Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 submitted electronically ~~and posted on its corporate website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer”,~~filer,” “smaller reporting ~~company”~~company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s Common Stock, ~~$.05~~$0.05 par value per share, ~~outstanding~~ as of February ~~5, 2018~~4, 2020 was ~~13,196,616.~~13,590,159

December 31,

September 30,

2017

2017

(in thousands, except share and per share data)

(Unaudited)

ASSETS

Current Assets:

Cash and cash equivalents

$
21,596

$
16,534

Restricted cash

350

—

Available-for-sale securities

24,756

31,802

Accounts receivable, net of allowance for doubtful accounts of $204 and $230
  as of December 31, 2017 and September 30, 2017, respectively

6,695

7,211

Inventories

3,871

3,516

Income tax receivable

240

599

Prepaids and other

2,488

1,221

Total Current Assets

59,996

60,883

Property and equipment, net

23,624

22,942

Deferred tax assets

2,313

4,027

Intangible assets, net

20,076

20,562

Goodwill

27,505

27,282

Other assets

1,039

897

Total Assets

$
134,553

$
136,593

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

Accounts payable

$
2,309

$
2,396

Accrued liabilities:

Compensation

1,683

3,822

Accrued other

1,790

1,835

Contingent consideration, current portion

13,752

1,750

Total Current Liabilities

19,534

9,803

Contingent consideration, less current portion

2,410

13,114

Other long-term liabilities

2,062

2,119

Total Liabilities

24,006

25,036

Commitments and Contingencies (Note 14)

Stockholders’ Equity:

Series A Preferred stock- $.05 par value, 450,000 shares authorized; no shares issued and outstanding

—

—

Common stock- $.05 par value, 45,000,000 shares authorized; 13,195,616 and
   13,094,988 shares issued and outstanding as of December 31, 2017 and
   September 30, 2017, respectively

660

655

Additional paid-in capital

5,337

5,413

Accumulated other comprehensive income

4,034

3,417

Retained earnings

100,516

102,072

Total Stockholders’ Equity

110,547

111,557

Total Liabilities and Stockholders’ Equity

$
134,553

$
136,593

~~The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.~~

Three Months Ended

December 31,

2017

2016

(In thousands, except per share data)

(Unaudited)

Revenue:

Product sales

$
8,088

$
7,701

Royalties and license fees

7,076

8,001

Research, development and other

1,849

2,059

Total revenue

17,013

17,761

Operating costs and expenses:

Product costs

2,891

2,628

Research and development

7,831

5,970

Selling, general and administrative

5,188

4,862

Acquired intangible asset amortization

618

596

Contingent consideration expense

1,118

437

Total operating costs and expenses

17,646

14,493

Operating (loss) income

(633
)

3,268

Other income:

Investment income, net

121

85

Foreign exchange (loss) gain

(186
)

674

Gain on strategic investment

177

—

Other income, net

112

759

(Loss) income before income taxes

(521
)

4,027

Income tax provision

(1,035
)

(1,727
)
Net (loss) income

$
(1,556
)

$
2,300

Basic net (loss) income per share

$
(0.12
)

$
0.17

Diluted net (loss) income per share

$
(0.12
)

$
0.17

Weighted average number of shares outstanding:

Basic

13,064

13,200

Diluted

13,064

13,446

	December 31,		September 30,
	2019		2019
(in thousands, except share and per share data)	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	9,006	$	30,361
Available-for-sale securities		39,256		24,931
Accounts receivable, net of allowance for doubtful accounts of $176 and $200 as of December 31, 2019 and September 30, 2019, respectively		7,681		8,993
Contract assets - royalties and license fees		7,847		8,210
Inventories, net		4,951		4,501
Income tax receivable		561		558
Prepaids and other		4,164		3,866
Total Current Assets		73,466		81,420
Property and equipment, net		30,766		29,748
Deferred income taxes		6,370		6,176
Intangible assets, net		13,785		14,226
Goodwill		26,546		26,171
Other assets		4,125		2,124
Total Assets	$	155,058	$	159,865

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	2,396	$	2,085
Accrued liabilities:
Compensation		1,989		4,581
Accrued other		4,878		4,790
Deferred revenue		4,928		5,553
Contingent consideration		—		3,200
Total Current Liabilities		14,191		20,209
Deferred revenue, less current portion		10,907		11,628
Other long-term liabilities		6,634		5,512
Total Liabilities		31,732		37,349
Commitments and Contingencies (Note 16)
Stockholders’ Equity:
Series A Preferred stock — $.05 par value, 450,000 shares authorized; no shares issued and outstanding		—		—
Common stock — $.05 par value, 45,000,000 shares authorized; 13,593,069 and 13,504,102 shares issued and outstanding as of December 31, 2019 and September 30, 2019, respectively		680		675
Additional paid-in capital		10,361		10,740
Accumulated other comprehensive income		1,432		396
Retained earnings		110,853		110,705
Total Stockholders’ Equity		123,326		122,516
Total Liabilities and Stockholders’ Equity	$	155,058	$	159,865

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Three Months Ended

December 31,

2017

2016

(In thousands)

(Unaudited)

Net (loss) income

$
(1,556
)

$
2,300

Other comprehensive income (loss) :

Unrealized holding (losses) gains on available-for-sale securities, net of tax

(14
)

46

Foreign currency translation adjustments

631

(2,254
)

Other comprehensive income (loss)

617

(2,208
)

Comprehensive (loss) income

$
(939
)

$
92

	Three Months Ended
	December 31,
	2019			2018
(In thousands, except per share data)	(Unaudited)
Revenue:
Product sales	$	9,974		$	9,751
Royalties and license fees		10,148			10,096
Research, development and other		2,494			2,394
Total revenue		22,616			22,241
Operating costs and expenses:
Product costs		3,203			3,523
Research and development		12,142			11,486
Selling, general and administrative		6,943			5,949
Acquired intangible asset amortization		594			606
Contingent consideration gain		—			(35	)
Total operating costs and expenses		22,882			21,529
Operating (loss) income		(266	)		712
Other income:
Investment income, net		250			316
Interest expense		(40	)		(37	)
Foreign exchange (loss) gain		(47	)		136
Other		1			7
Other income		164			422
(Loss) income before income taxes		(102	)		1,134
Income tax benefit		250			176
Net income	$	148		$	1,310

Basic net income per share:	$	0.01		$	0.10
Diluted net income per share:	$	0.01		$	0.09
Weighted average number of shares outstanding:
Basic		13,469			13,367
Diluted		13,769			13,827

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

	Three Months Ended December 31, 2019 and 2018
										Accumulated
							Additional			Other					Total
	Common Stock						Paid-In			Comprehensive			Retained		Stockholders’
(In thousands)	Shares			Amount			Capital			Income			Earnings		Equity
Balance at September 30, 2019		13,504		$	675		$	10,740		$	396		$	110,705	$	122,516
Net income		—			—			—			—			148		148
Other comprehensive loss, net of tax		—			—			—			1,036			—		1,036
Issuance of common stock		125			7			(7	)		—			—		—
Common stock options exercised, net		8			—			91			—			—		91
Purchase of common stock to pay employee taxes		(44	)		(2	)		(1,856	)		—			—		(1,858	)
Stock-based compensation		—			—			1,393			—			—		1,393
Balance at December 31, 2019		13,593		$	680		$	10,361		$	1,432		$	110,853	$	123,326

Balance at September 30, 2018		13,398		$	670		$	7,607		$	2,718		$	97,615	$	108,610
Net impact from adoption of ASC Topic 606		—			—			—			—			5,498		5,498
Net income		—			—			—			—			1,310		1,310
Other comprehensive income, net of tax		—			—			—			(534	)		—		(534	)
Issuance of common stock		128			6			(6	)		—			—		—
Common stock options exercised, net		1			—			36			—			—		36
Purchase of common stock to pay employee taxes		(44	)		(2	)		(2,528	)		—			—		(2,530	)
Stock-based compensation		—			—			1,231			—			—		1,231
Balance at December 31, 2018		13,483		$	674		$	6,340		$	2,184		$	104,423	$	113,621

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

	Three Months Ended						Three Months Ended
	December 31,						December 31,
	2017			2016			2019			2018
(in thousands)	(Unaudited)						(Unaudited)
Operating Activities:
Net (loss) income	$	(1,556	)	$	2,300
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Net income							$	148		$	1,310
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		1,520			1,282			1,804			1,756
Stock-based compensation		903			789			1,393			1,231
Contingent consideration expense		1,118			437
Unrealized foreign exchange loss (income)		180			(663	)
Payment of contingent consideration obligations in excess of acquisition-date value								(608	)		(2,041	)
Contingent consideration gain								—			(35	)
Deferred taxes		1,714			742			(194	)		310
Gain on strategic investment		(177	)		—			—			(7	)
Provision for bad debts		28			—			(27	)		63
Other		(7	)		(5	)		50			12
Change in operating assets and liabilities:
Accounts receivable		484			345
Accounts receivable and contract asset								1,726			(762	)
Inventories		(345	)		73			(413	)		(161	)
Prepaids and other		(1,188	)		(746	)		(800	)		(649	)
Accounts payable and accrued liabilities		(2,295	)		(2,713	)
Accounts payable								529			190
Accrued liabilities								(3,112	)		(3,737	)
Income taxes		190			82			(59	)		(496	)
Deferred revenue		45			28			(1,346	)		(2,389	)
Net cash provided by operating activities		614			1,951
Net cash used in operating activities								(909	)		(5,405	)
Investing Activities:
Purchases of property and equipment		(1,298	)		(1,545	)		(1,671	)		(2,066	)
Purchases of available-for-sale securities		(11,364	)		(12,541	)		(21,758	)		(10,098	)
Maturities of available-for-sale securities		18,400			7,071			7,425			20,000
Net cash provided by (used in) investing activities		5,738			(7,015	)
Cash received from sale of strategic investment								—			7
Net cash (used in) provided by investing activities								(16,004	)		7,843
Financing Activities:
Issuance of common stock		155			13			91			36
Payments for taxes related to net share settlement of equity awards		(1,130	)		(2,129	)		(1,964	)		(2,661	)
Payment of deferred financing costs		—			(38	)
Payment of contingent consideration obligations								(2,592	)		(9,064	)
Net cash used in financing activities		(975	)		(2,154	)		(4,465	)		(11,689	)
Effect of exchange rate changes on cash and cash equivalents		35			(116	)		23			(15	)
Net change in cash and cash equivalents		5,412			(7,334	)		(21,355	)		(9,266	)
Cash and Cash Equivalents:
Beginning of period		16,534			24,987			30,361			23,668
End of period	$	21,946		$	17,653		$	9,006		$	14,402
Supplemental Information:
Cash paid for income taxes	$	12		$	897		$	4		$	3
Noncash transactions from investing and financing activities:
Acquisition of property and equipment on account	$	187		$	227
Strategic investment gain receivable included in other current assets		177			—
Deferred financing costs in accounts payable		—			45
Acquisition of property and equipment, net of refundable credits in other current assets and liabilities							$	167		$	147

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.”) (“GAAP”) and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, needed to fairly present the financial results of Surmodics, Inc. and subsidiaries (“Surmodics” or the “Company”) for the periods presented. These financial statements include ~~some~~ amounts that are based on management’s best estimates and judgments. These estimates may be adjusted as more information becomes available, and any adjustment could be significant. The impact of any change in estimates is included in the determination of net income (loss) ~~income~~ in the period in which the change in estimate is identified. The results of operations for the three months ended December 31, ~~2017~~2019 are not necessarily indicative of the results that may be expected for the entire ~~2018~~2020 fiscal year.

In accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), the Company has omitted footnote disclosures that would substantially duplicate the disclosures contained in the audited consolidated financial statements of the Company. These unaudited condensed consolidated financial statements should be read together with the audited consolidated financial statements for the fiscal year ended September 30, ~~2017,~~2019, and footnotes thereto included in the Company’s Annual Report on Form 10-K as filed with the SEC on December ~~1, 2017.~~3, 2019.

