Securities registered pursuant to Section 12(b) of the ~~Securities Exchange Act of 1934:~~Act:

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 every Interactive Data File required to be submitted 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 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,” “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, $0.05 par value per share, as of April ~~30, 2019~~24, 2020 was ~~13,488,496~~13,605,831.

	March 31,		September 30,		March 31,		September 30,
	2019		2018		2020		2019
(in thousands, except share and per share data)	(Unaudited)				(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	22,470	$	23,318	$	15,208	$	30,361
Restricted cash		—		350
Available-for-sale securities		24,023		41,352		33,190		24,931
Accounts receivable, net of allowance for doubtful accounts of $181 and $147 as of March 31, 2019 and September 30, 2018, respectively		9,312		8,877
Contract assets - royalties and license fees		7,065		—
Accounts receivable, net of allowance for doubtful accounts of $240 and $200 as of March 31, 2020 and September 30, 2019, respectively						8,886		8,993
Contract assets — royalties and license fees						6,282		8,210
Inventories, net		4,345		4,016		5,740		4,501
Income tax receivable		1,137		1,152		4,257		558
Prepaids and other		3,165		2,462		3,738		3,866
Total Current Assets		71,517		81,527		77,301		81,420
Deferred tax assets		5,301		6,304
Property and equipment, net		29,512		30,143		29,785		29,748
Deferred income taxes						4,788		6,176
Intangible assets, net		16,020		17,683		13,037		14,226
Goodwill		26,549		27,032		26,276		26,171
Other assets		2,081		1,446		4,360		2,124
Total Assets	$	150,980	$	164,135	$	155,547	$	159,865

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	3,746	$	2,546	$	1,658	$	2,085
Accrued liabilities:
Compensation		2,107		5,635		2,300		4,581
Accrued other		5,097		6,265		4,645		4,790
Deferred revenue		6,385		9,646		4,675		5,553
Contingent consideration		3,009		11,041		—		3,200
Total Current Liabilities		20,344		35,133		13,278		20,209
Contingent consideration, less current portion		—		3,425
Deferred revenue, less current portion		10,470		11,247		9,861		11,628
Other long-term liabilities		4,853		5,720		7,442		5,512
Total Liabilities		35,667		55,525		30,581		37,349
Commitments and Contingencies (Note 15)
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; 13,488,738 and 13,397,647 shares issued and outstanding as of March 31, 2019 and September 30, 2018, respectively		674		670
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; 13,609,495 and 13,504,102 shares issued and outstanding as of March 31, 2020 and September 30, 2019, respectively						680		675
Additional paid-in capital		7,510		7,607		11,481		10,740
Accumulated other comprehensive income		1,444		2,718		490		396
Retained earnings		105,685		97,615		112,315		110,705
Total Stockholders’ Equity		115,313		108,610		124,966		122,516
Total Liabilities and Stockholders’ Equity	$	150,980	$	164,135	$	155,547	$	159,865

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

	Three Months Ended							Six Months Ended						Three Months Ended							Six Months Ended
	March 31,							March 31,						March 31,							March 31,
	2019			2018				2019			2018			2020			2019				2020				2019
(In thousands, except per share data)	(Unaudited)						(Unaudited)							(Unaudited)						(Unaudited)
Revenue:
Product sales	$	9,887		$	8,686			$	19,638		$	16,774		$	11,770		$	9,887			$	21,744			$	19,638
Royalties and license fees		9,932			8,428				20,028			15,504			8,221			9,932				18,369				20,028
Research, development and other		2,857			1,944				5,251			3,793			2,831			2,857				5,325				5,251
Total revenue		22,676			19,058				44,917			36,071			22,822			22,676				45,438				44,917
Operating costs and expenses:
Product costs		3,093			2,913				6,616			5,804			3,769			3,093				6,972				6,616
Research and development		13,555			10,774				25,041			18,605			11,935			13,555				24,077				25,041
Selling, general and administrative		4,876			6,440				10,825			11,628			6,733			4,876				13,676				10,825
Acquired intangible asset amortization		604			636				1,210			1,254			541			604				1,135				1,210
Contingent consideration gain		(317	)		(2,230	)			(352	)		(1,112	)		—			(317	)			—				(352	)
Total operating costs and expenses		21,811			18,533				43,340			36,179			22,978			21,811				45,860				43,340
Operating income (loss)		865			525				1,577			(108	)
Other income (loss):
Operating (loss) income															(156	)		865				(422	)			1,577
Other (expense) income:
Investment income, net		265			142				581			263			210			265				460		��		581
Interest expense		(37	)		—				(74	)		—			(30	)		(37	)			(70	)			(74	)
Foreign exchange gain (loss)		5			(353	)			141			(539	)
Gain on strategic investment and other		2			—				9			177
Other income (loss), net		235			(211	)			657			(99	)
Income (loss) before income taxes		1,100			314				2,234			(207	)
Foreign exchange (loss) gain															(30	)		5				(77	)			141
Impairment loss on strategic investment															(479	)		—				(479	)			—
Other															—			2				1				9
Other (expense) income															(329	)		235				(165	)			657
(Loss) income before income taxes															(485	)		1,100				(587	)			2,234
Income tax benefit		162			1,220				338			185			1,947			162				2,197				338
Net income (loss)	$	1,262		$	1,534			$	2,572		$	(22	)
Net income														$	1,462		$	1,262			$	1,610			$	2,572

Basic net income (loss) per share	$	0.09		$	0.12			$	0.19		$	(0.00	)
Diluted net income (loss) per share	$	0.09		$	0.11			$	0.19		$	(0.00	)
Basic net income per share														$	0.11		$	0.09			$	0.12			$	0.19
Diluted net income per share														$	0.11		$	0.09			$	0.12			$	0.19

