated statements of operaons consisted of the following: (In thousands) Current (beneﬁt) expense: U.S. Federal U.S. State Internaonal Total current (beneﬁt) expense Deferred expense (beneﬁt): U.S. Federal U.S. State Internaonal Total deferred expense (beneﬁt) Total income tax expense (beneﬁt) 2022 Fiscal Year 2021 2020 $ $ (510 ) $ (143 ) 166 (487 ) 5,200 515 (447 ) 5,268 4,781 $ 263 $ 108 87 458 1,851 (62 ) (138 ) 1,651 2,109 $ (1,570 ) 42 90 (1,438 ) (1,336 ) 197 — (1,139 ) (2,577 ) The diﬀerence between amounts calculated at the statutory U.S. federal income tax rate of 21% and the Company’s eﬀecve tax rate was as follows: (In thousands) Amount at statutory U.S. federal income tax rate Change because of the following items: State income taxes, net of federal beneﬁt Foreign and state rate diﬀerenal U.S. federal and foreign R&D credits Valuaon allowance change (1) Stock-based compensaon (2) U.S. Federal and state rate change Tax reserve change Foreign-derived income deducon Impact of CARES Act (3) Acquision-related transacon costs Other 2022 Fiscal Year 2021 2020 $ (4,724 ) $ 1,333 $ (305 ) (897 ) 628 (1,511 ) 10,978 481 — (123 ) — — — (51 ) 4,781 $ (273 ) 596 (920 ) 1,059 (544 ) (35 ) (150 ) — 735 187 121 2,109 $ (551 ) 212 (1,571 ) 825 (81 ) 17 609 (88 ) (1,700 ) — 56 (2,577 ) Income tax expense (beneﬁt) $ (1) In ﬁscal 2022, the valuaon allowance change includes a non-cash charge to income tax expense of $10.2 million that resulted from the establishment of a full valuaon allowance against U.S. net deferred tax assets as of September 30, 2022. A valuaon allowance is required to be recognized against deferred tax assets if, based on the available evidence, it is more likely than not (deﬁned as a likelihood of more than 50%) that all or a poron of such assets will not be realized. The relevant guidance weighs available evidence such as historical cumulave taxable losses more heavily than future proﬁtability. The valuaon allowance has no impact on the availability of U.S. net deferred tax assets to oﬀset future tax liabilies. (2) Includes non-deducble stock-based compensaon. (3) In ﬁscal 2020, the impact of the CARES Act included a discrete tax beneﬁt of $1.7 million that resulted from our ability under the CARES Act to carry back net operang losses (“NOLs”) incurred to periods when the statutory tax rate was 35% versus our current tax rate of 21%. In March 2020, the CARES Act was enacted and included signiﬁcant business tax provisions. In parcular, the CARES Act modiﬁed the rules associated with NOLs and made technical correcons to tax depreciaon methods for qualiﬁed improvement property. Under the temporary provisions of the CARES Act, NOL carryforwards and carrybacks may oﬀset 100% of taxable income for taxable years beginning before 2021. In addion, NOLs arising in 2018, 2019 and 2020 taxable years may be carried back to each of the preceding ﬁve years to generate a refund. 76 TABLE OF CONTENTS Excess tax beneﬁts related to stock-based compensaon expense are recorded within income tax (expense) beneﬁt on the consolidated statements of operaons and totaled $0.2 million, $0.9 million and $0.4 million for ﬁscal 2022, 2021 and 2020, respecvely. The components of deferred income taxes, net, consisted of the following and resulted from diﬀerences in the recognion of transacons for income tax and ﬁnancial reporng purposes: (In thousands) Depreciable assets Deferred revenue Accruals and reserves Stock-based compensaon Impaired strategic investments NOL carryforwards (1) U.S. Federal and state R&D credits (2) Other Valuaon allowance Deferred taxes, net September 30, 2022 2021 $ $ (3,995 ) $ 2,103 1,615 2,443 1,787 6,379 4,465 848 (17,672 ) (2,027 ) $ (5,106 ) 2,130 1,572 1,997 1,782 4,319 3,066 618 (7,253 ) 3,125 (1) As of September 30, 2022, NOL carryforwards consisted of U.S. federal NOL carryforwards of $2.3 million, U.S. state NOL carryforwards of $0.4 million, and Ireland NOL carryforwards of $3.7 million. U.S. federal and state NOL carryforwards begin to expire in ﬁscal 2034 and 2028, respecvely. Ireland NOL carryforwards have an unlimited carryforward period. (2) As of September 30, 2022, U.S. federal and state R&D credits begin to expire in ﬁscal 2028. As of September 30, 2022 and 2021, valuaon allowances against deferred tax assets, net, totaled $17.7 million and $7.3 million, respecvely. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise from net operang loss and tax credits and are primarily a result of temporary diﬀerences between the ﬁnancial reporng and tax bases of assets and liabilies. We evaluate the recoverability of deferred tax assets by assessing all available evidence, both posive and negave, to determine whether, based on the weight of that evidence, a valuaon allowance for deferred tax assets is needed. A valuaon allowance is established if it is more likely than not (deﬁned as a likelihood of more than 50%) that all or a poron of deferred tax assets will not be realized. The determinaon of whether a valuaon allowance should be established, as well as the amount of such allowance, requires signiﬁcant judgment and esmates, including esmates of future earnings. In evaluang the realizability of our net deferred tax assets, we perform an assessment each reporng period of both posive and negave evidence. As of September 30, 2022, we idenﬁed negave evidence that included the existence of three-year cumulave U.S. pre-tax losses adjusted for permanent adjustments and short-term future losses. As of September 30, 2022, we idenﬁed posive evidence that included (i) our forecast of long-term future earnings; and (ii) future reversal of taxable temporary diﬀerences and carryforwards. We apply judgment to consider the relave impact of negave and posive evidence and the weight given to negave and posive evidence is commensurate with the extent to which such evidence can be objecvely veriﬁed. Objecve historical evidence, such as cumulave three-year pre-tax losses adjusted for permanent adjustments, is given greater weight than subjecve posive evidence such as forecasts of future earnings. The more objecve negave evidence that exists limits our ability to consider other, potenally posive, subjecve evidence, such as our future earnings projecons. Based on our evaluaon of all available posive and negave evidence, and by placing greater weight on the objecve negave evidence associated with our three-year cumulave U.S. pre-tax loss adjusted for permanent adjustments, we determined, as of September 30, 2022, that it is more likely than not that our net U.S. deferred tax assets will not be realized. Accordingly, in ﬁscal 2022, we recorded a full valuaon allowance against our net U.S. deferred tax assets as of September 30, 2022, resulng in a non-cash charge to income tax expense of $10.2 million in ﬁscal 2022. Due to signiﬁcant esmates used to establish the valuaon allowance and the potenal for changes in facts and circumstances, it is reasonably possible that we will be required to record addional adjustments to the valuaon allowance in future reporng periods that could have a material eﬀect on our results of operaons. 