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards ~~Codification~~Update (“~~ASC”~~ASU”) ~~Update No. 2014-09,~~ ~~Revenue from Contracts with Customers (ASC Topic 606)~~. Principles of this guidance require entities to recognize revenue in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration an entity expects to be entitled to in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This accounting standard will be effective for the Company beginning in the first quarter of fiscal year 2019 (October 1, 2018) using one of two prescribed retrospective methods. The Company is currently evaluating the impact that the adoption of this standard will have on the Company’s business model and consolidated results of operations, cash flows and financial position. The Company currently plans to adopt the standard using the modified retrospective approach and expects the impact will be material to the consolidated financial statements due to an anticipated one-quarter acceleration of minimum license fees and royalty revenue earned under its hydrophilic license agreements, as well as require several additional financial statement footnote disclosures. Under the modified retrospective approach, the Company will apply the new revenue standard to all new revenue contracts initiated on or after the effective date, and, for contracts which have remaining obligations as of the effective date, the Company will adjust the beginning balance of retained earnings as of October 1, 2018.

~~In February 2016, the FASB issued Accounting Standards Update~~ ASU 2016-02, Leases ~~(ASC~~ (“ASC Topic ~~842)~~842”). ~~The new guidance primarily affects lessee accounting, while accounting by lessors will not be significantly impacted by the update.~~ The update maintains two classifications of leases: finance leases, which replace capital leases, and operating leases. Lessees ~~will need to~~ recognize a right-of-use asset and a lease liability on the ~~statement of financial position~~consolidated balance sheets for those leases previously classified as operating leases under the ~~old~~previous guidance. The liability ~~will be~~is equal to the present value of ~~remaining contractual~~ lease ~~payments. The~~payments, while the asset ~~will be~~is based on the liability, subject to adjustment, such as for direct costs. ~~The~~

Effective October 1, 2019, the Company adopted the new lease accounting standard ~~will be effective for~~using the optional transition method which allowed us to continue to apply the guidance under the lease standard in effect at the time in the comparative periods presented. In addition, the Company ~~beginning~~elected the ~~first quarter~~package of ~~fiscal year 2020 (October 1, 2019) and will be applied using~~practical expedients, including opting not to reassess whether any existing contracts contain a ~~modified retrospective approach.~~lease, historical lease classification as operating or finance leases, or initial direct costs. The Company ~~is currently evaluating~~has also elected the ~~impact that~~practical expedient to not separate the ~~adoption~~lease and non-lease components for all classes of ~~this standard will have on the Company’s results of operations, cash flows and financial position.~~underlying assets. The Company ~~believes~~elected the ~~impact will be material due to~~short-term lease recognition exemption for all leases that qualified and has accordingly excluded short-term leases from the recognition of right-of-use assets and lease liabilities.

As a result of adoption of Accounting Standards Codification (“ASC”) Topic 842, we recorded operating lease right-of-use assets and corresponding operating lease liabilities ~~that will be recorded~~of approximately $1.7 million and $2.9 million, respectively, as of October 1, 2019 with no impact on ~~the Company’s~~retained earnings. In addition, deferred rent liabilities related to escalating rent payments and tenant incentives totaling approximately $1.2 million were eliminated upon adoption, as these items are netted against right-of-use assets. The condensed consolidated balance sheets ~~upon adoption of~~for reporting periods beginning on or after October 1, 2019 are presented under the ~~standard.~~new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.

In June 2016, the FASB issued ASU No 2016-13, Financial Instruments – Credit Losses, ~~(ASC Topic 326),~~ Measurement of Credit Losses on Financial Statements. This ASU requires a financial asset (or a group of financial assets) measured at an amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be

collected on the financial asset. The accounting standard will be effective for the Company beginning in the first quarter of fiscal ~~2020~~2021 (October 1, ~~2019)~~2020). Early adoption is permitted and the guidance will be applied using a modified retrospective approach. The Company is currently evaluating the impact that the adoption of this standard will have on the Company’s results of operations, cash flows and financial position.

No other new accounting pronouncement issued or effective has had, or is expected to have, a material impact on the Company’s condensed consolidated financial statements.

The following table presents our revenues disaggregated by product classification and by operating segment, excluding sales taxes collected and remitted to governmental authorities (in thousands, unaudited).

Contract asset balances consist of estimated sales-based royalties earned but not collected at each balance sheet date and are subject to timing fluctuations at the end of a given period. The Company’s deferred revenue, or contract liability, is primarily related to the upfront and milestone payments received pursuant to the collaborative license and commercialization agreement with Abbott (the “Abbott Agreement”) for the Company’s SurVeil™ drug-coated balloon product (“SurVeil DCB”) discussed in Note 3.

As of December 31, 2019, the estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied for executed contracts with an original duration of one year or more totaled approximately $15.8 million. These remaining performance obligations relate to the Abbott Agreement (Note 3), exclude contingent milestone payments under the Abbott Agreement, and are expected to be recognized over the next six years as services, principally the TRANSCEND study, are completed.

Under the Abbott Agreement, Abbott will have exclusive worldwide commercialization rights for the SurVeil DCB to treat the superficial femoral artery, which is currently being evaluated in a U.S. pivotal clinical trial. Separately, Abbott also received options to negotiate agreements for Surmodics' below-the-knee and arteriovenous (“AV”) fistula DCB products, which are currently in pre-clinical development and a first-in human clinical study, respectively. Surmodics is responsible for conducting all necessary clinical trials and other activities required to achieve U.S. and European Union regulatory clearances for the SurVeil DCB, including completion of the ongoing TRANSCEND clinical trial. Abbott and Surmodics participate on a joint development committee charged with providing guidance on the Company’s clinical and regulatory activities with regard to the SurVeil product.

To account for the Abbott Agreement, the Company applied the guidance in ASC Topic 808 (Collaborative Arrangements) as the parties are active participants and are exposed to significant risks and rewards dependent on commercial success of the collaborative activity.

The Company has received a $25 million upfront fee as well as a $10 million milestone under the Abbott Agreement and may receive up to $56 million of additional payments upon achievement of various clinical and regulatory milestones. For the three months ended December 2019 and 2018, the Company recognized revenue totaling $1.3 million and $2.4 million, respectively, from the Abbott arrangement, all of which was previously included in deferred revenue. As of December 31, 2019 and September 30, 2019, deferred revenue from the upfront and milestone payments received of $15.8 million and $17.1 million, respectively, is recorded in the condensed consolidated balance sheets. Upon the commercialization of the SurVeil DCB, Surmodics will be responsible for the manufacture and supply of clinical and commercial quantities of the product. Revenue from these product sales, including a per-unit transfer price and a share of net profits resulting from third-party sales by Abbott, will be recognized if and when these products are shipped and control is transferred to the customer.

The accounting guidance on fair value measurements defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The guidance is applicable for all financial assets and financial liabilities and for all nonfinancial assets and nonfinancial liabilities recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Fair value is defined as the exchange price that would be received from selling an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and also considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance.

Accounting guidance on fair value measurements requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1 — Quoted (unadjusted) prices in active markets for identical assets or liabilities.

The Company did not have any Level 1 assets as of December 31, ~~2017~~2019 and September 30, ~~2017.~~2019.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

The Company’s Level 2 assets as of December 31, ~~2017~~2019 and September 30, ~~2017~~2019 consisted of money market funds, commercial paper instruments and corporate bonds.

Level 3 — Unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.

The Level 3 ~~liabilities~~liability as of ~~December 31, 2017 and~~ September 30, ~~2017 consist~~2019 consisted of contingent consideration obligations related to the fiscal 2016 ~~acquisitions~~acquisition of ~~Creagh Medical Ltd. (“Creagh Medical”) and~~ NorMedix, Inc. (“NorMedix”). Consideration owed to the sellers of ~~Creagh Medical upon achievement of~~NorMedix from revenue and value-creating milestones ~~through September 30, 2018, is due to be paid during the quarter ending December 31, 2018. Consideration owed to the sellers of NorMedix upon achievement of revenue and value-creating milestones~~achieved through September 30, 2019 ~~is due to be~~totaling $3.2 million was paid ~~within sixty days following~~during the ~~quarter in which each milestone is achieved. Contingent consideration included in current liabilities of $13.8~~three months ended December 31, 2019, with $0.6 million and ~~$1.8~~$2.6 million classified as cash flows used in operating and financing activities, respectively, on the condensed consolidated statements of ~~December 31, 2017 and September 30, 2017, respectively, represents the Company’s estimate of fair value of amounts expected to be paid within one year of each respective balance sheet date.~~cash flows.

In valuing Level 3 assets and liabilities, the Company is required to maximize the use of quoted market prices and minimize the use of unobservable inputs.

In instances where the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.

The following table presents information about the Company’s assets ~~and liabilities~~ measured at fair value on a recurring basis as of December 31, ~~2017:~~2019:

(Dollars in thousands)	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total Fair Value as of December 31, 2017			Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value as of December 31, 2019
Assets
Cash equivalents	$	—	$	13,799	$	—		$	13,799		$	—	$	6,286	$	—	$	6,286
Available-for-sale securities		—		24,756		—			24,756			—		39,256		—		39,256
Total assets	$	—	$	38,555	$	—		$	38,555		$	—	$	45,542	$	—	$	45,542

Liabilities
Contingent consideration	$	—	$	—	$	(16,162	)	$	(16,162	)
Total liabilities	$	—	$	—	$	(16,162	)	$	(16,162	)

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, ~~2017:~~2019:

(Dollars in thousands)	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total Fair Value as of September 30, 2017			Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Total Fair Value as of September 30, 2019
Assets
Cash equivalents	$	—	$	6,639	$	—		$	6,639		$	—	$	24,375	$	—		$	24,375
Available-for-sale securities		—		31,802		—		$	31,802			—		24,931		—		$	24,931
Total assets	$	—	$	38,441	$	—		$	38,441		$	—	$	49,306	$	—		$	49,306

Liabilities
Contingent consideration	$	—	$	—	$	(14,864	)	$	(14,864	)	$	—	$	—	$	(3,200	)	$	(3,200	)
Total liabilities	$	—	$	—	$	(14,864	)	$	(14,864	)	$	—	$	—	$	(3,200	)	$	(3,200	)

Changes in the contingent consideration liabilities measured at fair value using Level 3 inputs ~~for the~~ were as follows : three months ended December 31, ~~2017~~2019 and ~~2016:~~2018

There were no transfers of assets or liabilities between amounts measured using Level 1, Level 2, or Level 3 fair value measurements ~~during~~in fiscal ~~2018 to date or~~2020 and fiscal ~~2017.~~2019.

The valuation techniques used to measure the fair value of assets are as follows:

Cash equivalents — These assets are classified as Level 2 and are carried at historical cost which is a reasonable estimate of fair value because of the relatively short time between origination of the instrument and its expected realization.

Available-for-sale securities — Fair market values for these assets are based on quoted vendor prices and broker pricing in active markets underlying the securities where all significant inputs are observable. To ensure the accuracy of quoted vendor prices and broker pricing, the Company performs regular reviews of investment returns to industry benchmarks and sample tests of individual securities to validate quoted vendor prices with other available market data.

Contingent consideration — The contingent consideration liabilities were determined based on discounted cash flow analyses that included revenue estimates, probability of strategic milestone achievement and a discount rate, which are considered significant unobservable inputs. For the NorMedix revenue-based milestones, the Company discounted forecasted revenue by 23.5%, which represents the Company’s weighted average cost of capital for this transaction, adjusted for the short-term nature of the cash flows. The present value of forecasted revenue was used as an input into an option pricing approach, which also considered the Company’s risk of non-payment of the NorMedix revenue-based milestones. Expected payments of the Creagh Medical revenue milestones were discounted using the Company’s estimated cost of debt at December 31, 2017. Non-revenue milestones for the Creagh Medical and NorMedix acquisitions that have not already been achieved were projected to have a 25-98% probability of achievement and expected payments were discounted using the Company’s estimated cost of debt, or 2.7% to 3.0%. To the extent that actual results differ from these estimates, the fair value of the contingent consideration liabilities could change significantly. Accretion expense is recorded as an increase to the contingent consideration liabilities due to the passage of time. Fair value adjustments represent changes in the value of the obligations related to adjustments to forecasted revenue and probability of strategic milestone completion. The contingent consideration liability related to the Creagh Medical acquisition is denominated in Euros and is not hedged. Foreign currency translation and losses are recorded as this obligation is marked to period-end exchange rates.