Weighted average number of shares outstanding:
Basic		13,390			13,102				13,379			13,078			13,507			13,390				13,474				13,379
Diluted		13,785			13,465				13,816			13,078			13,751			13,785				13,779				13,816

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

	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	March 31,						March 31,						March 31,						March 31,
	2019			2018			2019			2018			2020			2019			2020			2019
(In thousands)	(Unaudited)						(Unaudited)						(Unaudited)						(Unaudited)
Net income (loss)	$	1,262		$	1,534		$	2,572		$	(22	)
Net income													$	1,462		$	1,262		$	1,610		$	2,572
Other comprehensive (loss) income:
Unrealized holding gains (losses) on available-for-sale securities, net of tax		39			(28	)		44			(41	)
Unrealized holding (losses) gains on available-for- sale securities, net of tax														(174	)		39			(179	)		44
Foreign currency translation adjustments		(779	)		1,207			(1,318	)		1,837			(768	)		(779	)		273			(1,318	)
Other comprehensive (loss) income		(740	)		1,179			(1,274	)		1,796			(942	)		(740	)		94			(1,274	)
Comprehensive income	$	522		$	2,713		$	1,298		$	1,774
Comprehensive (loss) income													$	520		$	522		$	1,704		$	1,298

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

	Three Months Ended March 31, 2019 and 2018																		Three Months Ended March 31, 2020 and 2019
										Accumulated																		Accumulated
							Additional			Other						Total									Additional			Other					Total
	Common Stock						Paid-In			Comprehensive			Retained			Stockholders’			Common Stock						Paid-In			Comprehensive			Retained		Stockholders’
(In thousands)	Shares			Amount			Capital			Income			Earnings			Equity			Shares			Amount			Capital			Income			Earnings		Equity
Balance at December 31, 2019																				13,593		$	680		$	10,361		$	1,432		$	110,853	$	123,326
Net income																				—			—			—			—			1,462		1,462
Other comprehensive loss, net of tax																				—			—			—			(942	)		—		(942	)
Issuance of common stock																				5			—			218			—			—		218
Common stock options exercised, net																				12			—			9			—			—		9
Purchase of common stock to pay employee taxes																				(1	)		—			(411	)		—			—		(411	)
Stock-based compensation																				—			—			1,304			—			—		1,304
Balance at March 31, 2020																				13,609		$	680		$	11,481		$	490		$	112,315	$	124,966

Balance at December 31, 2018		13,483		$	674		$	6,340		$	2,184		$	104,423		$	113,621			13,483		$	674		$	6,340		$	2,184		$	104,423	$	113,621
Net income		—			—			—			—			1,262			1,262			—			—			—			—			1,262		1,262
Other comprehensive loss, net of tax		—			—			—			(740	)		—			(740	)		—			—			—			(740	)		—		(740	)
Issuance of common stock		6			—			209			—			—			209			6			—			209			—			—		209
Common stock options exercised, net		1			—			19			—			—			19			1			—			19			—			—		19
Purchase of common stock to pay employee taxes		(1	)		—			(17	)		—			—			(17	)		(1	)		—			(17	)		—			—		(17	)
Stock-based compensation		—			—			959			—			—			959			—			—			959			—			—		959
Balance at March 31, 2019		13,489		$	674		$	7,510		$	1,444		$	105,685		$	115,313			13,489		$	674		$	7,510		$	1,444		$	105,685	$	115,313

Balance at December 31, 2017		13,196		$	660		$	5,337		$	4,034		$	100,516		$	110,547

																			Six Months Ended March 31, 2020 and 2019
																												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		—			—			—			—			1,534			1,534			—			—			—			—			1,610		1,610
Other comprehensive income, net of tax		—			—			—			1,179			—			1,179			—			—			—			94			—		94
Issuance of common stock		3			—			166			—			—			166			130			7			211			—			—		218
Common stock options exercised, net		159			8			54			—			—			62			20			—			100			—			—		100
Purchase of common stock to pay employee taxes		(111	)		(6	)		(1,225	)		—			—			(1,231	)		(45	)		(2	)		(2,267	)		—			—		(2,269	)
Stock-based compensation		—			—			1,099			—			—			1,099			—			—			2,697			—			—		2,697
Balance at March 31, 2018		13,247		$	662		$	5,431		$	5,213		$	102,050		$	113,356
Balance at March 31, 2020																				13,609		$	680		$	11,481		$	490		$	112,315	$	124,966

	Six Months Ended March 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, 2018		13,398		$	670		$	7,607		$	2,718		$	97,615		$	108,610			13,398		$	670		$	7,607		$	2,718		$	97,615	$	108,610
Net impact from adoption of ASC Topic 606 (Note 2)		—			—			—			—			5,498			5,498
Net impact from adoption of ASC Topic 606																				—			—			—			—			5,498	$	5,498
Net income		—			—			—			—			2,572			2,572			—			—			—			—			2,572		2,572
Other comprehensive loss, net of tax		—			—			—			(1,274	)		—			(1,274	)		—			—			—			(1,274	)		—		(1,274	)
Issuance of common stock		134			6			203			—			—			209			134			6			203			—			—		209
Common stock options exercised, net		2			0			55			—			—			55			2			—			55			—			—		55
Purchase of common stock to pay employee taxes		(45	)		(2	)		(2,545	)		—			—			(2,547	)		(45	)		(2	)		(2,545	)		—			—		(2,547	)
Stock-based compensation		—			—			2,190			—			—			2,190			—			—			2,190			—			—		2,190
Balance at March 31, 2019		13,489		$	674		$	7,510		$	1,444		$	105,685		$	115,313			13,489		$	674		$	7,510		$	1,444		$	105,685	$	115,313