77 TABLE OF CONTENTS Unrecognized tax beneﬁts are the diﬀerences between a tax posion taken, or expected to be taken in a tax return, and the beneﬁt recognized for accounng purposes pursuant to accounng guidance. The following is a reconciliaon of the changes in unrecognized tax beneﬁts, excluding interest and penales: (In thousands) Unrecognized tax beneﬁts, beginning balance Increases in tax posions for prior years Decreases in tax posions for prior years Increases in tax posions for current year Selements with taxing authories Lapse of the statute of limitaons Unrecognized tax beneﬁts, ending balance 2022 Fiscal Year 2021 2020 $ $ 2,887 $ 53 (35 ) 519 — (631 ) 2,793 $ 2,871 $ 15 (8 ) 458 — (449 ) 2,887 $ 2,323 58 (1 ) 664 — (173 ) 2,871 The total amount of unrecognized tax beneﬁts excluding interest and penales that, if recognized, would aﬀect the eﬀecve tax rate was $2.5 million and $2.7 million as of September 30, 2022 and 2021, respecvely. As of September 30, 2022, the Company does not expect the liability for unrecognized tax beneﬁts to change signiﬁcantly in the next 12 months and has classiﬁed the above balances on the consolidated balance sheets in other noncurrent liabilies. Interest and penales related to unrecognized tax beneﬁts are recorded in income tax expense on the consolidated statements of operaons. As of September 30, 2022 and 2021, the gross amount accrued for interest and penales on unrecognized tax beneﬁts was $0.3 million and $0.4 million, respecvely. The Company ﬁles income tax returns, including returns for its subsidiaries, in the U.S. federal jurisdicon and in various state jurisdicons, as well as several non-U.S. jurisdicons. Uncertain tax posions are related to tax years that remain subject to examinaon. The Internal Revenue Service commenced an examinaon of the Company’s ﬁscal 2019 U.S. federal tax return during ﬁscal 2022; the examinaon has not been completed. U.S. federal income tax returns for years prior to ﬁscal 2019 are no longer subject to examinaon by federal tax authories. For tax returns for U.S. state and local jurisdicons, the Company is no longer subject to examinaon for tax years generally before ﬁscal 2012. For tax returns for non-U.S. jurisdicons, the Company is no longer subject to income tax examinaon for years prior to 2018. Addionally, the Company has been indemniﬁed of liability for any taxes relang to Creagh Medical, NorMedix and Vetex for periods prior to the respecve acquision dates, pursuant to the terms of the related share purchase agreements. As of September 30, 2022 and 2021, there were no undistributed earnings in foreign subsidiaries. 10. Deﬁned Contribuon Plans The Company has a 401(k) rerement and savings plan for the beneﬁt of qualifying U.S. employees, and a deﬁned contribuon Personal Rerement Savings Account plan for the beneﬁt of qualifying Ireland employees. For eligible U.S. employees, eﬀecve January 1, 2022, the Company makes matching contribuons of up to 4% of eligible compensaon; prior to January 1, 2022, the Company made matching contribuons of up to 3% of eligible compensaon on employee contribuons of up to 6% of eligible compensaon. For eligible Ireland employees, the Company makes contribuons of up to 8% of eligible compensaon on employee contribuons of up to 6% of eligible compensaon. Expense recognized for Company contribuons to deﬁned contribuon plans totaled $1.7 million, $1.1 million and $1.0 million in ﬁscal 2022, 2021 and 2020, respecvely. 11. Commitments and Conngencies Clinical Trials. The Company has engaged CRO consultants to assist with the administraon of its ongoing clinical trials. The Company has executed separate contracts with two CROs for services rendered in connecon with the TRANSCEND pivotal clinical trial for the SurVeil DCB, including pass-through expenses paid by the CROs, of up to approximately $30 million in the aggregate. As of September 30, 2022, an esmated $5 million remains to be paid on these contracts, which may vary depending on actual pass-through expenses incurred to execute the trial. The Company esmates that the total cost of the TRANSCEND clinical trial will be in the range of $37 million to $40 million from incepon to compleon. In the event the Company were to terminate any trial, it may incur certain ﬁnancial penales, which would become payable to the CRO for costs to wind down the terminated trial. Asset Acquisions. In ﬁscal 2018, the Company acquired certain intellectual property assets of Embolitech, LLC (the “Embolitech Transacon”). As part of the Embolitech Transacon, the Company paid the sellers $5.0 million in ﬁscal 2018, $1.0 million in ﬁscal 2020, $1.0 million in ﬁscal 2021 and $0.5 million in ﬁscal 2022. The Company is obligated to pay addional installments totaling $2.0 million in ﬁscal 2023 through ﬁscal 2024. These payments may be accelerated upon the occurrence of certain sales and regulatory milestones. An addional $1.0 million payment is conngent upon the achievement of a certain regulatory milestone within a conngency period ending in 2033. 78 TABLE OF CONTENTS Business Combinaons. See Note 12 Acquisions for disclosure of the ﬁscal 2021 acquision of Vetex and associated deferred and conngent consideraon liabilies. 12. Acquisions Vetex Medical Limited On July 2, 2021, Surmodics acquired all of the outstanding shares of Vetex Medical Limited (“Vetex”). Vetex, which was formerly privately held and is based in Galway, Ireland, develops and manufactures medical devices focused on venous clot removal soluons. The transacon expanded Surmodics’ thrombectomy porolio with a second FDA 510(k)-cleared device, a mechanical venous thrombectomy device. The acquision was accounted for as a business combinaon. The acquired assets, liabilies and operang results of Vetex have been included on our consolidated ﬁnancial statements within the Medical Device segment from the date of acquision. Surmodics acquired Vetex with an upfront cash payment of $39.9 million funded using cash on hand and $10.0 million from the revolving credit facility in place during the period. The Company is obligated to pay addional installments totaling $3.5 million in ﬁscal 2024 through ﬁscal 2027. These payments may be accelerated upon the occurrence of certain product development and