Investments consisted principally of commercial paper and corporate bond securities and are classified as available-for-sale as of December 31, ~~2017~~2019 and September 30, ~~2017. Available-for-sale~~2019. These available-for-sale securities are reported at fair value with unrealized gains and losses, net of tax, excluded from the condensed consolidated statements of operations and reported in the condensed consolidated statements of comprehensive ~~(loss)~~ income as well as a separate component of stockholders’ equity in the condensed consolidated balance sheets, except for other-than-temporary impairments, which are reported as a charge to current ~~earnings.~~earnings as they occur. A loss would be recognized when there is an other-than-temporary impairment in the fair value of any individual security classified as available-for-sale, with the associated net unrealized loss reclassified out of accumulated other comprehensive income with a corresponding adjustment to other ~~income (loss).~~income. This adjustment ~~results~~would result in a new cost basis for the investment. Interest earned on debt securities, including amortization of premiums and accretion of discounts, is included in investment income, net within other income. Realized gains and losses from the sales of debt securities, which are included in other income, are determined using the specific identification method. Investment purchases are accounted for on the date the trade is executed, which may not be the same as the date the transaction is cash settled.

The amortized cost, unrealized holding gains and losses, and fair value of available-for-sale securities were as follows:

	December 31, 2017									December 31, 2019
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Commercial paper and corporate bonds	$	24,782	$	—	$	(26	)	$	24,756	$	39,251	$	5	$	—	$	39,256
Total	$	24,782	$	—	$	(26	)	$	24,756	$	39,251	$	5	$	—	$	39,256

	September 30, 2017									September 30, 2019
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Commercial paper and corporate bonds	$	31,817	$	—	$	(15	)	$	31,802	$	24,918	$	13	$	—	$	24,931
Total	$	31,817	$	—	$	(15	)	$	31,802	$	24,918	$	13	$	—	$	24,931

Inventories are principally stated at the lower of cost or market using the specific identification 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:

	December 31,		September 30,		December 31,		September 30,
(Dollars in thousands)	2017		2017		2019		2019
Raw materials	$	2,123	$	1,603	$	2,409	$	2,034
Work-in process		669		659		1,349		892
Finished products		1,079		1,254		1,193		1,575
Total	$	3,871	$	3,516	$	4,951	$	4,501

	December 31,		September 30,		December 31,		September 30,
(Dollars in thousands)	2017		2017		2019		2019
ViaCyte, Inc.	$	479	$	479	$	479	$	479
Operating lease right-of-use assets						1,696		—
Other noncurrent assets		560		418		1,950		1,645
Other assets, net	$	1,039	$	897
Other assets					$	4,125	$	2,124

The Company has invested a total of $5.3 million in ViaCyte, Inc. (“ViaCyte”), a privately-held California-based biotechnology firm that is developing a unique treatment for diabetes using coated islet cells, the cells that produce insulin in the human body. The balance of the investment of $0.5 million, which is net of previously recorded other-than-temporary impairments of $4.8 million, is accounted for under the cost method and represents less than a 1% ownership interest. The Company does not exert significant influence over ViaCyte’s operating or financial activities.

The carrying value of each cost method investment is reviewed quarterly for changes in circumstances or the occurrence of events that suggest the Company’s investment may not be recoverable. The fair value of cost method investments is not adjusted if there are no identified events or changes in circumstances that may have a material effect on the fair value of the investment.

Other noncurrent assets include prepaid expenses related to our ongoing clinical trials and a receivable related to refundable Irish research and development tax credits.

Intangible assets consist principally of acquired patents and technology, customer lists and relationships, licenses and trademarks. The Company recorded amortization expense of $0.7 million ~~and $0.6 million~~ for both the ~~three-month periods~~three months ended December 31, ~~2017~~2019 and ~~2016, respectively.~~2018.

	December 31, 2017									December 31, 2019
(Dollars in thousands)	Weighted Average Original Life (Years)		Gross Carrying Amount		Accumulated Amortization			Net		Weighted Average Original Life (Years)		Gross Carrying Amount		Accumulated Amortization			Net
Definite-lived intangible assets:
Customer lists and relationships		8.9	$	18,478	$	(8,279	)	$	10,199		8.9	$	17,684	$	(11,177	)	$	6,507
Developed technology		11.7		9,334		(1,702	)		7,632		11.5	$	9,562	$	(3,453	)	$	6,109
Non-compete		5.0		230		(115	)		115		5.0	$	230	$	(207	)	$	23
Patents and other		16.5		2,321		(1,459	)		862		16.5	$	2,321	$	(1,755	)	$	566
Subtotal				30,363		(11,555	)		18,808				29,797		(16,592	)		13,205
Unamortized intangible assets:
In-process research and development				688		—			688
Trademarks and trade names				580		—			580				580		—			580
Total			$	31,631	$	(11,555	)	$	20,076			$	30,377	$	(16,592	)	$	13,785

	September 30, 2017									September 30, 2019
(Dollars in thousands)	Weighted Average Original Life (Years)		Gross Carrying Amount		Accumulated Amortization			Net		Weighted Average Original Life (Years)		Gross Carrying Amount		Accumulated Amortization			Net
Definite-lived intangible assets:
Customer lists and relationships		8.9	$	18,293	$	(7,834	)	$	10,459		8.9	$	17,374	$	(10,661	)	$	6,713
Developed technology		11.7		9,297		(1,478	)		7,819		11.5		9,490		(3,196	)		6,294
Non-compete		5.0		230		(103	)		127		5.0		230		(196	)		34
Patents and other		16.5		2,321		(1,423	)		898		16.5		2,321		(1,716	)		605
Subtotal				30,141		(10,838	)		19,303				29,415		(15,769	)		13,646
Unamortized intangible assets:
In-process research and development				679		—			679
Trademarks and trade names				580		—			580				580		—			580
Total			$	31,400	$	(10,838	)	$	20,562			$	29,995	$	(15,769	)	$	14,226

Based on the intangible assets in service as of December 31, ~~2017, excluding any possible future amortization associated with acquired in-process research and development (“IPR&D”), which has not met technological feasibility as of December 31, 2017,~~2019, estimated amortization expense for the remainder of fiscal ~~2018~~2020 and each of the next five fiscal years is as follows (in thousands):

Remainder of 2018	$	2,015
2019		2,686
2020		2,511
Remainder of 2020			$	1,799
2021		2,372		2,319
2022		2,332		2,279
2023		1,715		1,668
2024				1,610
2025				1,553

Future amortization amounts presented above are estimates. Actual future amortization expense may be different as a result of future acquisitions, impairments, ~~completion or abandonment of IPR&D intangible assets,~~ changes in amortization periods, foreign currency translation rates, or other factors.

The Company defines IPR&D as the value of technology acquired for which the related projects have substance and are incomplete. IPR&D acquired in a business acquisition is recognized at fair value and requires the IPR&D to be capitalized as an indefinite-lived intangible asset until completion of the IPR&D project or abandonment. Upon completion of the development project (generally when regulatory approval to market the product is obtained), an impairment assessment is performed prior to amortizing the asset over its estimated useful life. If the IPR&D projects are abandoned, the related IPR&D assets would be written off.

Goodwill represents the excess of the cost of an acquired entity over the fair value assigned to the assets purchased and liabilities assumed in connection with a business acquisition. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment in accordance with accounting guidance for goodwill. The carrying amount of goodwill is evaluated annually, and between annual evaluations if events occur or circumstances change indicating that the carrying amount of goodwill may be impaired.

Goodwill as of December 31, ~~2017~~2019 and September 30, ~~2017~~2019 totaled ~~$27.5~~$26.5 million and ~~$27.3~~$26.2 million, respectively. Goodwill in the Medical Device reporting unit represents the gross value from the fiscal 2016 acquisitions of Creagh Medical Limited (“Creagh Medical”) and NorMedix. Goodwill in the In Vitro Diagnostics reporting unit represents the gross value from the acquisition of BioFX Laboratories, Inc. (“BioFX”) in fiscal 2007.

Goodwill was not impaired in either reporting unit based on the outcome of the fiscal ~~2017~~2019 annual impairment test, and there have been no events or circumstances that have occurred in the first three months of fiscal ~~2018~~2020 to indicate that goodwill has been impaired.

~~The change~~Changes in the carrying amount of goodwill by segment ~~for the three months ended December 31, 2017 was~~were as follows:

(Dollars in thousands)	In Vitro Diagnostics		Medical Device		Total		In Vitro Diagnostics		Medical Device		Total
Balance as of September 30, 2017	$	8,010	$	19,272	$	27,282
Balance as of September 30, 2019							$	8,010	$	18,161	$	26,171
Currency translation adjustment		—		223		223		—		375		375
Balance as of December 31, 2017	$	8,010	$	19,495	$	27,505
Balance as of December 31, 2019							$	8,010	$	18,536	$	26,546

The Company has stock-based compensation plans under which it grants stock options, restricted stock awards, performance share awards, restricted stock units and deferred stock units. Accounting guidance requires all share-based payments to be recognized as an operating expense, based on their fair values, over the requisite service period.

The Company’s stock-based compensation expenses ~~(benefit)~~ were allocated to the following expense categories:

	Three Months Ended					Three Months Ended
	December 31,					December 31,
(Dollars in thousands)	2017			2016		2019		2018
Product costs	$	(6	)	$	13	$	33	$	32
Research and development		158			125		262		213
Selling, general and administrative		751			651		1,098		986
Total	$	903		$	789	$	1,393	$	1,231

As of December 31, ~~2017,~~2019, approximately ~~$8.0~~$10.5 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 2.7 years. The unrecognized compensation costs above include $1.3 million, remaining to be expensed over the life of the awards, based on payout levels associated with performance share awards that are currently anticipated to be fully expensed because the performance conditions are expected to exceed minimum threshold levels.

The Company uses the Black-Scholes option pricing model to determine the weighted average grant date fair value of stock options granted. The weighted average per share fair values of stock options granted during the ~~three-month periods~~three months ended December 31, ~~2017~~2019 and ~~2016~~2018 were ~~$10.57~~$14.38 and ~~$7.59,~~$18.30, respectively. ~~The assumptions used as inputs in the model were as follows:~~

	Three Months Ended						Three Months Ended
	December 31,						December 31,
	2017			2016			2019			2018
Risk-free interest rates		2.0	%		1.7	%		1.6	%		2.9	%
Expected life (years)		4.8			4.6			4.6			4.5
Expected volatility		33.0	%		34.4	%		37.8	%		33.2	%
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%

The risk-free interest rate assumption was based on the U.S. Treasury’s rates for U.S. Treasury zero-coupon bonds with maturities similar to those of the expected term of the ~~award.~~awards. The expected life of options granted was determined based on the Company’s experience. Expected volatility was based on the Company’s stock price movement over a period approximating the expected term. Based on management’s judgment, dividend yields were expected to be 0.0% for the expected life of the options. The Company also estimated forfeitures of options granted, which were based on historical experience.

Non-qualified stock options are granted at fair market value on the date of grant. Non-qualified stock options expire in seven ~~to ten~~ years or upon termination of employment or service as a Board member. With respect to members of our Board, non-qualified stock options generally become exercisable on a pro-rata basis within the one-year period following the date of grant. With respect to our employees, non-qualified stock options generally become exercisable with respect to 25% of the shares on each of the first four anniversaries following the grant date. The stock-based compensation table above includes stock option expenses recognized related to these awards, which totaled ~~$0.4~~$0.6 million and ~~$0.3~~$0.5 million for the ~~three-month periods~~three months ended December 31, ~~2017~~2019 and ~~2016, respectively.~~2018.

The total pre-tax intrinsic value of options exercised during the three months ended December 31, ~~2017~~2019 and ~~2016~~2018 was ~~$0.3~~$0.2 million and less than $0.1 million, respectively. The intrinsic value represents the difference between the Company’s common stock fair market value on the date of exercise and the option’s exercise price.