Balance at September 30, 2017		13,095		$	655		$	5,413		$	3,417		$	102,072		$	111,557
Net loss		—			—			—			—			(22	)		(22	)
Other comprehensive income, net of tax		—			—			—			1,796			—			1,796
Issuance of common stock		127			6			160			—			—			166
Common stock options exercised, net		171			8			209			—			—			217
Purchase of common stock to pay employee taxes		(146	)		(7	)		(2,354	)		—			—			(2,361	)
Stock-based compensation		—			—			2,003			—			—			2,003
Balance at March 31, 2018		13,247		$	662		$	5,431		$	5,213		$	102,050		$	113,356

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

	Six Months Ended						Six Months Ended
	March 31,						March 31,
	2019			2018			2020			2019
(in thousands)	(Unaudited)						(Unaudited)
Operating Activities:
Net income (loss)	$	2,572		$	(22	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Net income							$	1,610		$	2,572
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		3,575			3,106			3,600			3,575
Stock-based compensation		2,190			2,003			2,697			2,190
Payment of contingent consideration obligations in excess of acquisition-date value		(2,041	)		—			(608	)		(2,041	)
Contingent consideration gain		(352	)		(1,112	)		—			(352	)
Unrealized foreign exchange gain		—			518
Deferred taxes (1)		(213	)		701
Gain on strategic investment		(7	)		(177	)
Deferred taxes								1,388			(213	)
Losses (gains) on strategic investments								479			(7	)
Provision for bad debts		119			25			137			119
Other		(10	)		92			108			(10	)
Change in operating assets and liabilities:
Accounts receivable and contract asset (1)		(756	)		(15	)
Accounts receivable and contract asset								1,914			(756	)
Inventories		(355	)		(500	)		(1,233	)		(355	)
Prepaids and other		(1,430	)		(1,366	)		(622	)		(1,430	)
Accounts payable		1,273			(418	)		(128	)		1,273
Accrued liabilities		(4,071	)		810			(1,826	)		(4,071	)
Income taxes (1)		(291	)		(776	)
Deferred revenue (1)		(4,141	)		24,562
Net cash (used in) provided by operating activities		(3,938	)		27,431
Income taxes								(3,615	)		(291	)
Deferred revenue								(2,644	)		(4,141	)
Net cash provided by (used in) operating activities								1,257			(3,938	)
Investing Activities:
Purchases of property and equipment		(3,118	)		(4,020	)		(2,311	)		(3,118	)
Purchases of available-for-sale securities		(20,085	)		(43,517	)		(35,863	)		(20,085	)
Maturities of available-for-sale securities		37,458			33,000			27,425			37,458
Cash proceeds from sales of property and equipment		10			4			—			10
Cash received from sale of strategic investment		7			177			—			7
Net cash provided by (used in) investing activities		14,272			(14,356	)
Net cash (used in) provided by investing activities								(10,749	)		14,272
Financing Activities:
Issuance of common stock		264			377			318			264
Payments for taxes related to net share settlement of equity awards		(2,678	)		(1,132	)		(2,373	)		(2,678	)
Payment of contingent consideration obligations		(9,064	)		(925	)		(2,592	)		(9,064	)
Payments for acquisition of in process research and development								(1,000	)		—
Net cash used in financing activities		(11,478	)		(1,680	)		(5,647	)		(11,478	)
Effect of exchange rate changes on cash, restricted cash and cash equivalents		(54	)		133
Net change in cash, restricted cash and cash equivalents		(1,198	)		11,528
Cash, Restricted Cash and Cash Equivalents:
Effect of exchange rate changes on cash and cash equivalents								(14	)		(54	)
Net change in cash and cash equivalents								(15,153	)		(1,198	)
Cash and Cash Equivalents:
Beginning of period		23,668			16,534			30,361			23,668
End of period	$	22,470		$	28,062		$	15,208		$	22,470
Supplemental Information:
Cash paid for income taxes	$	150		$	782		$	6		$	150
Noncash transactions from investing and financing activities:
Acquisition of property and equipment, net of refundable credits in other current assets and liabilities	$	65		$	329		$	87		$	65
Accrued taxes related to net share settlement of equity awards		—			1,222
Right of use assets obtained in exchange for new operating lease liabilities								597			—

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~~(referred to as “Surmodics”, the “Company”), “we,” “us,” “our” and other like terms) for the periods presented. These financial statements include 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) in the period in which the change in estimate is identified. The results of operations for the three and six months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the entire 2019 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, ~~2018,~~2019, and footnotes thereto included in the Company’s Annual Report on Form 10-K as filed with the SEC on ~~November 30, 2018.~~December 3, 2019.

These financial statements include 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 in the period in which the change in estimate is identified. The results of operations for the three and six months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the entire 2020 fiscal year.

We are subject to risks and uncertainties as a result of the COVID-19 pandemic caused by a novel strain of coronavirus first identified in Wuhan, China in December 2019. On March 18, 2020, the Centers for Medicare & Medicaid Services (“CMS”) released guidance for U.S. healthcare providers to limit all elective medical procedures in order to conserve personal protective equipment and limit exposure to COVID-19 during the pendency of the pandemic. In addition to limiting elective medical procedures, many hospitals and other healthcare providers have strictly limited access to their facilities during the pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and healthcare delivery, led to social distancing recommendations, and created significant volatility in financial markets.