regulatory milestones. An addional $3.5 million in payments is conngent upon the achievement of certain product development and regulatory milestones within a conngency period ending in ﬁscal 2027. The acquision date fair value of purchase consideraon was as follows: (In thousands) Consideraon paid at closing Deferred consideraon Conngent consideraon Total purchase consideraon Less: Cash acquired Total purchase consideraon, net of cash acquired $ $ 39,985 3,257 814 44,056 (432 ) 43,624 The fair value of conngent consideraon was derived using a discounted cash ﬂow approach based on Level 3 inputs. See Note 5 Fair Value Measurements for addional disclosures regarding conngent consideraon. The ﬁnal allocaon of purchase consideraon as of the acquision date was as follows: (In thousands) Asset (Liability) Current assets Property and equipment Intangible assets Other non-current assets Accrued compensaon Other accrued liabilies Deferred income taxes Net assets acquired Goodwill Total purchase consideraon, net of cash acquired $ $ 18 37 27,600 37 (236 ) (111 ) (3,087 ) 24,258 19,366 43,624 During the third quarter of ﬁscal 2022, the Company recorded measurement adjustments to provisional amounts previously recognized, which resulted in a $0.3 million increase in goodwill and a corresponding decrease in net idenﬁable assets acquired. The Company ﬁnalized the accounng for the Vetex acquision in the third quarter of ﬁscal 2022. Acquired intangible assets consist of developed technology. We used the income approach, speciﬁcally the discounted cash ﬂow method and the incremental cash ﬂow approach using Level 3 inputs, to derive the fair value of the developed technology. The developed technology is amorzed on a straight-line basis over its esmated useful life of 12 years. The amorzaon of the acquired intangible assets is tax deducble. 79 TABLE OF CONTENTS The goodwill recorded from the Vetex acquision is a result of expected synergies from integrang the Vetex business into the Company’s Medical Device segment and from acquiring and retaining the exisng Vetex workforce. The goodwill is not deducble for tax purposes. In the year of acquision, ﬁscal 2021, we reported zero revenue and $(0.9) million net loss from Vetex in our consolidated statements of operaons. In addion, in ﬁscal 2021, we recognized $1.0 million in acquision transacon, integraon and other costs related to the Vetex acquision on the consolidated statements of operaons. The pro forma impact of business combinaons during ﬁscal years 2021 and 2020 was not signiﬁcant, neither individually nor in the aggregate, to the consolidated results of the Company. 13. Reportable Segment Informaon Reportable segments are components of an enterprise about which separate ﬁnancial informaon is available that is evaluated regularly by the chief operang decision maker, who is the Company’s Chief Execuve Oﬃcer, in deciding how to allocate resources and in assessing performance. We operate two reportable segments: • Medical Device: Manufacture of performance coangs, including surface modiﬁcaon coang technologies to improve access, deliverability and predictable deployment of medical devices and drug-delivery coang technologies to provide site-speciﬁc drug-delivery from the surface of a medical device, with end markets that include coronary, peripheral, neuro-vascular, and structural heart, among others; and the manufacture of vascular intervenon medical devices, including drug-coated balloons, mechanical thrombectomy devices, and radial access balloon catheters and guide sheaths. • In Vitro Diagnoscs: Manufacture of chemical and biological components used in in vitro diagnosc immunoassay and molecular tests within the diagnosc and biomedical research markets. Component products include protein stabilizers, substrates, surface coangs and angens. Segment revenue, operang (loss) income, and depreciaon and amorzaon were as follows: (In thousands) Revenue: Medical Device In Vitro Diagnoscs Total revenue Operang (loss) income: Medical Device In Vitro Diagnoscs Total segment operang (loss) income Corporate Total operang (loss) income Depreciaon and amorzaon: Medical Device In Vitro Diagnoscs Corporate Total depreciaon and amorzaon 2022 Fiscal Year 2021 2020 $ $ $ $ $ $ 72,389 $ 27,562 99,951 $ 78,253 $ 26,883 105,136 $ (22,923 ) $ 13,073 (9,850 ) (12,247 ) (22,097 ) $ 8,368 $ 355 419 9,142 $ 4,683 $ 13,770 18,453 (11,750 ) 6,703 $ 7,224 $ 395 398 8,017 $ 71,401 23,463 94,864 (3,246 ) 11,771 8,525 (9,776 ) (1,251 ) 6,223 483 557 7,263 The Corporate category includes expenses that are not fully allocated to the Medical Device and In Vitro Diagnoscs segments. These Corporate costs are related to administrave corporate funcons, such as execuve management, corporate accounng, informaon technology, legal, human resources and Board of Directors. Corporate may also include expenses, such as acquision-related costs and ligaon, which are not speciﬁc to a segment and thus not allocated to the reportable segments. Asset informaon by segment is not presented because the Company does not provide its chief operang decision maker assets by segment, as the data is not readily available. 80 TABLE OF CONTENTS Revenue by geographic region was as follows: Domesc Foreign Fiscal Year 2021 2022 74 % 26 % 79 % 21 % 2020 78 % 22 % Long-lived assets by country, including property and equipment and intangible assets net of accumulated depreciaon and amorzaon, respecvely, were as follows: (In thousands) U.S. Ireland 14. Subsequent Events MidCap Credit Agreement September 30, 2022 2021 $ 24,788 $ 30,505 25,920 41,224 On October 14, 2022, the Company entered into a secured revolving credit facility and secured term loan facilies pursuant to a Credit, Security and Guaranty Agreement (the “MidCap Credit Agreement”) with Mid Cap Funding IV Trust, as agent, and MidCap Financial Trust, as term loan servicer and the lenders from me to me party thereto. The MidCap Credit Agreement provides for availability under a secured revolving line of credit of up to $25.0 million (the “Midcap Revolving Credit Facility”), and proceeds may be used for transacon fees and for working capital needs and general corporate purposes. Availability under the Midcap Revolving Credit Facility is subject to a borrowing base. The MidCap Credit Agreement also provides for up to $75.0 million in term loans (the “Term Loans”), consisng of a $25.0 million Tranche 1 (“Tranche 1”) and a $50.0 million Tranche 2 (“Tranche 2”), which may be drawn in increments of at least $10.0 million. In addion, aer the closing and prior to December 31, 2024, the Term Loan lenders may, in their sole discreon, fund an addional tranche of Term Loans of up to $25.0 million upon the wrien request of the Company. Upon closing, the Company borrowed $25.0 million of Tranche 1, borrowed $5.0 million on the Midcap Revolving Credit Facility, and used approximately $10.0 million of the proceeds to repay borrowings under the Bridgewater Revolving Credit Facility, and intends to use the remaining proceeds to fund working capital needs and other general corporate purposes. Unl December 31, 2024, the Company will be eligible to borrow Tranche 2 at the Company’s opon upon meeng certain condions set forth in the MidCap Credit Agreement, including having no less than $60.0 million of rolling-four- quarter core net revenue as of the end of the prior ﬁscal quarter. Pursuant to the MidCap Credit Agreement, the Company provided a ﬁrst priority security interest in all exisng and future acquired assets, including intellectual property and real estate, owned by the Company. The MidCap Credit Agreement contains certain covenants that limit the Company’s ability to engage in certain transacons. Subject to certain limited excepons, these covenants limit the Company’s ability to, among other things: • • • • • • • create, incur, assume or permit to exist any addional indebtedness, or create, incur, allow or permit to exist any addional liens; enter into any amendment or other modiﬁcaon of certain agreements; eﬀect certain changes in the Company’s business, ﬁscal year, management, enty name or business locaons; liquidate or dissolve, merge with or into, or consolidate with, any other company; pay cash dividends on, make any other distribuons in respect of, or redeem, rere or repurchase, any shares of the Company’s capital stock; make certain investments, other than limited permied acquisions; and enter into transacons with the Company’s aﬃliates. The MidCap Credit Agreement also contains customary indemniﬁcaon obligaons and customary events of default, including, among other things, (i) non- payment, (ii) breach of warranty, (iii) non-performance of covenants and obligaons, (iv) default on other indebtedness, (v) judgments, (vi) change of control, (vii) bankruptcy and insolvency, (viii) impairment of security, (ix) terminaon of a pension plan, (x) regulatory maers, and (xi) material adverse eﬀect. In addion, the Company must maintain minimum core net revenue levels tested quarterly to the extent that Term Loans advanced under the MidCap Credit Agreement exceed $25.0 million. In the event of default under the MidCap Credit Agreement, the Company would be required to pay interest on principal and all other due and unpaid obligaons at the current rate in eﬀect plus 2%. 81 TABLE OF CONTENTS The Midcap Revolving Credit Facility and the Term Loans mature on October 1, 2027. The Midcap Revolving Credit Facility bears interest at an annual rate equal to 3.00% plus the greater of Term SOFR (as deﬁned in the MidCap Credit Agreement) or 1.50%, and the Term Loans bear interest at an annual rate equal to 5.75% plus the greater of Term SOFR or 1.50%. The Company is required to make monthly interest payments on the Midcap Revolving Credit Facility with the enre principal payment due at maturity. The Company is required to make 48 monthly interest payments on the Term Loans beginning on November 1, 2022 (the “Interest-Only Period”). If the Company is in covenant compliance at the end of the Interest-Only Period, the Company will have the opon to extend the Interest-Only Period through maturity with the enre principal payment due at maturity. If the Company is not in covenant compliance at the end of the Interest-Only Period, the Company is required to make 12 months of straight-line amorzaon payments with the enre principal amount due at maturity. Subject to certain limitaons, the Term Loans have a prepayment fee for payments made prior to the maturity date equal to 3.0% of the prepaid principal amount for the ﬁrst year following the closing date of the MidCap Credit Agreement, 2.0% of the prepaid principal amount for the second year following the closing date and 1.0% of the prepaid principal amount for the third year following the closing date and thereaer. In addion, if the Midcap Revolving Credit Facility is terminated in whole or in part prior to the maturity date, the Company must pay a prepayment fee equal to 3.0% of the terminated commitment amount for the ﬁrst year following the closing date of the MidCap Credit Agreement, 2.0% of the terminated commitment amount for the second year following the closing date of the MidCap Credit Agreement and 1.0% of the terminated commitment amount for the third year following the closing date and thereaer. The Company is also required to pay a full exit fee at the me of maturity or full prepayment event equal to 2.5% of the aggregate principal amount of the Term Loans made pursuant to the MidCap Credit Agreement and a paral exit fee at the me of any paral prepayment event equal to 2.5% of the amount prepaid. The Company also is obligated to pay customary originaon fees at the me of each funding of the Term Loans and a customary annual administrave fee based on the amount borrowed under the Term Loan, due on an annual basis. The customary fees on the Midcap Revolving Credit Facility include (i) an originaon fee based on the commitment amount, which was paid on the closing date, (ii) an annual collateral management fee based on the outstanding balance of the Midcap Revolving Credit Facility, payable monthly in arrears and (iii) an unused line fee based on the average unused poron of the Midcap Revolving Credit Facility, payable monthly in arrears. The Company must also maintain a minimum balance of no less than 20% of availability under the Midcap Revolving Credit Facility or a minimum balance fee applies. Interest Rate Swap On October 14, 2022, the Company entered into a 5-year interest rate swap transacon with Wells Fargo Bank, N.A. with respect to $25.0 million of noonal value of the Term Loans funded as Tranche 1 under the MidCap Credit Agreement. The interest rate swap transacon will eﬀecvely ﬁx at 4.455% the one- month term SOFR poron of interest rate under the Term Loans funded as Tranche 1 such that the ﬁxed interest rate per annum on the swapped $25.0 million noonal value of such Term Loan will be 10.205% through its maturity. 