The Company has entered into restricted stock agreements with certain key employees, covering the issuance of common stock (“Restricted Stock”). Under accounting guidance, these shares are considered to be non-vested shares. The Restricted Stock is released to the key employees if they are employed by the Company at the end of the vesting period. Restricted Stock vesting periods range from one to three years. During the three months ended December 31, ~~2017~~2019 and ~~2016,~~2018, the Company awarded ~~57,635~~54,694 and ~~39,958~~42,248 Restricted Stock shares, respectively, to certain key employees and officers. Forfeiture of ~~2,220~~4,099 and 507 Restricted Stock shares occurred during the three months ended December 31, ~~2017.~~2019 and 2018, respectively. As of December 31, ~~2017~~2019 and September 30, ~~2017, 100,557~~2019, 99,500 and ~~67,917~~90,409 Restricted Stock shares were outstanding, respectively. Compensation expense has been recognized for the estimated fair value of the common shares, net of estimated forfeitures, and is being charged to operating expenses over the vesting term. The stock-based compensation expense table includes Restricted Stock expenses recognized related to these awards, which totaled ~~$0.2~~$0.5 million and ~~$0.1~~$0.4 million for the ~~three-month periods~~three months ended December 31, ~~2017~~2019 and ~~2016,~~2018, respectively.

The Company has entered into performance share agreements with certain key employees ~~and executives,~~ covering the issuance of common stock (“Performance Shares”). Performance Shares vest upon the achievement of all or a portion of certain performance objectives (which may include financial or project objectives), which must be achieved during the performance period. The Organization and Compensation Committee of the Board of Directors (the “Committee”) approves the performance objectives used for our executive compensation programs, which objectives were cumulative revenue and cumulative earnings before interest, income taxes, depreciation and amortization (“EBITDA”) for the three-year performance periods for awards granted in fiscal ~~2015 (2015 – 2017), fiscal 2016 (2016 – 2018) and fiscal~~ 2017 (2017 – 2019). The fiscal 2017 awards also ~~include~~included performance objectives related to achievement of the Company’s strategic initiatives. Assuming that the minimum performance level is attained, the number of shares that may actually vest will vary based on performance from 20% (minimum) to 200% (maximum) of the target number of shares. Shares will be issued to participants as soon as practicable following the end of each performance period, subject to Committee approval and verification of results. Awards granted in fiscal ~~2015~~2017 were finalized in the three months ended December

31, ~~2017~~2019 and resulted in the issuance of ~~51,478~~67,653 shares, ~~(maximum was 84,398 shares)~~with a value of $2.8 million, based on the performance objectives relative to actual results achieved during the performance period. The per share compensation cost for each award iswas fixed on the grant date. Compensation expense is recognized in each period based on management’s estimate of the achievement level of actual and forecasted results, as appropriate, compared with the specified performance objectives and the related impact on the number of Performance Shares expected to vest. The stock-based compensation expense table includes ~~the~~ Performance Shares ~~expenses~~expense recognized related to these awards, which totaled $0.2 million for ~~both~~ the ~~three-month periods~~three months ended December 31, ~~2017 and 2016.~~2018. Performance Shares expense recognized in the three months ended December 31, 2019 was insignificant as all Performances Shares were vested as of September 30, 2019.

The fair values of the Performance Shares, at target, were $1.2 million ~~and $1.3 million~~ for awards granted in fiscal ~~2017 and 2016, respectively.~~2017. There have been no Performance Share awards granted subsequent to fiscal 2017.

~~The aggregate number of shares that could be awarded to our executives if the minimum, target and maximum performance goals are met, based on the fair value at the date of grant is as follows:~~

Under the amended 1999 Employee Stock Purchase Plan (“Stock Purchase Plan”), the Company is authorized to issue up to 600,000 shares of common stock. All full-time and part-time U.S. employees can choose to have up to 10% of their annual compensation withheld, with a limit of $25,000, to purchase the Company’s common stock at purchase prices defined within the provisions of the Stock Purchase Plan. As of December 31, ~~2017~~2019 and September 30, ~~2017,~~2019, there was less than $0.1 million of employee contributions included in accrued liabilities in the condensed consolidated balance sheets. Stock compensation expense recognized related to the Stock Purchase Plan for the three months ended December 31, ~~2017~~2019 and ~~2016~~2018 totaled less than $0.1 million in each respective period. The stock-based compensation table includes the Stock Purchase Plan expenses.

During the three months ended December 31, ~~2017~~2019 and ~~2016,~~2018, the Company awarded ~~5,626~~8,032 and ~~6,570~~6,206 restricted stock units (“RSUs”), respectively, to non-employee directors and certain key employees in foreign jurisdictions. ~~As of December 31, 2017 and September 30, 2017, 28,444 and 44,391 RSUs were outstanding.~~ RSU awards are not considered issued or outstanding common stock of the Company until they vest. As of December 31, 2019 and September 30, 2019, outstanding, unvested RSUs totaled 62,113 and 62,242, respectively. Compensation expense has been recognized for the estimated fair value of the common shares and is being charged to operating expenses over the vesting term. The estimated fair value of the RSUs was calculated based on the closing market price of Surmodics’ common stock on the grant date. ~~Compensation expense has been recognized for the estimated fair value of the common shares and is being charged to income over the vesting term.~~ The stock-based compensation table includes RSU expenses recognized related to these awards, which totaled ~~less than~~$0.2 million and $0.1 million for ~~both~~ the ~~three-month periods~~three months ended December 31, ~~2017~~2019 and ~~2016.~~2018, respectively.

Directors ~~can also~~may elect to receive their annual fees for services to the Board in deferred stock units (“DSUs”). ~~Certain directors elected~~Directors may elect this option ~~beginning on January 1, 2013 with deferral elections made annually.~~quarterly. During the three months ended December 31, ~~2017~~2019 and ~~2016, 500~~2018, 823 and ~~1,971~~751 units, respectively, were issued with a total fair value of less than $0.1 million in each period. As of December 31, ~~2017~~2019 and September 30, ~~2017,~~2018, outstanding, fully vested DSUs totaled ~~24,941~~30,552 and ~~24,441,~~29,729, respectively. ~~These DSUs are fully vested.~~ Stock-based compensation expense related to DSU awards totaled less than $0.1 million for both the ~~three-month periods~~three months ended December 31, ~~2017~~2019 and ~~2016.~~2018.

~~The Company has a revolving credit facility with available principal totaling~~ ~~$30.0~~ ~~million, which terminates on~~ November 2019. In addition, the agreement has a $5.0 million multi-currency overdraft facility in Ireland. Borrowings under the credit facility, if any, will bear interest at a benchmark rate plus a margin ranging from 1.00% to 1.75% based on the Company’s leverage ratio, as defined in the loan agreement. A facility fee is payable quarterly on unused commitments at a rate of 0.15% per annum. The Company has the option to increase the credit facility in increments of $5.0 million up to an additional $20.0 million, subject to approval of the lender. The Company’s obligations under the credit facility are secured by substantially all of its assets, other than intellectual property and real estate, as well as the majority of its equity interest in its subsidiaries.

In connection with the credit facility, the Company is required to maintain certain financial covenants related to a maximum leverage ratio and a minimum EBITDA amount and to comply with nonfinancial covenants. As of December 31, 2017, the Company had no borrowings outstanding on the line of credit and was in compliance with all financial covenants under the credit facility.

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 income per common share is computed by dividing net income by the weighted average number of common and dilutive common equivalent shares outstanding during the period. The Company’s potentially dilutive common shares are those that result from dilutive common stock options, non-vested stock relating to restricted stock awards, restricted stock units and deferred stock units, ~~and~~as well as performance ~~shares.~~shares in years prior to fiscal 2020. Options to purchase shares of common stock as well as unvested restricted stock and performance stock units are considered to be potentially dilutive common shares, but have been excluded from the calculation of diluted net loss per share as their effect is anti-dilutive for the three months ended December 31, 2017 as a result of the net loss incurred for that period. Therefore, diluted net loss per share was the same as basic net loss per share for the three months ended December 31, 2017. shares.

The calculation of weighted average diluted shares outstanding excludes outstanding stock options associated with the right to purchase ~~0.3~~0.1 million shares of common stock for both the three months ended December 31, ~~2016,~~2019 and 2018, as their inclusion would have had an antidilutive effect on diluted net income per ~~share.~~share for those periods.

The following table sets forth the denominator for the computation of basic and diluted net income per share ~~(in thousands)~~(in thousands):

	Three Months Ended					Three Months Ended
	December 31,					December 31,
	2017			2016		2019		2018
Net (loss) income available to common shareholders	$	(1,556	)	$	2,300
Net income available to common shareholders						$	148	$	1,310
Basic weighted average shares outstanding		13,064			13,200		13,469		13,367
Dilutive effect of outstanding stock options, non-vested restricted stock, restricted stock units, deferred stock units and performance shares		—			246		300		460
Diluted weighted average shares outstanding		13,064			13,446		13,769		13,827

The Company’s Board of Directors has authorized the repurchase of up to $25.3 million of the Company’s outstanding common stock. This authorization does not have an expiration date.

For interim income tax reporting, the Company estimates its annual effective tax rate and applies it to year-to-date pretax (loss) income, excluding unusual or infrequently occurring discrete items. Tax jurisdictions with losses for which tax benefits cannot be realized are excluded. The Company recorded income tax ~~provisions~~benefit of ~~$1.0~~$0.3 million and ~~$1.7~~$0.2 million for the three months ended December 31, ~~2017~~2019 and ~~2016,~~2018, respectively. In December 2017, the Tax Cuts and Jobs Act tax legislation was signed into law, which reduced the U.S. Federal statutory tax rate from 35% to 21%, among other changes. As a result of the enactment of this legislation, the Company’s fiscal 2018 first quarter net loss includes discrete tax expense of $1.2 million from the Company’s net deferred tax assets revaluation based on the enacted tax rate of 21%, as compared with the previous rate of 35%. U.S. tax law requires that taxpayers with a fiscal year beginning before and ending after the effective date of a rate change calculate a blended tax rate for the year based on the pro rata number of days in the year before and after such effective date. As a result, for the fiscal year ending September 30, 2018, our U.S. federal statutory income tax rate is expected to be 24.5%.

The effective income tax rate for the three months ended December 31, ~~2017~~2019 and ~~2016~~2018 differs from the U.S. federal statutory tax rate of ~~24.5% and 35%, respectively,~~ 21% primarily due to operating losses incurred in Ireland, where tax benefits are offset by a valuation allowance, and non-deductible acquired intangible asset amortization, contingent consideration accretion, including fair value adjustments, as well as unrealized foreign currency translation gains and losses on Euro-denominated contingent consideration liabilities. These increases to the ~~effective income tax rate were partially offset by~~favorable impacts of the U.S. federal research and development ~~income~~ tax ~~credit~~credits in both periods, as well as stock award activity in the three-month period and ~~in fiscal 2017, the domestic production manufacturing deduction.~~ operating results of our Irish subsidiary, where tax benefit is offset by a valuation allowance. The effective income tax rate for the three months ended December 31, ~~2017~~2019 and ~~2016 is also~~2018 was impacted by discrete tax ~~(benefit) expense~~benefits of ~~$(0.2)~~$0.2 million and ~~$0.3~~$0.5 million, respectively, related to ~~expiring stock option~~share awards vested, expired, cancelled and ~~$0.1 million and $0.2 million of state income tax reserve reversals related to~~exercised during the ~~expiration of statutory filing requirements in each respective period.~~periods.

The total amount of unrecognized tax benefits, excluding interest and penalties that, if recognized, would affect the effective tax rate is ~~$1.4~~$2.7 million and ~~$1.2~~$2.1 million as of December 31, ~~2017~~2019 and September 30, ~~2017,~~2019, respectively. Currently, the Company does not expect the liability for unrecognized tax benefits to change significantly in the next 12 months with the above balances classified on the condensed consolidated balance sheets in other long-term liabilities. Interest and penalties related to unrecognized tax benefits are recorded in the income tax (benefit) provision.