Many of our customers use our licensed technology and purchased materials to manufacture products used in procedures impacted by the CMS guidance to limit elective procedures. In addition, our customers and business partners need access to healthcare providers and facilities to effectively market, distribute and sell products incorporating our coating and device technologies, as well as our whole-product solutions. Likewise, we and our business partners need access to healthcare providers and facilities to conduct clinical trials and other activities required to achieve regulatory clearing for our products under development.

We believe reductions in elective procedures in response to CMS guidance have had, and will continue to have, an adverse impact, which may be material, to the Company's financial condition, liquidity and results of operations. The severity of the impact of the COVID-19 pandemic on our business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on our customers, all of which are uncertain and cannot be predicted. As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company's financial condition, liquidity or results of operations is uncertain. For further information, refer to “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) ~~Accounting Standards Codification (“ASC”) issued Update No. 2014-09,~~ ~~Revenue from Contracts with Customers (“ASC Topic 606”)~~. The core principal of ASC Topic 606 is 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, as well as significant judgements and changes in judgements, which are described in Note 2 to the condensed consolidated financial statements. The Company adopted ASC Topic 606 in the first quarter of fiscal year 2019 using the modified retrospective method and applied the new revenue standard to all new customer contracts initiated on or after the effective date and contracts which had remaining performance obligations as of the effective date.

The adoption of ASC Topic 606 resulted in an acceleration of minimum license fees and sales-based royalty revenue earned under the Company’s hydrophilic coating technology license agreements by approximately one quarter. Prior to the adoption of ASC Topic 606, sales-based royalties were recognized in the period the Company’s customers reported the underlying sales, which is generally one quarter after the sales occurred. Additionally, minimum royalties were recognized in the period they were contractually owed to the Company. Upon adoption of ASC Topic 606, sales-based royalties are recognized in the period the underlying customer sale occurs, while the minimum royalties are recognized at each renewal of the license contract, which generally occurs on the last day of the quarter for minimum royalties contractually due in the following quarter. ~~The adoption of ASC Topic 606 resulted in cumulative-effect adjustments to opening retained earnings, contract assets, deferred tax assets and income tax receivable.~~

The impact of the adoption of ASC Topic 606 on the opening consolidated balance sheet as of October 1, 2018, as compared with the consolidated balance sheet previously reported as of September 30, 2018, was as follows:

The impact of adoption of ASC Topic 606 to the Company’s condensed consolidated statements of operations for three and six months ended March 31, 2019 was an increase of royalty and license fee revenue of $0.3 million and $0.1 million, respectively, as well as reduced income tax benefit of less than $0.1 million for each period.

~~In February 2016, the FASB~~ issued Accounting Standards Update (“ASU”) 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 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 2021 (October 1, 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.

~~Effective October 1, 2018, the Company adopted ASC Topic 606 using the modified retrospective adoption method.~~ Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to receive in exchange for those goods or services.

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

	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	March 31,				March 31,				March 31,				March 31,
(In thousands)	2019		2018		2019		2018
(Dollars in thousands)									2020		2019		2020		2019
Medical Device	(Unaudited)				(Unaudited)
Product sales	$	4,558	$	3,687	$	9,336	$	7,537	$	5,455	$	4,558	$	10,477	$	9,336
Royalties		8,313		7,891		15,998		14,933		6,714		8,313		15,613		15,998
Research, development and other		2,811		1,937		5,195		3,785		2,628		2,811		4,862		5,195
License fees		1,619		537		4,030		571		1,507		1,619		2,756		4,030
Total Revenue - Medical Device		17,301		14,052		34,559		26,826
IVD
Total Revenue — Medical Device										16,304		17,301		33,708		34,559
In Vitro Diagnostics
Product sales		5,329		4,999		10,302		9,237		6,315		5,329		11,267		10,302
Other		46		7		56		8		203		46		463		56
Total Revenue - IVD		5,375		5,006		10,358		9,245
Total Revenue — In Vitro Diagnostics										6,518		5,375		11,730		10,358
Total Revenue	$	22,676	$	19,058	$	44,917	$	36,071	$	22,822	$	22,676	$	45,438	$	44,917

The Company derives its revenue from three primary sources: (1) product revenues 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; and (3) research and commercial development fees generated on customer projects.

~~The Company recognizes revenue when control is transferred to the customer. The transfer of control varies by revenue classification and is described below.~~

~~Product sales~~ ~~– Revenue from product sales is recognized at the point in time control of the products is transferred, generally upon shipment based upon the standard contract terms.Shipping and handling activities are considered to be fulfillment activities rather than promised services and are not, therefore, considered to be separate performance obligations.~~ The Company’s sales terms provide no right of return outside of a standard warranty policy and returns are generally not significant. Payment terms for product sales are generally set at 30-45 days after the consideration becomes due and payable.

~~Royalties~~ – Royalty revenue consists of sales-based and recurring minimum royalties earned under licenses of our surface modification technologies. Performance obligations under these licenses, which consist of the right to use the Company’s proprietary technology, are satisfied ~~at a point in time corresponding with~~ delivery of the underlying technology rights to the customer, which is generally upon transfer of the licensed technology to the customer. Sales-based royalty revenue represents variable consideration under the license agreements and is recognized in the period a customer sells products incorporating the Company’s licensed technologies. The Company estimates sales-based royalty revenue earned but unpaid at each reporting period using the expected value method based on historical sales information, adjusted for known changes such as product launches and patent expirations. The Company's license arrangements also often provide for recurring fees (minimum royalties) which the Company recognizes at the later of the satisfaction of the underlying performance obligation or upon renewal of the contract, which is generally done on a quarterly basis. Sales-based and minimum royalties are generally due within 45 days of the end of each quarter.