82 TABLE OF CONTENTS 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 Securies Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to ensure that informaon required to be disclosed in our reports ﬁled under the Exchange Act, is recorded, processed, summarized and reported within the me periods speciﬁed in the SEC’s rules and forms, and that such informaon is accumulated and communicated to our management, including our Chief Execuve Oﬃcer and Chief Financial Oﬃcer, as appropriate, to allow mely decisions regarding required disclosure. In designing and evaluang the disclosure controls and procedures, management recognizes that any controls and procedures, no maer how well designed and operated, can provide only reasonable assurance of achieving the desired control objecves, and no evaluaon can provide absolute assurance that 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 parcipaon of the Company’s Chief Execuve Oﬃcer and Chief Financial Oﬃcer, referred to collecvely herein as the Cerfying Oﬃcers, carried out an evaluaon of the eﬀecveness of the design and operaon of the Company’s disclosure controls and procedures as of September 30, 2022, the end of the period covered by this Annual Report on Form 10-K. Based on that evaluaon, the Cerfying Oﬃcers 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 eﬀecve as of September 30, 2022, as designed and implemented to ensure that informaon required to be disclosed by the Company in reports that it ﬁles under the Exchange Act is recorded, processed, summarized and reported within the me period speciﬁed in the Securies Exchange Commission rules and forms, and to ensure that informaon required to be disclosed by the Company in the reports the Company ﬁles or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Cerfying Oﬃcers, as appropriate, to allow mely decisions regarding required disclosures. 2. Internal Control over Financial Reporng a. Management’s Annual Report on Internal Control Over Financial Reporng. Our management is responsible for establishing and maintaining adequate internal control over ﬁnancial reporng, as deﬁned in Exchange Act Rules 13a-15(f) and 15d-15(f). The Company’s internal control over ﬁnancial reporng is a process designed to provide reasonable assurance regarding the reliability of ﬁnancial reporng and the preparaon of ﬁnancial statements for external purposes in accordance with U.S. GAAP. Our internal control over ﬁnancial reporng includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reﬂect the transacons and disposions of our assets; (ii) provide reasonable assurance that transacons are recorded as necessary to permit preparaon of ﬁnancial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizaon of our management and directors; and (iii) provide reasonable assurance regarding prevenon or mely detecon of unauthorized acquision, use or disposion of assets that could have a material eﬀect on our consolidated ﬁnancial statements. Management evaluated the design and operang eﬀecveness of the Company’s internal control over ﬁnancial reporng based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Commiee of Sponsoring Organizaons of the Treadway Commission. Based on the evaluaon, management concluded that internal control over ﬁnancial reporng was eﬀecve as of September 30, 2022. The Company’s independent registered public accounng ﬁrm, Deloie & Touche LLP, who audited the consolidated ﬁnancial statements included in this Annual Report on Form 10-K, has issued an aestaon report on the eﬀecveness of the Company’s internal control over ﬁnancial reporng as of September 30, 2022. This report states that internal control over ﬁnancial reporng was eﬀecve and appears in “Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K. b. Changes in Internal Control Over Financial Reporng. There were no changes in our internal control over ﬁnancial reporng idenﬁed in management’s evaluaon pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended September 30, 2022 that materially aﬀected, or are reasonable likely to materially aﬀect, our internal control over ﬁnancial reporng. ITEM 9B. OTHER INFORMATION. None. 83 TABLE OF CONTENTS ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. Not Applicable. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The informaon required by Item 10 relang to directors, our audit commiee, the nature of changes, if any, to procedures by which our shareholders may recommend nominees for directors, our code of ethics and compliance with Secon 16(a) of the Exchange Act will appear in the Company’s Proxy Statement for its 2023 Annual Meeng of Shareholders and is incorporated herein by reference. The informaon required by Item 10 relang to execuve oﬃcers appears in Part I, Item 1 of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. The informaon required by Item 11 will appear in the Company’s Proxy Statement for its 2023 Annual Meeng of Shareholders and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The informaon required by Item 12 will appear in the Company’s Proxy Statement for its 2023 Annual Meeng of Shareholders and is incorporated herein by reference. Equity Compensaon Plan Informaon The following table provides informaon related to the Company’s equity compensaon plans in eﬀect as of September 30, 2022: Plan Category Equity compensaon plans approved by shareholders Equity compensaon plans not approved by shareholders Total (a) Number of Securies to be Issued Upon Exercise of Outstanding Opons, Warrants and Rights (b) Weighted-Average Exercise Price of Outstanding Opons, Warrants and Rights (c) Number of Securies Remaining Available for Future Issuance Under Equity Compensaon Plans (Excluding Securies Reﬂected in Column (a)) 1,261,049 (1) $ — 1,261,049 $ (1 ) 37.42 N/A 37.42 967,063 — 967,063 (1) Excludes shares that may be issued under the Company’s amended and restated 1999 Employee Stock Purchase Plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. The informaon required by Item 13 will appear in the Company’s Proxy Statement for its 2023 Annual Meeng of Shareholders and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The informaon required by Item 14 will appear in the Company’s Proxy Statement for its 2023 Annual Meeng of Shareholders and is incorporated herein by reference. 84 TABLE OF CONTENTS PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) 1. Financial Statements The following consolidated ﬁnancial statements are set forth in Part II, Item 8: Reports of Independent Registered Public Accounng Firm Consolidated Balance Sheets Consolidated Statements of Operaons Consolidated Statements of Comprehensive (Loss) Income Consolidated Statements of Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 2. Financial Statement Schedules Schedule II —Valuaon and Qualifying Accounts for ﬁscal years ended September 30, 2022, 2021 and 2020. All other schedules are omied because they are inapplicable, not required, or the informaon is in the consolidated ﬁnancial statements or related notes. Surmodics, Inc. Schedule II – Valuaon and Qualifying Accounts Balance at Beginning of Fiscal Year Addions: Charges to Income Deducons: Other Changes (Debit) Credit Balance at End of Fiscal Year (In thousands) Allowance for credit losses: Fiscal year ended September 30, 2020 $ Fiscal year ended September 30, 2021 Fiscal year ended September 30, 2022 200 $ 130 119 73 $ (11 ) 5 (143 ) (a) $ — (a) (43 ) (a) 130 119 81 (a) Primarily consists of uncollecble accounts wrien oﬀ, less recoveries. 