The Company files income tax returns, including returns for its subsidiaries, in the U.S. federal jurisdiction and in various state jurisdictions as well as several non-U.S. jurisdictions. Uncertain tax positions are related to tax years that remain subject to examination. U.S. income tax returns for years prior to fiscal ~~2013~~2015 are no longer subject to examination by federal tax authorities. For tax returns for state and local jurisdictions, the Company is no longer subject to examination for tax years generally before fiscal ~~2007.~~2009. For tax returns for non-U.S. jurisdictions, the Company is no longer subject to income tax examination for years prior to ~~2012.~~2014. Additionally, the Company has been indemnified of liability for any taxes relating to Creagh Medical and NorMedix for periods prior to their respective acquisition dates, pursuant to the terms of the related share purchase agreements. As of December 31, ~~2017~~2019 and September 30, ~~2017~~2019, there were no undistributed earnings in foreign subsidiaries.~~The Internal Revenue Service (“IRS”) commenced an examination of our fiscal 2016 U.S. federal income tax return in the fourth quarter of fiscal 2017. The examination has not been completed.~~

The Company’s management evaluates performance and allocates resources based on reported results for two reportable segments, as follows: (1) the Medical Device unit, which ~~is comprised of manufacturing balloons~~designs, develops and ~~catheters used~~manufactures interventional medical devices, primarily for ~~a variety of interventional cardiology,~~the peripheral ~~and other applications,~~vascular market; surface modification coating technologies to improve access, deliverability, and predictable deployment of medical ~~devices,~~devices; as well as ~~drug delivery~~drug-delivery coating technologies to provide site-specific ~~drug delivery~~drug-delivery from the surface of a medical device, with end markets that include coronary, peripheral, ~~and neurovascular,~~neuro-vascular and urology, among others, and (2) the In Vitro Diagnostics unit, which consists of component products and technologies for diagnostic ~~immunoassay as well as molecular tests~~test kits and biomedical research applications, with products that include protein stabilization reagents, substrates, antigens and surface coatings.

Segment revenue, operating (loss) income, and depreciation and amortization, were as follows:

	Three Months Ended						Three Months Ended
	December 31,						December 31,
(Dollars in thousands)	2017			2016			2019			2018
Revenue:
Medical Device	$	12,774		$	13,757		$	17,404		$	17,258
In Vitro Diagnostics		4,239			4,004			5,212			4,983
Total revenue	$	17,013		$	17,761		$	22,616		$	22,241

Operating (loss) income:
Medical Device	$	(389	)	$	3,719		$	(423	)	$	357
In Vitro Diagnostics		1,670			1,456			2,599			2,455
Total segment operating income		1,281			5,175			2,176			2,812
Corporate		(1,914	)		(1,907	)		(2,442	)		(2,100	)
Total operating (loss) income	$	(633	)	$	3,268		$	(266	)	$	712

Depreciation and amortization:
Medical Device	$	1,272		$	1,004		$	1,455		$	1,388
In Vitro Diagnostics		90			103			110			116
Corporate		158			175			239			252
Total depreciation and amortization	$	1,520		$	1,282		$	1,804		$	1,756

The Corporate category includes expenses that are not fully allocated to Medical Device and In Vitro Diagnostics segments. These Corporate costs are related to functions, such as executive management, corporate accounting, legal, human resources and

Board of Directors. Corporate may also include expenses ~~such as litigation,~~ which are not specific to a segment and thus not allocated to the operating segments.

Asset information by operating segment is not presented because the Company does not provide its chief operating decision maker assets by operating segment, as the data is not readily available or significant to the decision-making process.

The Company leases facilities for research, office, manufacturing and warehousing. The Company determines whether a contract is a lease or contains a lease at inception 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 unamortized balance of leasehold improvement incentives in the form of tenant allowances represents the primary difference between the balance of the right-of-use assets and operating lease liabilities. As the Company’s leases typically do not provide an implicit rate, the Company’s lease liabilities are measured on a discounted basis using the Company's incremental borrowing rate. Lease terms used in the recognition of right-of-use assets and lease liabilities include only options to extend the lease that are reasonably certain to be exercised. The condensed consolidated balance sheets do not include recognized assets or liabilities for leases that, at the commencement date, have a term of twelve months or less and do not include an option to purchase the underlying asset that is reasonably certain to be exercised. The Company recognizes such leases in the condensed consolidated statements of income on a straight-line basis over the lease term.

The Company’s leases include one or more options to renew and extend the lease term at the Company’s discretion. These renewal options are not included in our right-of-use assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term.

The Company's operating lease cost for the three months ended December 31, 2019 was $0.1 million. Cash paid for operating lease liabilities approximated operating lease cost for the three months ended December 31, 2019.

Operating lease right-of-use assets and operating lease liabilities were as follows:

As of December 31, 2019, operating lease maturities for the remainder of fiscal 2020 and each of the next five fiscal years are as follows (in thousands):

As of December 31, 2019, the weighted average remaining lease term for operating leases was 8.2 years and the weighted average discount rate used to determine operating lease liabilities was 4.6%.

Litigation. From time to time, the Company may become involved in various legal actions involving its operations, products and technologies, including intellectual property and employment disputes. The outcomes of these legal actions are not within the Company’s complete control and may not be known for prolonged periods of time. In some actions, the claimants seek damages as well as other relief, including injunctions barring the sale of products that are the subject of the lawsuit, which if granted, could require significant expenditures or result in lost revenue. The Company records a liability in the condensed consolidated financial statements for these actions when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate, the minimum amount of the range is accrued. If a loss is possible but not known or probable, and can be reasonably estimated, the estimated loss or range of loss is disclosed. In most cases, significant judgment is required to estimate the amount and timing of a loss to be recorded.

On January 17, 2018, we entered into a settlement agreement fully resolving the previously disclosed litigation involving Merit Medical Systems, Inc. (“Merit”) and NorMedix. The Company believes that the settlement will not have a material impact on its business, financial condition or results of operations.

InnoCore Technologies BV. In March 2006, the Company entered into a license agreement whereby ~~Surmodics~~the Company obtained an exclusive license to a drug delivery coating for licensed products within the vascular field which included peripheral, coronary and neurovascular biodurable stent products. The license requires an annual minimum payment of 200,000 euros (equivalent to ~~$240,000~~$224,000 using a euro to US dollar exchange rate of ~~$1.1979~~$1.1215 to the Euro as of December 31, ~~2017)~~2019) until the last patent expires, which is currently estimated to be September 2027. The total minimum future payments associated with this license are approximately ~~$2.4 million.~~$1.8 million as of December 31, 2019. The license is currently utilized by one of the Company’s drug delivery customers.

Clinical Trials.The Company ~~leases certain facilities under noncancelable operating lease agreements. Rent expense~~has engaged clinical trial clinical research organization (“CRO”) consultants to assist with the administration of its ongoing clinical trials. The Company has executed separate contracts with two CROs for services rendered in connection with the TRANSCEND pivotal clinical trial for the ~~three months ended December 31, 2017 and 2016 was $0.1~~SurVeil DCB, including pass-through expenses paid by the CROs, of up to $26 million ~~for each period. In November 2017,~~in the Company executed a lease for a 36,000 square feet facility in Eden Prairie, Minnesota. This facility will consolidate substantially all of our whole products solutions research and development operations into one location. Contractual obligations under the lease agreement total $4.0 million over the ten-year lease term, which is expected to commence in May 2018. In connection with this lease, the Company deposited $0.4 million into a restricted cash account, to be held until the leased facility is occupied, at which point the cash will be returned to the Company. Annual commitments pursuant to operating lease agreements in place asaggregate. As of December 31, ~~2017~~ ~~for~~2019, an estimated $11.9 million remains to be paid on these contracts, which may vary depending on actual pass-through expenses incurred to execute the ~~remainder of fiscal 2018 and each~~trial. The Company estimates that the total cost of the ~~next five~~TRANSCEND clinical trial will be in the range of $35 million to $40 million from inception to completion. In the event the Company were to terminate any trial, it may incur certain financial penalties which would become payable to the CRO for costs to wind down the terminated trial.

Asset Acquisitions. In July 2019, the Company acquired certain intellectual property assets supporting ongoing development of the Company’s medical device pipeline. As a result of this acquisition, the Company made an upfront, nonrefundable payment of $0.8 million. In addition, the Company is obligated to pay up to $1.3 million of additional consideration upon achievement of certain strategic milestones within a contingency period ending in 2022, of which $0.2 million is guaranteed to be paid in fiscal ~~years~~2021.

In May 2018, the Company acquired certain intellectual property assets of Embolitech, LLC (the “Embolitech Transaction”). As part of the Embolitech Transaction, the Company paid the sellers $5.0 million during fiscal 2018. Additionally, the Company is ~~as follows~~ (obligated to pay $3.5 million in ~~thousands)~~:several installments beginning in fiscal 2020 and ending in fiscal 2024. These payments may be accelerated upon the occurrence of certain sales and regulatory milestones. An additional $2.0 million payment is contingent upon the achievement of certain regulatory milestones within a contingency period ending in 2033.

As of December 31, 2019, $1.2 million and $2.1 million, respectively, is included in other accrued and other long-term liabilities on the condensed consolidated balance sheets related to the Embolitech Transaction. As of September 30, 2019, $1.0 million and $2.1 million is included in other accrued liabilities and other long-term liabilities, respectively, on the consolidated balance sheets related to the Embolitech Transaction.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information management believes is useful in understanding the operating results, cash flows and financial condition of Surmodics, Inc. and subsidiaries (referred to as “Surmodics,” the “Company,” “we,” “us,” “our” and other like terms). The discussion should be read in conjunction with both the unaudited condensed consolidated financial statements and related notes included in this Form 10-Q and our audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations, each included in our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2017.~~2019. This discussion contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We refer readers to the statement entitled “Forward-Looking Statements” located at the end of this Item 2.

Surmodics is a leading provider of medical device and in vitro diagnostic technologies to the healthcare ~~industry. In fiscal 2018, our~~industry, with the mission of improving the detection and treatment of disease. Our revenue performance continues to be driven by growth in our ~~core~~ Medical Device and In Vitro Diagnostics (“IVD”) ~~businesses. Revenue~~product offerings. We remain committed to developing medical device products and platforms leveraging the technologies and manufacturing capabilities in ~~the~~our Medical Device business unit for the treatment of peripheral arterial disease (“PAD”) and other vascular diseases. Our primary focus has been the continued development of our drug-coated balloon (“DCB”) platform, our radial access device platform, and our thrombectomy device platform.

Our business model for our whole-product solutions strategy is ~~composed~~to design, develop and manufacture highly differentiated products that incorporate our proprietary catheter, balloon, thrombectomy and/or surface modification coating technologies to improve patient outcomes and reduce procedure costs, while maintaining patient safety. We are focused on developing devices that consider the needs of various care settings ranging from hospitals to alternate care facilities, in order to provide improved care and address unmet needs in the treatment of PAD and other vascular diseases. Our strategy has been built on our investment in proprietary device technologies, as well as state-of-the-art medical device design, development and manufacturing capabilities. Over the past several years, we have made investments to enhance our clinical and regulatory capabilities, and in fiscal 2020, we intend to make additional investments to obtain clinical data, reduce the time from product ~~sales, hydrophilic coatings royalties,~~development to commercialization, and ~~contract research~~drive clinician engagement with our products after approval to optimize adoption.

Below is a brief summary of our pipeline of medical device products under development and ~~development services. Medical Device segment revenue decreased~~recently commercialized, grouped by 7%product family.

For more information regarding our product development and ~~other revenue. Product sales in~~commercialization strategy, see Part I, Item 1 of our ~~Medical Device segment grew 3% year-over-year as a result of higher reagent shipments. Our IVD business derives its revenue from diagnostic technology product sales. Revenue from~~Annual Report on Form 10-K for the ~~IVD segment increased by 6% in the first three months of~~ fiscal year ~~2018 as compared with the same prior-year period.~~ended September 30, 2019.