~~License fees~~ – For distinct license performance obligations, upfront license fees are recognized when the Company satisfies the underlying performance obligation. This generally occurs upon transfer of the right to use the Company’s licensed technology to the customer, with the exception of the license of the Company’s SurVeil® drug-coated balloon (the “~~SurVeil~~ ~~DCB”) disclosed below and in Note 3 to the condensed consolidated financial statements. Certain license arrangements include contingent milestone payments,~~

which are due following achievement by our customers of specified sales or regulatory milestones. Contingent milestone payment terms vary by contract. The Company has generally fulfilled its performance obligation prior to achievement of these milestones. However, because of the uncertainty of the milestone achievement, and/or the dependence on sales of our customers, variable consideration for contingent milestones is fully constrained and excluded from the contract price until the milestone is achieved by our customer, to the extent collectability is reasonably certain.

Pursuant to the terms of the collaborative arrangement contract with Abbott Vascular, Inc. (“Abbott”) disclosed in Note 3 (the “Abbott Agreement”), the Company received an upfront payment of $25 million in fiscal 2018. To the extent the Company achieves certain agreed-upon ~~clinical and regulatory milestones, the Company~~ ~~may receive up to $67 million of additional milestone payments~~. The performance obligation identified in this arrangement includes delivery of our licensed technology and completion of research and development activities, primarily clinical trial activities (together, “R&D and Clinical Activities”). These promises are not distinct performance obligations because the product necessary for completion of the R&D and Clinical Activities is currently only able to be manufactured by the Company~~due to the exclusive proprietary know-how and certain regulatory requirements associated with the manufacture of the product.~~ The customer (Abbott) simultaneously receives and consumes the benefits of the R&D and Clinical Activities as study data are generated to support regulatory approval submissions. Control is effectively transferred over time as we complete the TRANSCEND clinical study of our ~~SurVeil~~ ~~DCB. Revenue related to this contract is recognized~~ using the cost-to-cost method which measures progress based on costs incurred to date relative to the expected total cost of the services, as the Company believes this represents a faithful depiction of the satisfaction of its performance obligation. Use of the cost-to-cost method requires significant estimates including the total cost of the TRANSCEND study, which is expected to be completed over the next six years. Revenue is recorded based on the cost-to-cost completion estimate relative to the transaction price, which is equal to the total upfront fee plus the expected value of the clinical and regulatory milestones. As of March 31, 2019, consideration from the clinical and regulatory milestones has been fully constrained and excluded from the contract price, due to the high level of uncertainty as to the achievement of the underlying regulatory approval(s) and/or clinical milestones. Significant judgment is used to estimate total revenue and cost at completion for this contract.

~~Research and development~~ – The Company performs third-party research and development activities, which are typically charged to customers on a time-and-materials basis. Generally, revenue for research and development is recorded over time as the services are provided to the customer in the amount to which the Company has the right to invoice. These services are generally charged to the customer as they are provided. Payment terms for R&D services are generally set at 30-45 days after the consideration becomes due and payable.

~~If a contract contains more than one distinct performance obligation, the transaction price is allocated to each performance obligation based on relative standalone selling price.~~

Contract ~~assets are generally short in duration given the nature of products produced and services provided by the Company.~~ ~~Contract assets~~asset balances consist of sales-based and minimum royalty revenue earned for which unconditional right to payment does not exist as of the balance sheet date. These assets are comprised of estimated sales-based royalties earned, but not yet reported by the Company’s customers, minimum royalties on non-cancellable contracts, and contingent milestones earned but not yet billable based on the terms of the contract. The increase in contract assets from October 1, 2018 to March 31, 2019 resulted primarily from changes in estimated sales-based royalties earned but not collected at each balance sheet ~~date.~~

~~The Company records~~date and are subject to timing fluctuations at the end of a contract liability, or deferred revenue, when there is an obligation to provide a product or service to the customer and payment is received or due in advance of performance, or when payment is received for a period outside the contract term.given period. The Company’s deferred revenue, ~~at March 31, 2019 and September 30, 2018~~or contract liability, is primarily related to the upfront ~~payment~~and milestone payments received pursuant to the collaborative license and commercialization agreement with Abbott ~~Agreement (Note 3).~~Vascular, Inc. (the “Abbott Agreement”) for the Company’s SurVeil™ drug-coated balloon product (“SurVeil DCB”) discussed in Note 3.

Remaining performance obligations include deferred revenue and amounts the Company expects to receive for goods and services that have not yet been delivered or provided under existing, noncancellable contracts. For contracts that have an original duration of one year or less, the Company has elected the practical expedient applicable to such contracts and does not disclose the transaction price for remaining performance obligations at the end of each reporting period and when the Company expects to recognize this revenue. As of March 31, ~~2019,~~2020, 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 ~~was~~totaled approximately ~~$16.7~~$14.3 million. ~~This revenue is entirely related~~These remaining performance obligations relate to ~~the R&D and Clinical Services performance obligation in~~ the Abbott Agreement ~~from the upfront payment received in fiscal 2018 and does not include revenue from potential~~(Note 3), exclude contingent milestone payments ~~that may~~under the Abbott Agreement, and are expected to be ~~received throughout the course of the agreement. The Company expects to recognize the remaining revenue from this~~

~~performance obligation~~recognized over the next ~~six~~five years through fiscal 2025 as ~~the~~ services, ~~which are primarily comprised of~~principally the TRANSCEND ~~clinical~~ 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)~~(“AV”) fistula ~~DCB~~drug-coated balloon (“DCB”) products, which are currently in pre-clinical development and a ~~first-in human~~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 ~~will~~ participate on a joint development committee charged with providing guidance on the Company’s clinical and regulatory activities with regard to the SurVeil DCB 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 determined that the upfront and milestone payments represent consideration paid in a vendor-customer relationship and has thus applied the guidance in ASC Topic 606 to these payments and the related performance obligations, as further discussed in Note 2. The Company is the principal in the arrangement and the related development costs and the revenue and R&D costs will be reported gross in license fee revenue and research and development costs on the condensed consolidated statements of operations.