3. Exhibits Exhibit Descripon 2.1 2.2 2.3 2.4 2.5 Agreement of Merger dated January 18, 2005 among Surmodics, Inc., SIRx, InnoRx, et al. — incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated January 24, 2005. 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 Current Report on Form 8-K dated November 27, 2015. Stock Purchase Agreement, dated January 8, 2016, among Surmodics, Inc. and the shareholders of NorMedix, Inc. and Gregg Suon as Seller’s Agent — incorporated by reference to Exhibit 2.1 to the Company’s Form Current Report on Form 8-K ﬁled on January 13, 2016. Share Purchase Agreement by and among Surmodics, Inc., SurModics MD, LLC, and the shareholders of Vetex Medical Limited named therein dated as of July 2, 2021 — incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated July 2, 2021. Put and Call Opon Agreement by and among SurModics MD, LLC and the shareholders of Vetex Medical Limited named therein dated as of July 2, 2021 — incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K dated July 2, 2021. 85 TABLE OF CONTENTS Exhibit Descripon 3.1 3.2 4.1 Restated Arcles of Incorporaon, as amended — incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q ﬁled on July 29, 2016 Restated Bylaws of Surmodics, Inc., as amended December 18, 2015 — incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K ﬁled on December 23, 2015. Descripon of Securies of Surmodics, Inc. — incorporated by reference to Exhibit 4.1 of the Company’s Annual Report on Form 10-K ﬁled on December 3, 2019. 10.1* Form of Incenve Stock Opon Agreement for the Surmodics, Inc. 2009 Equity Incenve Plan — incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K ﬁled on February 12, 2010. 10.2* Form of Non-Statutory Stock Opon Agreement for the Surmodics, Inc. 2009 Equity Incenve Plan — incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K ﬁled on February 12, 2010. 10.3* Form of Restricted Stock Agreement for the Surmodics, Inc. 2009 Equity Incenve Plan — incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q ﬁled on February 4, 2015. 10.4* Surmodics, Inc. 2009 Equity Incenve Plan (as amended and restated on February 17, 2016) — incorporated by reference to Appendix B to the Company’s Deﬁnive Proxy Statement for the annual meeng of shareholders held on February 17, 2016 ﬁled on January 8, 2016. 10.5* Surmodics, Inc. 1999 Employee Stock Purchase Plan (as amended and restated on February 17, 2016) — incorporated by reference to Appendix D to the Company’s Deﬁnive Proxy Statement for the annual meeng of shareholders held on February 17, 2016 ﬁled on January 8, 2016. 10.6* Severance Agreement by and between Gary R. Maharaj and Surmodics, Inc. dated as of December 14, 2010 – incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q ﬁled on February 4, 2011. 10.7* Change of Control Agreement with Charles W. Olson dated February 9, 2012 — incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8 K ﬁled on February 10, 2012. 10.8* Amendment dated February 9, 2015 to Change of Control Agreement with Charles W. Olson dated February 9, 2012 — incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8 K ﬁled on February 13, 2015. 10.9* Change of Control Agreement with Joseph J. Sch dated February 9, 2012 — incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8 K ﬁled on February 10, 2012. 10.10* Amendment dated February 9, 2015 to Change of Control Agreement with Joseph J. Sch dated February 9, 2012 — incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8 K ﬁled on February 13, 2015. 10.11* Form of Change of Control Agreement with Execuve Oﬃcers — incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q ﬁled on February 7, 2020. 10.12* Form of Restricted Stock Unit Award Agreement (Non-Employee Director) for the Surmodics, Inc. 2009 Equity Incenve Plan — incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q ﬁled on May 8, 2014. 10.13* Form of Restricted Stock Unit Award Agreement (Non-Employee Director) for the Surmodics, Inc. 2009 Equity Incenve Plan — incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q ﬁled on February 4, 2015. 10.14* Form of Deferred Stock Unit Master Agreement (Quarterly Awards) for the Surmodics, Inc. 2009 Equity Incenve Plan — incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q ﬁled on February 8, 2013. 10.15* Form of Deferred Stock Unit Master Agreement (Quarterly Awards) for the Surmodics, Inc. 2009 Equity Incenve Plan — incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q ﬁled on February 4, 2015. 10.16* Form of Restricted Stock Unit Award Agreement (Employee) for the Surmodics, Inc. 2009 Equity Incenve Plan — incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K ﬁled on February 22, 2016. 10.17* Omnibus Amendment to Certain Equity Agreements with Non-Employee Directors under the Surmodics, Inc. 2009 Equity Incenve Plan — incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q ﬁled on May 8, 2014. 86 TABLE OF CONTENTS Exhibit 10.18* Descripon Form of Non-Statutory Stock Opon Agreement (Non-Employee Director) for the Surmodics, Inc. 2009 Equity Incenve Plan — incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q ﬁled on May 8, 2014. 10.19** Development and Distribuon Agreement between Surmodics, Inc. and Abbo Vascular, Inc., dated as of February 26, 2018. – incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q ﬁled on May 4, 2018. 10.20* Change of Control Agreement by and between Surmodics, Inc. and Teri W. Sides, dated as of October 30, 2018 – incorporated by reference to Exhibit 10.34 to the Company’s Annual Report on Form 10-K ﬁled on November 30, 2018. 10.21* Surmodics, Inc. 2019 Equity Incenve Plan, as amended and restated February 10, 2022 – incorporated by reference to Appendix B to the Company’s Schedule 14A ﬁled on December 20, 2021. 10.22* Form of Non-Qualiﬁed Stock Opon Award Agreement for the Surmodics, Inc. 2019 Equity Incenve Plan – incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K ﬁled on May 6, 2019. 10.23* Form of Restricted Stock Award Agreement for the Surmodics, Inc. 2019 Equity Incenve Plan – incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K ﬁled on May 6, 2019. 10.24* Form of Restricted Stock Unit Award Agreement (Employee) for the Surmodics, Inc. 2019 Equity Incenve Plan – incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K ﬁled on May 6, 2019. 