We continue to derive our revenue from three primary sources: (1) product sales revenue from the sale of reagent chemicals to licensees, the sale of stabilization products, antigens, substrates and surface coatings to the diagnostic and biomedical research markets as well as the sale of medical devices and related products (such as balloons and catheters) to original equipment manufacturer (OEM) suppliers and distributors; (2) royalties and license fees from licensing our proprietary surface modification and device drug delivery technologies to customers; the vast majority (typically in excess of 90%) of revenue in the “royalties and license fees” category is in the form of royalties; and (3) research and commercial development fees generated on customer projects. Revenue fluctuates from quarter to quarter depending on, among other factors: our customers’ success in selling products incorporating our technologies; the timing of introductions of licensed products by our customers; the timing of introductions of products that compete with our customers’ products; the number and activity level associated with customer development projects; the number and terms of new license agreements that are finalized each quarter; and the value of reagent chemicals and other products sold to customers.Photolink^TM Fourth-Generation Patents

We have several U.S. and international issued patents and pending international patent applications protecting various aspects of proprietary surface modification technologies, including compositions, methods of manufacture and methods of coating devices. The expiration dates for these patents and the anticipated expiration dates of patent applications that cover our hydrophilic coating technologies range from fiscal 2020 to fiscal 2035. Our ~~third-generation~~fourth-generation PhotoLink hydrophilic technology ~~was~~is protected by a family of patents that expired in ~~November 2015 (in~~ the ~~U.S.) and October 2016 (in certain other countries).~~first quarter of fiscal 2020 in all countries where patent coverage existed for this technology. The Medical Device business royalty revenue associated with our ~~third-generation~~fourth-generation hydrophilic coating technology was approximately ~~12%~~21% of our fiscal ~~2017~~2019 revenue. ~~Approximately 21% of our total revenue in fiscal 2017 was generated from our fourth-generation~~ ~~PhotoLink~~ ~~technology, which is protected by a family of patents that begin to expire in fiscal 2020.~~ Of the license agreements using our early-generation technologies, most ~~will~~ continue to generate royalty revenue, at a reduced royalty rate, beyond patent expiration. ~~Our remaining hydrophilic~~The remainder of our royalty ~~revenue is primarily~~revenues are derived from our other ~~Surmodics coating technologies~~coatings that are protected by a number of patents ~~extending~~that extend to at least fiscal 2035. While we are actively seeking to convert our customers to one of our advanced generations of our hydrophilic coating technology, there can be no assurance that we will be successful in doing so, or that those customers that have converted, or will convert, will sell products utilizing our technology which will generate earned royalty revenue for us.

Since fiscal 2013, with our investment in our drug-coated balloon (“DCB”) platform, we have been focused on a strategy to develop and manufacture proprietary medical device products that combine our surface modification coatings with medical devices or delivery systems (“whole-product solutions”). Our aim is to provide customers earlier access to highly differentiated whole-product solutions that address unmet clinical needs. To that end, we will continue to invest in our whole-product solutions strategy throughout fiscal 2018. Tangible results of these investments in fiscal 2018 include U.S. Food and Drug Administration (“FDA”) clearance for our Telemark™ coronary/peripheral support microcatheter (“~~Telemark~~ ~~Microcatheter”) and initializing the TRANSCEND~~

~~Surveil~~ pivotal clinical trial in the U.S. Additionally, in late fiscal 2017 we received FDA and Conformité Européenne (“CE Mark”) clearances for our .014” low-profile percutaneous transluminal angioplasty balloon dilation catheter (“.014” PTA balloon catheter”), designed for peripheral angioplasty procedures.

~~The development of these products, as well as the~~ ~~SurVeil~~ ~~DCB, is a major step forward in our strategy to offer whole-product solutions for the medical device industry. The~~ ~~SurVeil~~ DCB early feasibility clinical study, conducted in the U.S., met its primary endpoint by demonstrating peak paclitaxel plasma concentrations post-index procedure. Consistent with pre-clinical data, systemic levels were low and cleared rapidly.

~~In July 2017, we received an investigational device exemption (“IDE”) from the FDA to initiate a pivotal clinical trial of the~~ ~~SurVeil~~ ~~DCB. The randomized clinical trial, TRANSCEND, will evaluate the~~ ~~SurVeil~~ ~~DCB for treatment for PAD in the upper leg compared with the Medtronic IN.PACT® Admiral® DCB. The objective of the TRANSCEND clinical trial is to evaluate the safety and effectiveness of the~~ ~~SurVeil~~ DCB device for treatment of subjects with symptomatic PAD due to stenosis of the femoral and/or popliteal arteries. If successful, the TRANSCEND clinical trial will be used to support regulatory approvals and reimbursement in the U.S. and Europe. The trial will enroll up to 446 subjects at up to 60 sites in the U.S. and 18 outside the U.S. Study participants will be randomized to receive either treatment with ~~SurVeil~~ ~~DCB or~~ ~~IN.PACT Admiral~~ DCB. The trial’s primary efficacy endpoint is primary patency, defined as a composite of freedom from restenosis and clinically-driven target lesion revascularization through 12 months post-index procedure. All randomized subjects will be followed through 60 months post-index procedure. We initiated enrollment in the TRANSCEND clinical trial in October 2017 and have engaged a clinical research organization to assist us with the administration of the clinical trial. There is no assurance that the TRANSCEND clinical trial will support regulatory approval, or that any anticipated time frame will be met. We estimate that the cost of the TRANSCEND clinical trial will range between $32 million to $40 million over the next several years.

We are executing on our plan to develop and commercialize 12-15 medical device products over the next 5 years. Additional planned activities include initiation of surface modification experiments that improve medical device performance, as well as incorporation of our catheter technology platform into various other devices intended for the emerging peripheral vascular treatment market. Additionally, we are developing other products that utilize our DCB platform, including DCB’s for treatment of PAD below-the-knee (“BTK”) and arteriovenous (“AV”) fistulae, commonly associated with hemodialysis.

We prioritize our internal research and development (“R&D”) programs based on a number of factors, including a program’s strategic fit, commercial impact, potential competitive advantage, technical feasibility, and the amount of investment required. The measures and metrics used to monitor a program’s progress vary, but typically include key deliverables, milestones, timelines, and an overall program budget. We typically make decisions to continue or terminate a program based on research results (relative to the above measures and metrics) and other factors, including our own strategic and/or business priorities, and the amount of additional investment required.

With respect to cost components, R&D expenses consist of labor, materials and overhead costs (for example, utilities, depreciation, and indirect labor) for both customer R&D and internal R&D programs. We manage our R&D organization in a flexible manner, balancing workloads/resources between customer R&D and internal R&D programs, based on the level of customer program activity and resource needs for our internally developed product programs. Therefore, costs incurred for customer R&D and internal R&D can shift as customer activity increases or decreases.

Critical accounting policies are those policies that require the application of management’s most challenging, subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies involve judgments and uncertainties that are sufficiently likely to result in materially different results under different assumptions and conditions. For the ~~quarter~~three months ended December 31, ~~2017,~~2019, there were no significant changes in our critical accounting policies.

For a detailed description of our other critical accounting policies and significant estimates, see Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 in our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2017.~~2019.

Revenue. Revenue for the first quarter of fiscal ~~2018~~2020 was ~~$17.0~~$22.6 million, ~~a decrease~~an increase of ~~$0.8~~$0.4 million, or ~~4.3%~~1.7%, as compared with the first quarter of fiscal ~~2017.The change in revenue, as detailed in the table below,~~2019. The following is ~~further explained in the narrative below.~~a summary of each operating segment’s revenue.

								Three Months Ended December 31,
	Three Months Ended December 31,				%							%
(Dollars in thousands)	2017		2016		Change			2019		2018		Change
Revenue
Medical Device	$	12,774	$	13,757		(7.1	)%	$	17,404	$	17,258		0.8	%
In Vitro Diagnostics		4,239		4,004		5.9	%		5,212		4,983		4.6	%
Total Revenue	$	17,013	$	17,761		(4.2	)%	$	22,616	$	22,241		1.7	%

Medical Device. Medical Device revenue was ~~$12.8~~$17.4 million in the first quarter of fiscal ~~2018, a decrease of 7.1%~~2020 and was essentially flat as compared with ~~$13.8~~the first quarter of fiscal 2019. Product sales increased 5.1%, or $0.2 million, for the first quarter of fiscal 2017. The decrease in quarterly revenue was attributable to previously disclosed patent expirations, which resulted in a decrease in royalties and license fees of $0.9 million in the current-year quarter2020 as compared with the prior-year ~~quarter. We also realized decreases~~quarter, with growth in ~~research,~~coatings reagents partially offset by weakness in legacy balloon catheter products. Research, development and other revenue ~~of $0.2 million~~was level with the prior year period. Royalties and license fee revenue was essentially flat as compared with the prior-year first quarter. Impacting royalty revenue in the first quarter of fiscal ~~2018~~2020 was a $0.7 million one-

time catchup payment for previously under-reported hydrophilic coating royalty revenue, as ~~compared with~~well as growth in royalties from our hydrophilic coatings customers. These increases were offset by a $1.1 million planned decrease in license fee revenue from the Abbott Agreement due to reduced TRANSCEND clinical trial spending subsequent to full trial enrollment in the fourth quarter of fiscal 2019. As expected, the aforementioned patent expiration for our fourth-generation hydrophilic coating had an insignificant revenue impact in the first quarter of fiscal ~~2017 due~~2020. For the full fiscal 2020, the revenue impact of this expiration is expected to ~~delays in customer-sponsored R&D programs. Product sales increased $0.1 million, or 3.4%, as compared with the prior-year quarter as the result of increased reagent volumes.~~

~~As previously reported, the family of patents covering our third-generation~~ ~~PhotoLink~~ ~~technology~~ ~~expired in November 2015 (in the U.S.) and October 2016 (in certain other countries)~~. ~~There is a royalty rate step down for licensed customers at the time these patents expire.~~ ~~For fiscal 2018, we expect royalty and license fee revenue~~range from $5.0 to ~~decline between $2.5 million to $3.5 million as the result of these patent expirations.~~

In Vitro Diagnostics. In Vitro Diagnostics revenue ~~was $4.2~~increased 4.6% to $5.2 million in the first quarter of fiscal ~~2018, an increase of 5.9%,~~2020 as compared with ~~$4.0~~$5.0 million for the first quarter of fiscal ~~2017,~~2019, primarily due to ~~an increase~~growth in sales of our microarray ~~slide sales. We expect total revenue from our In Vitro Diagnostics business to grow in the mid-single digits, percentage-wise, in fiscal 2018 as compared with the prior fiscal year.~~slides.

~~The following is a summary of major~~Major costs and expenses as a ~~percent~~percentage of total ~~revenue:~~revenue were as follows:

	Three Months Ended December 31,										Three Months Ended December 31,
	2017					2016					2019					2018
(Dollars in thousands)	Amount		% Total Revenue			Amount		% Total Revenue			Amount		% Total Revenue			Amount		% Total Revenue
Product costs	$	2,891		17.0	%	$	2,628		14.8	%	$	3,203		14	%	$	3,523		16	%
Research and development		7,831		46.0			5,970		33.6			12,142		54			11,486		52
Selling, general and administrative		5,188		30.5			4,862		27.4			6,943		31			5,949		27
Acquired intangible asset amortization		618		3.6			596		3.4			594		3			606		3
Contingent consideration (gain) accretion expense		1,118		6.6			437		2.5

Product ~~costs~~costs.. Product gross ~~margins~~margin (defined as product sales less related product costs) ~~were 64.3%~~was 67.9% and ~~65.9%, respectively,~~63.9% of product sales for the ~~three months ended December 31, 2017 and 2016. In the~~ first quarter of fiscal ~~2018, the scale-up of our Irish manufacturing facility~~2020 and ~~non-proprietary medical device~~2019, respectively. Current-quarter product gross margin was favorably impacted by product mix ~~negatively impacted gross margins by 8.0%. This was partially offset by increases~~ in reagent and IVD product sales, which positively affected product gross margins by 4.8%. In the first quarter of fiscal 2017, product gross margins were negatively affect by $0.1 million, or 1.6%, from a damaged shipment to a vendor.our Medical Device business.