The Company has received a $25 million upfront fee as well as a $10 million milestone payment under the Abbott Agreement and may receive up to ~~$67~~$56 million of additional payments upon achievement of various clinical and regulatory milestones. ~~For~~Revenue recognized from the Abbott agreement totaled $1.5 million and $1.6 million in the three months ended March 31, 2020 and 2019, respectively, and $2.8 million and $4.0 million in the six months ended March 31, 2020 and 2019, ~~the Company recognized revenue totaling $1.6 million and $4.0 million,~~ respectively, ~~from the Abbott arrangement,~~ all of which was previously included in deferred revenue. ~~For both the three and six months ended March 31, 2018, the Company recognized revenue totaling $0.5 million from the Abbott arrangement.~~ As of March 31, ~~2019~~2020 and September 30, ~~2018,~~2019, deferred revenue from the upfront ~~payment~~and milestone payments received of ~~$16.7~~$14.3 million and ~~$20.6~~$17.1 million, respectively, iswas 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 March 31, ~~2019~~2020 and September 30, ~~2018.~~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 March 31, ~~2019~~2020 and September 30, ~~2018~~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 liability as of March 31, 2019 consisted of contingent consideration obligations related to the fiscal 2016 acquisition of NorMedix, Inc. (“NorMedix”). Level 3 liabilities as of September 30, 2018 consisted of contingent consideration obligations related to the fiscal 2016 acquisitions of Creagh Medical Ltd. (“Creagh Medical”) and NorMedix. Consideration owed to the sellers of Creagh Medical from revenue and value-creating milestones achieved through September 30, 2018 was paid during the six months ended March 31, 2019. Consideration owed to the sellers of NorMedix upon achievement of revenue and value-creating milestones through September 30, 2019, if any, is due to be paid in first quarter of fiscal 2020. Contingent consideration included in current liabilities of $3.0 million and $11.0 million as of March 31, 2019 and September 30, 2018, respectively, represents the Company’s estimated fair value of amounts expected to be paid within one year of each respective balance sheet date. During the first quarter of fiscal 2019, the Company paid contingent consideration obligations related to the Creagh Medical acquisition totaling $11.0 million, including $9.1 million classified as cash flows used in financing activities on the condensed consolidated statement of cash flows. The financing portion of the contingent consideration payment is equal to the acquisition-date value of the contingent consideration obligation, in accordance with ASC 230 ~~Statements of 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.

The Company’s Level 3 liability as of September 30, 2019 consisted of contingent consideration obligations related to the fiscal 2016 acquisition of NorMedix, Inc. (“NorMedix”).

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~~Assets and liabilities measured at fair value on a recurring basis by level of the fair value hierarchy were as ~~of March 31, 2019:~~follows:

											March 31, 2020
(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 March 31, 2019			Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Fair Value
Assets
Cash equivalents	$	—	$	17,950	$	—		$	17,950		$	—	$	10,394	$	—	$	10,394
Available-for-sale securities		—		24,023		—			24,023			—		33,190		—		33,190
Total assets	$	—	$	41,973	$	—		$	41,973		$	—	$	43,584	$	—	$	43,584

Liabilities
Contingent consideration	$	—	$	—	$	(3,009	)	$	(3,009	)
Total liabilities	$	—	$	—	$	(3,009	)	$	(3,009	)

~~The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2018:~~

~~The following table summarizes the changes~~Changes in the contingent consideration liabilities measured at fair value using Level 3 inputs were as follows:

Settlements of contingent consideration liabilities consisted of payments to the sellers of NorMedix for revenue and value-creating milestones achieved. For the ~~three~~six months ended March 31, 2020, acquisition-related contingent consideration payments totaling $3.2 million were classified as $0.6 million and $2.6 million in cash flows used in operating and financing activities, respectively, in the condensed consolidated statements of cash flows. For the six months ended March 31, 2019, acquisition-related contingent consideration payments totaling $11.0 million were classified as $2.0 million and ~~2018:~~$9.0 million in cash flows used in operating and financing activities, respectively, in the condensed consolidated statements of cash flows.

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 ~~2019 to date, or~~2020 and fiscal ~~2018.~~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 obligations — The values of 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 20.5%, 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. Non-revenue milestones for the NorMedix acquisition that have not already been achieved were projected to have a 5%-100% probability of achievement and expected payments were discounted using the Company’s estimated cost of debt of 6.0%. To the extent that actual results differ from these estimates, the fair value of the contingent consideration liabilities could change significantly during the contingency periods. 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 was denominated in Euros. Foreign currency translation gains and losses are recorded as this obligation is marked to exchange rates at period-end and on the date of settlement.