10.25* Form of Restricted Stock Unit Award Agreement (Director) for the Surmodics, Inc. 2019 Equity Incenve Plan – incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K ﬁled on May 6, 2019. 10.26* Form of Deferred Stock Unit Master Agreement (for non-employee directors) for the Surmodics, Inc. 2019 Equity Incenve Plan – incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K ﬁled on May 6, 2019. 10.27* Surmodics, Inc. Board Compensaon Policy, Amended and restated as of September 23, 2021 – incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K ﬁled on November 24, 2021. 10.28 Loan and Security Agreement dated as of September 14, 2020 among Surmodics, Inc. et al. and Bridgewater Bank – incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K ﬁled on September 15, 2020. 10.29 10.30 First Amendment to Loan and Security Agreement dated as of July 2, 2021 by and among Surmodics, Inc., the other loan pares party thereto, and Bridgewater Bank — incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 2, 2021. Second Amendment to Loan and Security Agreement dated as of March 7, 2022 by and among Surmodics, Inc., the other loan pares party thereto, and Bridgewater Bank — incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K ﬁled March 7, 2022. 10.31* Form of Restricted Stock Unit Award Agreement (Non-Employee Director) for the Surmodics, Inc. 2019 Equity Incenve Plan — incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K ﬁled on December 2, 2020. 10.32 Lease Agreement by and among Surmodics, Inc., MN Golden 1, LLC and MN Golden 2, LLC, as amended March 16, 2022 – incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q ﬁled on April 27, 2022. 10.33 21† 23† 24 Credit, Security and Guaranty Agreement dated as of October 14, 2022 by and among Surmodics, Inc., Surmodics Shared Services, LLC, Surmodics Holdings, LLC, Surmodics Coangs, LLC, SurModics MD, LLC, Surmodics Coangs Mfg, LLC, Surmodics IVD, Inc., NorMedix, Inc., and Surmodics MD Operaons, LLC, as borrowers, the guarantors from me to me party thereto, MidCap Funding IV Trust and MidCap Financial Trust and the lenders from me to me party thereto (excluding schedules and exhibits, which Surmodics, Inc. agrees to furnish to the Securies and Exchange Commission upon request) — incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K ﬁled on October 17, 2022. Subsidiaries of the Registrant. Consent of Deloie & Touche LLP. Power of Aorney (included on signature page of this Form 10-K). 87 TABLE OF CONTENTS Exhibit Descripon 31.1† Cerﬁcaon of Chief Execuve Oﬃcer pursuant to 18 U.S.C. Sec. 1350 as adopted pursuant to Secon 302 of the Sarbanes-Oxley Act of 2002. 31.2† Cerﬁcaon of Chief Financial Oﬃcer pursuant to 18 U.S.C. Sec. 1350 as adopted pursuant to Secon 302 of the Sarbanes-Oxley Act of 2002. 32.1† Cerﬁcaon of Chief Execuve Oﬃcer pursuant to 18 U.S.C. Sec. 1350 as adopted pursuant to Secon 906 of the Sarbanes-Oxley Act of 2002. 32.2† Cerﬁcaon of Chief Financial Oﬃcer pursuant to 18 U.S.C. Sec. 1350 as adopted pursuant to Secon 906 of the Sarbanes-Oxley Act of 2002. 101.INS† Inline XBRL Instance Document – the instance document does not appear in the Interacve Data File as its XBRL tags are embedded within the inline XBRL document. 101.SCH† Inline XBRL Taxonomy Extension Schema. 101.CAL† Inline XBRL Taxonomy Extension Calculaon Linkbase. 101.DEF† Inline XBRL Taxonomy Extension Deﬁnion Linkbase. 101.LAB† Inline XBRL Taxonomy Extension Label Linkbase. 101.PRE† Inline XBRL Taxonomy Extension Presentaon Linkbase. 104† Cover Page Interacve Data File (formaed as inline XBRL and contained in Exhibit 101). * Management contract or compensatory plan or arrangement. † Filed herewith. ** Porons of this document, which have been separately ﬁled with the Securies and Exchange Commission, have been omied pursuant to a request for conﬁdenal treatment. ITEM 16. FORM 10-K SUMMARY. None. 88 TABLE OF CONTENTS SIGNATURES Pursuant to the requirements of Secon 13 or 15(d) of the Securies Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SURMODICS, INC. By: /s/ Gary R. Maharaj Gary R. Maharaj President and Chief Execuve Oﬃcer Dated: November 23, 2022 Pursuant to the requirements of the Securies Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant, in the capacies, and on the dates indicated. (Power of Aorney) Each person whose signature appears below authorizes GARY R. MAHARAJ or TIMOTHY J. ARENS, and constutes and appoints said persons as his or her true and lawful aorneys-in-fact and agents, with full power of substuon and resubstuon, for him or her and in his or her name, place and stead, in any and all capacies, 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 in connecon therewith, with the Securies and Exchange Commission, authorizing said persons and granng unto said aorneys-in-fact and agents, full power and 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 purposes as he or she might or could do in person, hereby rafying and conﬁrming all said aorneys-in-fact and agents, or his substute or substutes, may lawfully do or cause to be done by virtue thereof. Signature Title Date /s/ Gary R. Maharaj Gary R. Maharaj /s/ Timothy J. Arens Timothy J. Arens /s/ John D. Manders John D. Manders /s/ Susan E. Knight Susan E. Knight /s/ José H. Bedoya José H. Bedoya /s/ David R. Dantzker, M.D. David R. Dantzker, M.D. /s/ Ronald B. Kalich Ronald B. Kalich /s/ Lisa Wipperman Heine Lisa Wipperman Heine President and Chief Execuve Oﬃcer (principal execuve oﬃcer) and Director November 23, 2022 Senior Vice President of Finance and Chief Financial Oﬃcer (principal ﬁnancial oﬃcer) November 23, 2022 Vice President of Finance and Corporate Controller (principal accounng oﬃcer) November 23, 2022 Chairman of the Board of Directors November 23, 2022 Director Director Director Director 89 November 23, 2022 November 23, 2022 November 23, 2022 November 23, 2022 Exhibit 21 Name Surmodics IVD, Inc. NorMedix, Inc. Creagh Medical Limited SurModics MD, LLC Surmodics MD Operaons, LLC Surmodics Coangs, LLC Surmodics Coangs Mfg, LLC Surmodics Holdings, LLC Surmodics Shared Services, LLC Vetex Medical Limited SURMODICS, INC. SUBSIDIARIES State of Incorporaon Maryland Minnesota Ireland Minnesota Minnesota Minnesota Minnesota Minnesota Minnesota Ireland CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporaon by reference in Registraon Statement Nos. 333-104258, 333-123521, 333-165098, 333-165101, 333-54266, 333-231199, 333-251486 and 333-262922 on Form S-8 and Registraon Statement No. 333-238611 on Form S-3 of our reports dated November 23, 2022, relang to the consolidated ﬁnancial statements and ﬁnancial statement schedule of Surmodics, Inc. and