Research and development (R&D) ~~expenses~~expenses.~~. The $1.9 million increase in~~ R&D expenses increased $0.7 million to 54% of revenue in the first quarter of fiscal ~~2018 period was primarily~~2020, as compared with 52% of revenue for the ~~result of planned higher spending for~~same prior-year period. This increase is due to investment in our ~~DCB~~medical device pipeline, with personnel investments in quality, technical, regulatory, and proprietary product ~~development and~~development. Partially offsetting these increases was planned lower TRANSCEND clinical ~~activities. We plan~~trial spending with the progression from active enrollment in fiscal 2019 to ~~accelerate~~patient follow up in fiscal 2020. For the full fiscal 2020, R&D ~~spending throughout fiscal 2018~~expenses are anticipated to ~~support our whole-product solutions strategy. We anticipate fiscal 2018 R&D expense will range between 55% and 60% of revenue.~~

~~Selling, general and administrative (SG&A) expenses. The $0.3 million increase in SG&A expenses reflects continued infrastructure investments to support our whole-products solutions strategy. We expect fiscal 2018 SG&A expenses will~~ be in the ~~high twenties,~~mid-to-high fifties as a percent of revenue.

~~Intangible~~Selling, general and administrative (SG&A) expenses. SG&A expenses increased $1.0 million to 31% of revenue in the first quarter of fiscal 2020, as compared with 27% of revenue for the same prior-year period. Contributing to the increase in SG&A expense during the quarter were increased investments to support product pipeline development and preparation for product market evaluations. For the full fiscal 2020, SG&A expenses are expected to be in the low-to-mid thirties as a percent of revenue.

Acquired intangible asset ~~amortization~~amortization.. As part of our ~~prior year~~fiscal 2016 acquisitions in our Medical Device business, we acquired certain intangible assets which are being amortized over periods ranging from 4 to 14 years. In addition, we own certain intangible assets related to the BioFx acquisition in fiscal 2007. We recognized $0.6 million in amortization expense related to these acquisitions in the ~~first quarter of both fiscal 2018 and 2017. Acquired intangible asset amortization is estimated to total $2.5 million in fiscal 2018.~~

~~Contingent consideration accretion expense. For the~~ three months ended December 31, ~~2017~~2019 and 2016, we recorded a net expense of $1.1 million and $0.4 million, respectively, related to our contingent consideration liabilities from prior year acquisitions. The increase in expense from the prior year is due to achievement of a revenue milestone. We expect to recognize a net expense of $3.0 million for fiscal 2018 related to our contingent consideration liabilities. If there are any changes in the amount, probability or timing of contingent consideration milestone achievement, there may be adjustments, which could be material, in the statements of operations to reflect changes in the fair value of contingent consideration liabilities.2018.

Other ~~income (loss), net.~~income. Major classifications of other income ~~net~~ are as follows:

	Three Months Ended					Three Months Ended
	December 31,					December 31,
(Dollars in thousands)	2017			2016		2019			2018
Investment income, net	$	121		$	85	$	250		$	316
Interest expense							(40	)		(37	)
Foreign exchange (loss) gain		(186	)		674		(47	)		136
Gains on strategic investment and other		177			—
Other income, net	$	112		$	759
Other							1			7
Other income						$	164		$	422

~~The increase~~Other income decreased to $0.2 million the first quarter of fiscal 2020, compared to $0.4 million in the same prior-year period, due to a decline in investment income commensurate with lower current-year interest rates, as well as fluctuations in U.S. dollar to Euro foreign currency gains (losses).

Income tax provision. The income tax benefit was $0.3 million and $0.2 million for three months ended December 31, 2019 and 2018, respectively. Discrete tax benefit from excess tax benefits realized from share awards vested, expired, cancelled and exercised of $0.2 million and $0.5 million were recognized in the first quarter of fiscal ~~2018 is the result of higher interest rates on debt investments. The foreign exchange (loss) gain in the three months ended December 31, 2017~~2020 and 2016 is related to the change in exchange rates associated with the Euro-denominated contingent consideration liability from the Creagh Medical acquisition, which is scheduled to be paid in the first quarter of fiscal 2019. During the three-month period ended December 31, 2017, the Euro strengthened against the U.S. Dollar, resulting in a loss for the quarter. During the three-month period ended December 31, 2016, the Euro weakened against the U.S. Dollar, resulting in a gain for the quarter. We recognized a gain on a previously sold strategic investment in the first quarter of fiscal 2018 as additional consideration was released from escrow.

~~Income tax provision.~~ The income tax provision was $1.0 million and $1.7 million, respectively, for the three months ended December 31, 2017 and 2016. In December 2017, the Tax Cuts and Jobs Act tax legislation was signed into law, which reduced the U.S. Federal statutory tax rate from 35% to 21%, among other changes. As a result of the enactment of this legislation, the Company’s fiscal 2018 first quarter net loss includes discrete tax expense of $1.2 million from our net deferred tax assets revaluation based on the change in the statutory tax rate. U.S. tax law requires that taxpayers with a fiscal year beginning before and ending after the effective date of a rate change calculate a blended tax rate for the year based on the pro rata number of days in the year before and after such effective date. As a result, for fiscal 2018, our statutory income tax rate is expected to be 24.5%.2019, respectively. The Company’s effective tax rate reflects the impact of state income taxes, permanent tax items and discrete tax ~~benefits.~~benefits, as well as operating results in Ireland, where tax expense or benefit is offset by a valuation allowance. The ~~difference between the U.S. federal statutory~~ tax ~~rates of 24.5% and 35.0% for~~benefits recognized in the three months ended December 31, ~~2017~~2019 and ~~2016, respectively, and~~2018 reflect expected full-year pre-tax operating results, impacted by our effective tax rates for the same periods is primarily due to operating losses in Ireland, where tax benefits are offset by a valuation allowance, non-deductible amortization and contingent consideration accretion, including fair value adjustments, associated with prior-year acquisitions, as well as foreign currency translation gains and losses on Euro-denominated contingent consideration liabilities. Offsetting these items are benefits from an increasedestimated U.S. federal R&D tax credit and ~~in the 2017 period,~~ ~~the domestic production manufacturing deduction~~.

~~Discrete items, other than the revaluation of deferred~~by excess tax ~~assets discussed above, largely consist of state income tax reserve reversals~~benefits related to the expiration of statutory filing requirements in each period, as well as the effects of expirations and cancellations of stock option awards, as further discussed below. Discrete tax (benefit) expense from (excess tax benefits) tax deficiencies realized from share awards vested, expired, cancelled and exercised totaled less than $(0.2) million and $0.3 million for the respective three-month periods ended December 31, 2017 and 2016.

~~We expect income tax expense, including the impact of tax reform, for fiscal 2018~~stock-based compensation due to ~~be in the range of $0.3 million to $0.8 million. Currently, income and losses generated in Ireland from our Creagh Medical acquisition do not reflect an Irish income tax~~

expense (benefit) as they are offset by a valuation allowance. Therefore, taxable income or losses in Ireland will result in no reported tax benefit or expense in fiscal 2018. Certain provisions of the Tax Cuts and Jobs Act significantly change the treatment of accumulated and future earnings of foreign subsidiaries. While we do not have accumulated earnings subject to a repatriation tax under the law, we may be subject to additional U.S. tax on our foreign subsidiary’s income in future years. Additionally, we may be subject to limitations on deductibility of officer and executive compensation under the new legislation. We are currently evaluating the impact of these tax law changes on our fiscal 2018 tax provision.equity award exercise activity.

Operating ~~(loss) income~~results for each of our reportable segments iswere as follows:

	Three Months Ended									Three Months Ended
	December 31,									December 31,
(Dollars in thousands)	2017			2016			% Change			2019			2018			% Change
Operating (loss) income:
Medical Device	$	(389	)	$	3,719			(110	)%	$	(423	)	$	357			(218	)%
In Vitro Diagnostics		1,670			1,456			15	%		2,599			2,455			6	%
Total segment operating income		1,281			5,175						2,176			2,812
Corporate		(1,914	)		(1,907	)		0	%		(2,442	)		(2,100	)		16	%
Total operating (loss) income	$	(633	)	$	3,268			(119	)%	$	(266	)	$	712			(137	)%

Medical Device. ~~Operating loss was $0.4 million in~~In the first quarter of fiscal ~~2018,~~2020, our Medical Device business incurred an operating loss of $0.4 million, as compared with operating income of ~~$3.7~~$0.4 million in the prior-year quarter. Operating expenses, excluding product costs, increased $1.3 million in the current year as we continue to invest in development of our medical device pipeline and related sales and marketing infrastructure, including additional headcount, to support our whole-products solutions strategy. This was partially offset by an increase in product gross margins to 66.1% for the first quarter of fiscal ~~2017. Operating (loss) income~~2020, as ~~a percentage of revenue was (3.0)% and 27.0%~~compared with 57.3% in the ~~first quarter of fiscal 2018 and 2017, respectively. Operating income decreased in the current-year quarter from the comparable~~ prior-year quarter, as a result of anticipated lower royalty revenue and license fees of $0.9 million and a $1.8 million increase in R&D expenses related to our planned investment in our DCB and proprietary medical device product development and clinical programs. Additionally, accretion expense on the contingent consideration obligations increased to $1.1 million in the first quarter of fiscal 2018 from $0.4 million in the first quarter of fiscal 2017 due to ~~the achievement of a revenue milestone.~~favorable current-quarter product mix.

In Vitro Diagnostics. Operating income was ~~$1.7~~$2.6 million in the first quarter of fiscal ~~2018,~~2020, as compared with ~~$1.5~~$2.5 million in the ~~first quarter of 2017.~~prior-year quarter. Operating income as a percentage of revenue was ~~39.4%~~49.9% and 36.3% in the three months ended December 31, 2017 and 2016, respectively. Operating income in the three months ended December 31, 2017 benefited from favorable product gross margins. Product gross margins increased to 64.2% in the three months ended December 31, 2017 from 61.0%, in the prior-year period. These improvements were primarily due to a casualty loss incurred49.3% in the first quarter of fiscal ~~2017 related to a damaged shipment from a vendor, which reduced product~~2020 and 2019, respectively. Product gross margins were essentially flat at 69.7% for the first quarter of fiscal 2020, as compared with 70.2% in the prior-year quarter.

Corporate. The Corporate category includes expenses for administrative corporate functions, such as executive, corporate accounting, legal, human resources and Board of Directors related fees and expenses, which have not been fully allocated to the Medical Device and In Vitro Diagnostics segments. Corporate also includes expenses, such as litigation, which are not specific to a segment and thus not allocated to our operating segments. ~~The unallocated Corporate operating loss was $1.9 million for both the three month ended December 31, 2017 and 2016.~~

As of December 31, ~~2017,~~2019, we had working capital of ~~$40.5~~$59.3 million, a decrease of ~~$10.6~~$1.9 million from September 30, ~~2017.~~2019. Working capital is defined by us as current assets minus current liabilities. The decrease from the prior year-end is primarily a result of contingent consideration obligations totaling $12.0 million related to the fiscal 2016 Creagh Medical acquisition being classified as current liabilities as of December 31, 2017. Contingent consideration earned for this acquisition is scheduled to be paid in December 2018. Our cashCash and cash equivalents and available-for-sale investments totaled ~~$46.7~~$48.3 million atas of December 31, ~~2017,~~2019, a decrease of ~~$1.6~~$7.0 million from ~~$48.3~~$55.3 million atas of September 30, ~~2017.~~2019. This change was primarily driven by ~~$1.3~~the $3.2 million contingent consideration payment related to the NorMedix acquisition, $2.6 million payments of ~~investments in capital equipment~~accrued compensation liabilities, and ~~$1.1~~$2.0 million of cash payments for taxes related to net share settlement of equity awards ~~partially offset by $0.6 million of cash provided by operations during the first three months of fiscal 2018.~~.

The Company’s investment policy excludes ownership of collateralized mortgage obligations, mortgage-backed derivatives and other derivative securities without prior written approval of the Board of Directors. Our investments primarily consist of money market, corporate bond and commercial paper securities. Our investment policy requires that no more than 5% of investments be

held in any one credit or issue, excluding U.S. government and government agency obligations. The primary investment objective of the portfolio is to provide for the safety of principal and appropriate liquidity while generating an above-benchmark (“Barclays Short Treasury 1-3 Month Index”) total rate of return on a pre-tax basis. Management plans to continue to direct its investment advisors to manage the Company’s securities investments primarily for the safety of principal for the foreseeable future as it continues to assess other investment opportunities and uses of its cash and securities investments, including those described below.