Investments consisted principally of commercial paper and corporate bond securities and are classified as available-for-sale as of March 31, ~~2019~~2020 and September 30, ~~2018.~~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 income ~~(loss)~~ 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 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. This adjustment 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:

	March 31, 2019									March 31, 2020
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
Short-term commercial paper and corporate bonds	$	24,030	$	—	$	(7	)	$	24,023
Commercial paper and corporate bonds										$	33,356	$	—	$	(166	)	$	33,190
Total	$	24,030	$	—	$	(7	)	$	24,023	$	33,356	$	—	$	(166	)	$	33,190

	September 30, 2018									September 30, 2019
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
Short-term commercial paper and corporate bonds	$	41,403	$	—	$	(51	)	$	41,352
Commercial paper and corporate bonds										$	24,918	$	13	$	—	$	24,931
Total	$	41,403	$	—	$	(51	)	$	41,352	$	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:

	March 31,		September 30,		March 31,		September 30,
(Dollars in thousands)	2019		2018		2020		2019
Raw materials	$	1,969	$	1,890	$	2,997	$	2,034
Work-in process		807		780		1,521		892
Finished products		1,569		1,346		1,222		1,575
Total	$	4,345	$	4,016	$	5,740	$	4,501

	March 31,		September 30,		March 31,		September 30,
(Dollars in thousands)	2019		2018		2020		2019
ViaCyte, Inc.	$	479	$	479	$	—	$	479
Operating lease right-of-use assets						2,234		—
Other noncurrent assets		1,602		967		2,126		1,645
Other assets, net	$	2,081	$	1,446
Other assets					$	4,360	$	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~~

As of September 30, 2019, the balance of the investment of $0.5 million, which iswas net of previously recorded other-than-temporary impairments of $4.8 million, iswas accounted for under the cost method and ~~represents~~represented 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. In the second quarter of fiscal 2020, the Company recorded a $0.5 million other-than-temporary impairment loss based on a current financing round and market valuations to reduce the carrying value of the investment to zero.

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~~Intangible asset amortization expense ofwas $0.6 million and $0.7 million for ~~both~~ the three ~~month periods~~months ended March 31, 2020 and 2019, respectively, and ~~2018. The Company recorded amortization expense of~~ $1.3 million ~~and $1.4 million~~ for each of the six months ended March 31, ~~2019~~2020 and ~~2018, respectively.~~2019.

	March 31, 2019									March 31, 2020
(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	$	17,687	$	(10,022	)	$	7,665		8.9	$	17,460	$	(11,404	)	$	6,056
Developed technology		11.5		9,563		(2,780	)		6,783		11.5	$	9,510	$	(3,650	)	$	5,860
Non-compete		5.0		230		(173	)		57		5.0	$	230	$	(219	)	$	11
Patents and other		16.5		2,321		(1,644	)		677		16.5	$	2,321	$	(1,791	)	$	530
Subtotal				29,801		(14,619	)		15,182
Total definite-lived intangible assets													29,521		(17,064	)		12,457
Unamortized intangible assets:
In-process research and development				258		—			258
Trademarks and trade names				580		—			580				580		—			580
Total			$	30,639	$	(14,619	)	$	16,020
Total intangible assets												$	30,101	$	(17,064	)	$	13,037

	September 30, 2018									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	$	18,086	$	(9,377	)	$	8,709		8.9	$	17,374	$	(10,661	)	$	6,713
Developed technology		11.5		9,656		(2,361	)		7,295		11.5		9,490		(3,196	)		6,294
Non-compete		5.0		230		(150	)		80		5.0		230		(196	)		34
Patents and other		16.5		2,321		(1,569	)		752		16.5		2,321		(1,716	)		605
Subtotal				30,293		(13,457	)		16,836
Total definite-lived intangible assets													29,415		(15,769	)		13,646
Unamortized intangible assets:
In-process research and development				267		—			267
Trademarks and trade names				580		—			580				580		—			580
Total			$	31,140	$	(13,457	)	$	17,683
Total intangible assets												$	29,995	$	(15,769	)	$	14,226

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

Remainder of 2019	$	1,317
2020		2,458
Remainder of 2020			$	1,177
2021		2,319		2,287
2022		2,279		2,247
2023		1,685		1,596
2024		1,611		1,591
2025				1,532

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~~and indicate that the carrying amount of goodwill may be impaired.

~~Goodwill as of March 31, 2019 and September 30, 2018 totaled $26.5 million and $27.0 million, respectively.~~ 14

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 ~~2018~~2019 annual impairment test which utilized a quantitative assessment. The carrying amount of goodwill was evaluated as of March 31, 2020 with consideration of macroeconomic, industry and Company-specific events and circumstances. As of and for the six months ended March 31, 2020, there have been no events or circumstances that have occurred ~~in the first six months of fiscal 2019~~ to indicate it is more likely than not that goodwill ~~has been impaired.~~was impaired for either of the Company's reporting units.

~~The change~~Changes in the carrying amount of goodwill by segment ~~for the six months ended March 31, 2019 was~~were as follows:

(Dollars in thousands)	In Vitro Diagnostics		Medical Device			Total			In Vitro Diagnostics		Medical Device		Total
Balance as of September 30, 2018	$	8,010	$	19,022		$	27,032
Balance as of September 30, 2019									$	8,010	$	18,161	$	26,171
Currency translation adjustment		—		(483	)		(483	)		—		105		105
Balance as of March 31, 2019	$	8,010	$	18,539		$	26,549
Balance as of March 31, 2020									$	8,010	$	18,266	$	26,276

	March 31,		September 30,		March 31,		September 30,
(Dollars in thousands)	2019		2018		2020		2019
Accrued professional fees	$	270	$	311	$	348	$	434
Accrued clinical study expense		1,876		2,839		1,639		2,163
Accrued purchases		1,389		533		1,467		679
Customer claim		—		1,000
Construction in progress		—		1,199
Deferred rent		125		121
Acquisition of in process research and development		965		—		145		989
Due to customers						490		19
Operating lease liability, current portion						354		—
Deferred rent, current portion						—		130
Other		472		262		202		376
Total	$	5,097	$	6,265
Accrued other liabilities					$	4,645	$	4,790