subsidiaries and the eﬀecveness of Surmodics, Inc.’s and subsidiaries internal control over ﬁnancial reporng appearing in this Annual Report on Form 10-K for the year ended September 30, 2022. Exhibit 23 /s/ DELOITTE & TOUCHE LLP Minneapolis, Minnesota November 23, 2022 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 31.1 I, Gary R. Maharaj, cerfy 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 the statements 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 informaon included in this report, fairly present in all material respects the ﬁnancial condion, results of operaons and cash ﬂows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other cerfying oﬃcer and I are responsible for establishing and maintaining disclosure controls and procedures (as deﬁned in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over ﬁnancial reporng (as deﬁned in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material informaon relang to the registrant, including its consolidated subsidiaries, is made known to us by others within those enes, parcularly during the period in which this report is being prepared; (b) Designed such internal control over ﬁnancial reporng, or caused such internal control over ﬁnancial reporng to be designed under our supervision, to provide reasonable assurance regarding the reliability of ﬁnancial reporng and the preparaon of ﬁnancial statements for external purposes in accordance with generally accepted accounng principles; (c) Evaluated the eﬀecveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the eﬀecveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluaon; and (d) Disclosed in this report any change in the registrant’s internal control over ﬁnancial reporng that occurred during the registrant’s most recent ﬁscal quarter (the registrant’s fourth ﬁscal quarter in the case of an annual report) that has materially aﬀected, or is reasonably likely to materially aﬀect, the registrant’s internal control over ﬁnancial reporng; and 5. The registrant’s other cerfying oﬃcer and I have disclosed, based on our most recent evaluaon of internal control over ﬁnancial reporng, to the registrant’s auditors and the audit commiee of the registrant’s board of directors (or persons performing the equivalent funcons): (a) All signiﬁcant deﬁciencies and material weaknesses in the design or operaon of internal control over ﬁnancial reporng which are reasonably likely to adversely aﬀect the registrant’s ability to record, process, summarize and report ﬁnancial informaon; 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 over ﬁnancial reporng. Dated: November 23, 2022 Signature: /s/ Gary R. Maharaj Gary R. Maharaj President and Chief Execuve Oﬃcer CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 31.2 I, Timothy J. Arens, cerfy 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 the statements 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 informaon included in this report, fairly present in all material respects the ﬁnancial condion, results of operaons and cash ﬂows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other cerfying oﬃcer and I are responsible for establishing and maintaining disclosure controls and procedures (as deﬁned in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over ﬁnancial reporng (as deﬁned in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material informaon relang to the registrant, including its consolidated subsidiaries, is made known to us by others within those enes, parcularly during the period in which this report is being prepared; (b) Designed such internal control over ﬁnancial reporng, or caused such internal control over ﬁnancial reporng to be designed under our supervision, to provide reasonable assurance regarding the reliability of ﬁnancial reporng and the preparaon of ﬁnancial statements for external purposes in accordance with generally accepted accounng principles; (c) Evaluated the eﬀecveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the eﬀecveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluaon; and (d) Disclosed in this report any change in the registrant’s internal control over ﬁnancial reporng that occurred during the registrant’s most recent ﬁscal quarter (the registrant’s fourth ﬁscal quarter in the case of an annual report) that has materially aﬀected, or is reasonably likely to materially aﬀect, the registrant’s internal control over ﬁnancial reporng; and 5. The registrant’s other cerfying oﬃcer and I have disclosed, based on our most recent evaluaon of internal control over ﬁnancial reporng, to the registrant’s auditors and the audit commiee of the registrant’s board of directors (or persons performing the equivalent funcons): (a) All signiﬁcant deﬁciencies and material weaknesses in the design or operaon of internal control over ﬁnancial reporng which are reasonably likely to adversely aﬀect the registrant’s ability to record, process, summarize and report ﬁnancial informaon; 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 over ﬁnancial reporng. Dated: November 23, 2022 Signature: /s/ Timothy J. Arens Timothy J. Arens Senior Vice President of Finance and Chief Financial Oﬃcer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 32.1 In connecon with the Annual Report of Surmodics, Inc. (the “Company”) on Form 10-K for the year ended September 30, 2022, as ﬁled with the Securies and Exchange Commission (the “Report”), I, Gary R. Maharaj, cerfy, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes- Oxley Act of 2002, that: (1) (2) The Report fully complies with the requirements of Secon 13(a) or 15(d) of the Securies Exchange Act of 1934; and The informaon contained in the Report fairly presents, in all material respects, the ﬁnancial condion and results of operaons of the Company. Dated: November 23, 2022 Signature: /s/ Gary R. Maharaj Gary R. Maharaj President and Chief Execuve Oﬃcer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 32.2 In connecon with the Annual Report of Surmodics, Inc. (the “Company”) on Form 10-K for the year ended September 30, 2022, as ﬁled with the Securies and Exchange Commission (the “Report”), I, Timothy J. Arens, cerfy, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes- Oxley Act of 2002, that: (1) (2) The Report fully complies with the requirements of Secon 13(a) or 15(d) of the Securies Exchange Act of 1934; and The informaon contained in the Report fairly presents, in all material respects, the ﬁnancial condion and results of operaons of the Company. Dated: November 23, 2022 Signature: /s/ Timothy J. Arens Timothy J. Arens Senior Vice President of Finance and Chief Financial Oﬃcer

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