The following table is a summary of cash provided by (used in) operating, investing, and ~~Restated Credit Agreement (the "Credit Agreement") with Wells Fargo Bank, National Association. The Credit Agreement provides for a secured revolving line~~financing activities, the effect of ~~credit of $30.0 million until November 2019. The Company's obligations under~~exchange rate changes on cash and cash equivalents, and the ~~Credit Agreement are secured by substantially all of its~~net change in cash and its subsidiaries' assets, other than intellectual property and real estate. The Company has also pledged the majority of the stock of its subsidiaries to secure such obligations. Interest under the Credit Agreement and accrues at a benchmark rate, plus an applicable margin ranging from 1.00% to 1.75% based on the Company's ratio of total funded debt to EBITDA (as definedcash equivalents:

Operating Activities. We used cash in the Credit Agreement). A facility fee is payable quarterly on unused commitments at a rate of 0.15% per annum. As of December 31, 2017, we had no debt outstanding and were in compliance with all financial covenants under the Credit Agreement.

~~We generated cash flows from~~ operating activities of approximately ~~$0.6~~$0.9 million and ~~$2.0~~$5.4 million ~~in the three months ended December 31, 2017~~ and ~~2016, respectively. The following table depicts our cash flows provided by operating activities:~~

~~Operating Activities.~~ ~~During~~reported net income was $0.1 million and $1.3 million during the first ~~three months~~quarter of fiscal ~~2018, operating cash flow was primarily generated by net loss as adjusted for non-cash expenses for depreciation~~2020 and amortization, stock-based compensation, contingent consideration expense, unrealized foreign exchange loss (income), and deferred taxes, partially offset by a gain on a strategic investment. Deferred tax asset reductions during the fiscal 2018 period were primarily related to changes in statutory tax rates from the enactment of the Tax Cuts and Jobs Act, resulting in a reduction of deferred tax assets totaling $1.2 million.2019, respectively. Net changes in operating assets and liabilities ~~for~~reduced cash flows from operating activities by $3.5 million and $8.0 million during the first ~~three months~~quarter of fiscal ~~2018 had a negative impact on cash flows of $3.1~~2020 and ~~$2.9 million in both the three-month periods ended December 31, 2017 and 2016,~~2019, respectively. Significant changes in operating assets and liabilities affecting cash flows during these periods included:

~~Investing Activities.~~ ~~We generated cash from investing activities of $5.7 million in the first three months of fiscal 2018~~2020, as compared with cash used of $0.8 million in the same prior-year period, due to timing fluctuations impacting accounts receivable balances which were favorable to cash flow in the current quarter and unfavorable in the prior-year quarter.

Additionally, the portion of acquisition-related contingent consideration payments classified as reduction of cash flows from operations was $0.6 million and $2.0 million in the first quarter of fiscal 2020 and 2019, respectively, as it related to accretion expense, which increased these obligations from the acquisition date through settlement.

Investing Activities. We used cash in investing activities of ~~$7.0~~$16.0 million in the first ~~three months~~quarter of fiscal ~~2017.~~2020, as compared with cash provided by investing activities of $7.8 million in the prior-year quarter. In the first quarter of fiscal 2020 and 2019, we used $14.3 million and received $9.9 million, respectively, for purchases of available-for-sale debt securities, net of maturities of other investments. We invested ~~$1.3~~$1.7 million and ~~$1.5~~$2.1 million in property and equipment in the first ~~three months~~quarter of fiscal ~~2018~~2020 and ~~fiscal 2017,~~2019, respectively. In the first three months of fiscal 2018, we received $7.0 million of proceeds from maturities of available-for-sale debt securities, net of re-invested proceeds, as compared with net cash used to purchase available-for-sale debt securities of $5.5 million in the same prior-year period.

Financing Activities. We used cash in financing activities of ~~$1.0~~$4.5 million and ~~$2.2~~$11.7 million in the first ~~three months~~quarter of fiscal ~~2018~~2020 and ~~2017,~~2019, respectively. ~~Cash~~ Contingent consideration payments totaled $3.2 million in the first quarter of fiscal 2020 related to the Normedix acquisition, with $0.6 million and $2.6 million classified as cash used inby operating and financing activities, ~~was lower~~respectively. In the first quarter of fiscal 2019, we paid contingent consideration of $11.1 million related to the Creagh Medical acquisition, with $2.0 million and $9.1 million classified as cash used by ~~$1.0~~operating and financing activities, respectively. In the first quarter of fiscal 2020 and 2019, we paid $2.0 million ~~in fiscal 2018 as we repurchased less~~and $2.7 million, respectively, to purchase common stock to pay employee taxes resulting from the exercise of stock options ~~in the fourth quarter~~and vesting of ~~fiscal 2016. Cash paid for financing activities was partially offset by cash received from the issuance of shares related to exercises of employee~~other stock ~~options totaling $0.2 million and $0.1 million for the respective three-month periods ended December 31, 2017 and 2016.~~awards.

We believe that our existing cash, and cash equivalents and investments, which totaled ~~$46.7~~$48.3 million as of December 31, ~~2017,~~2019, together with cash flow from operations, will provide liquidity sufficient to meet our cash needs and fund our operations and planned capital expenditures for the next twelve months. There can be no assurance, however, that ~~Surmodics’~~our business will continue to generate cash flows at current levels, and disruptions in financial markets may negatively impact our ability to access capital in a timely manner and on attractive terms.

Customer Concentrations~~. Our licensed technologies provide royalty revenue, which represents the largest revenue stream to the Company.~~

We have ~~licenses~~agreements with a diverse base of customers and certain customers have multiple products using our technology. Abbott and Medtronic plc (“Medtronic”) isare our largest ~~customer~~customers, comprising 19% and 14%, respectively, of our consolidated revenue for fiscal 2019. These same customers each comprised 12% and 18% of our consolidated revenue for the first quarter of fiscal ~~2017 and 17%~~2020, respectively. Abbott has several separately licensed products, including the SurVeil license, which generate royalty revenue for Surmodics, none of ~~our consolidated~~which represented more than 5% of total revenue for the first three months of fiscal ~~2018.~~2020. Medtronic has several separately licensed products that generate royalty revenue for Surmodics, none of which represented more than 4%3% of our total revenue. No other individual customer ~~using licensed technology~~ constitutes more than 7%10% of Surmodics’ total fiscal ~~2018~~2020 to date or ~~2017~~fiscal 2019 revenue.

Our Board of Directors has authorized the repurchase of up to an additional $25.3 million of the Company’s outstanding stock in open-market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, tender offers or by any combination of such methods. The authorization has no fixed expiration date.

As of December 31, ~~2017~~2019 and September 30, ~~2017,~~2019, 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 condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, expectations concerning our growth strategy, including our ability to sign new license agreements, bring new products to market and broaden our hydrophilic coatings royalty revenue, the impact of patent expirations on our hydrophilic coatings royalty revenue, product development programs, various milestone achievements, research and development plans and expenses, including the estimated cost associated with the TRANSCEND clinical trial, future cash flow and sources of funding, short-term requirements, future property and equipment investment levels, the impact of potential lawsuits or claims, the impact of Abbott, Medtronic, as well as other significant customers, including new diagnostic kit customers, our ability to recognize the expected benefits of our acquisitions and the Company’s strategy to transform to a provider of whole-product solutions, the timing, impact and success of the clinical evaluation of the SurVeil DCB, and our expectations related to our income tax expense for fiscal ~~2018.~~2020. Without limiting the foregoing, words or phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,” “project,” “will” and similar terminology, generally identify forward-looking statements. Forward-looking statements may also represent challenging goals for us. These statements, which represent the Company’s expectations or beliefs concerning various future events, are based on current expectations that involve a number of risks and uncertainties that could cause actual results to differ materially from those of such forward-looking statements. We caution 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 our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2017.~~2019. We disclaim any intent or obligation to update publicly these forward-looking statements, whether because of new information, 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:

Many of these factors are outside the control and knowledge of us, and could result in increased volatility 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.

Item 3. Quantitative and ~~Qualitative~~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 securities with varying maturity dates, which 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. We do not use derivative financial instruments to manage interest rate risk or to speculate on

future changes in interest rates. As of December 31, ~~2017,~~2019, we held ~~$38.6~~$39.3 million in available-for-sale debt securities, all with maturity dates of less than one year, therefore interest rate fluctuations would have an insignificant impact on ~~the~~our results of operations or cash flows. Our policy also allows the Company to hold a substantial portion of funds in cash and cash equivalents, which are defined as financial instruments with original maturities of three months or less and may include money market instruments, certificates of deposit, repurchase agreements, corporate bonds and commercial paper instruments.

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 operations in Ireland. In a period where the U.S. dollar is strengthening or weakening as compared with the Euro, our revenue and expenses denominated in ~~Euro’s~~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 transactions are denominated in U.S. dollars or Euros. We generate royalty revenue from the sale of customer products in foreign jurisdictions. Royalties generated in foreign jurisdictions by customers are converted and paid in U.S. dollars per contractual terms. Substantially all of our purchasing transactions are denominated in U.S. Dollars or Euros. Further, we are subject to foreign currency risk associated with the payment of up to €12.0 million of Creagh Medical contingent consideration in approximately December 2018. For the first three months of fiscal 2018, we have recorded a foreign currency exchange loss of $0.2 million related to this future payment. A 10% increase or decrease in the U.S. Dollar to Euro exchange rate could have a $1.2 million impact on this payment based on the exchange rate as of December 31, 2017. To date, we have not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange.

The Company maintains disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, referred to collectively herein as the Certifying Officers, carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, ~~2017.~~2019. Based on that evaluation, the Company’s Certifying Officers concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were effective to ensure that information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information 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 Certifying Officers, as appropriate, to allow timely decisions regarding required disclosures.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) during the three months ended December 31, ~~2017~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

From time to time, the Company has been involved in various legal actions involving its operations, products and technologies, including intellectual property and employment disputes. See footnote 14 to the condensed, consolidated financial statements, which describes a matter with Merit which arose during fiscal 2017. We entered into a settlement agreement full resolving the matter in January 2018, which was after our first quarter.

In our ~~report~~Annual Report on Form 10-K for the fiscal year ended September 30, ~~2017,~~2019, filed with the SEC on December ~~1, 2017,~~3, 2019, we identify under “Part 1, Item 1A. Risk Factors.” important factors which could affect our financial performance and could cause our actual results for future periods to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statements made in this Quarterly Report on Form 10-Q.

There have been no material changes in our risk factors subsequent to the filing of our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2017.~~2019.

The ~~following table presents information with respect to purchases~~Company did not purchase any of its common stock ~~of the Company made~~ during the three months ended December 31, ~~2017,~~2019. As of December 31, 2019, the Company had an aggregate of $25.3 million available for future common stock repurchases under an authorization approved by the ~~Company or~~Board of Directors for up to $20.0 million on ~~behalf~~November 6, 2015, all of which is remaining, and an authorization approved by the ~~Company or any “affiliated purchaser”~~Board of ~~the Company, as defined in Rule 10b-18(a)(3) under the Exchange Act.~~

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, $0.05 par value	SRDX	Nasdaq Global Select Market

Large accelerated filer	☐	Accelerated filer	☒		~~Accelerated filer~~	☒
Non-accelerated filer	☐		~~(Do not check if a smaller reporting company)~~	Smaller reporting company	☐
				Emerging Growth Company	☐

PART I. FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1921
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2628
Item 4.	Controls and Procedures	28
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	30

Performance Period	Minimum Shares		Target Shares		Maximum Shares
Fiscal 2016 – 2018		13,268		66,338		132,676
Fiscal 2017 – 2019		10,437		52,185		104,370

Period	Total Number of Shares Purchased		Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (1)
10/1/17 — 10/31/17		—	N/A		—	$	25,298,238
11/1/17 — 11/30/17		—	N/A		—	$	25,298,238
12/1/17 — 12/31/17		—	N/A		—	$	25,298,238
Total		—	N/A		—	$	25,298,238