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~~The Company recognizes 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~~Stock-based compensation ~~expenses were allocated to~~expense was reported as follows in the ~~following expense categories:~~condensed consolidated statements of operations:

	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	March 31,				March 31,				March 31,				March 31,
(Dollars in thousands)	2019		2018		2019		2018		2020		2019		2020		2019
Product costs	$	32	$	23	$	64	$	17	$	15	$	32	$	48	$	64
Research and development		178		179		391		337		168		178		430		391
Selling, general and administrative		749		899		1,735		1,649		1,121		749		2,219		1,735
Total	$	959	$	1,101	$	2,190	$	2,003	$	1,304	$	959	$	2,697	$	2,190

As of March 31, ~~2019,~~2020, approximately ~~$9.2~~$9.5 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 2.4 years. The unrecognized compensation costs above include $0.2 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~~Stock option fair value assumptions and the weighted average ~~per share~~ fair ~~values~~value of stock options granted ~~during the three months ended March 31, 2019 and 2018~~ were ~~$18.12 and $9.00, respectively,~~ ~~and $18.28 and $10.32 during the six months ended March 31, 2019 and 2018, respectively~~.as follows:

	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	March 31,						March 31,						March 31,						March 31,
	2019			2018			2019			2018			2020			2019			2020			2019
Stock option fair value assumptions:
Risk-free interest rates		2.5	%		2.6	%		2.8	%		2.1	%		1.4	%		2.5	%		1.6	%		2.8	%
Expected life (years)		4.5			4.8			4.5			4.8			4.7			4.5			4.6			4.5
Expected volatility		34.9	%		33.0	%		33.4	%		33.0	%		38.4	%		34.9	%		37.9	%		33.4	%
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%		—	%		—	%		—	%		—	%
Weighted average grant date fair value of stock options granted													$	13.65		$	18.12		$	14.24		$	18.28

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 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%~~zero 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 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 monthly 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 expense table above includes stock option expenses recognized related to these awards, which totaled ~~$0.5~~$0.6 million and ~~$0.4~~$0.5 million for the three months ended March 31, 2020 and 2019, respectively, and ~~2018, respectively,~~ ~~and $1.0~~$1.2 million and ~~$0.8~~$1.0 million for the six months ended March 31, 2020 and 2019, ~~and 2018, respectively~~.respectively.

The total pre-tax intrinsic value of options exercised ~~during~~was $0.9 million and less than $0.1 million for the three months ended March 31, 2020 and 2019, respectively, and ~~2018 was less than $0.1~~$1.1 million and ~~$3.1 million, respectively,~~ ~~and~~ $0.1 ~~million and $3.3~~ million for the six months ended March 31, 2020 and 2019, ~~and 2018, respectively. The intrinsic~~respectively. 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 six months ended March 31, ~~2019~~2020 and ~~2018,~~2019, the Company awarded ~~43,713~~60,112 and ~~53,455~~43,713 Restricted Stock shares, respectively, to certain key employees and officers. Forfeiture of ~~800~~12,980 and ~~3,482~~800 Restricted Stock

shares occurred during the six months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. As of March 31, ~~2019~~2020 and September 30, ~~2018, 94,971~~2019, 95,359 and ~~85,424~~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 ~~$0.4~~$0.5 million and ~~$0.3~~$0.4 million for the three months ended March 31, 2020 and 2019, respectively, and ~~2018, respectively,~~ ~~and $0.8~~$1.0 million and ~~$0.5~~$0.8 million for the six months ended March 31, 2020 and 2019, ~~and 2018, respectively~~.respectively.

The Company has entered into performance share agreements with certain key employees 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 ~~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 ~~2016~~2017 were finalized in the ~~six months ended March 31, 2019~~first quarter of fiscal 2020 and resulted in the issuance of ~~76,396~~67,653 shares, ~~(maximum was 132,676 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 Performance Shares expense ~~(benefit)~~ recognized related to these awards, which totaled $(0.2) million and ~~$0.2~~$(0.1) million for the three ~~months ended March 31, 2019~~ and ~~2018, respectively,~~ ~~and~~ ~~$(0.1) million and $0.4 million for the~~ six months ended March 31, 2019, respectively. Performance Shares expense recognized in the three and ~~2018, respectively~~.six months ended March 31, 2020 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 for awards granted in fiscal 2017. There ~~were~~have been no Performance Share awards granted insubsequent to fiscal ~~2018 and none, to date, in fiscal 2019.~~

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 as of March 31, 2019:

Under the 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 March 31, 2019 and September 30, 2018, there was $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 and six months ended March 31, 2019 and 2018 totaled less than $0.1 million in each respective period. The stock-based compensation table includes the Stock Purchase Plan expenses.2017.

During the six months ended March 31, ~~2019~~2020 and ~~2018,~~2019, the Company awarded ~~11,871~~16,858 and ~~21,265~~11,871 restricted stock units (“RSUs”), respectively, to non-employee directors and certain key employees in foreign jurisdictions. ~~As of March 31, 2019 and September 30, 2018, 62,420 and 60,440 RSUs were outstanding, respectively.~~ RSU awards are not considered issued or outstanding common stock of the Company until they vest. As of March 31, 2020 and September 30, 2019, outstanding, unvested RSUs totaled 69,784 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. The stock-based compensation expense table includes RSU expenses recognized related to these awards, which totaled $0.2 million and $0.1 million for ~~both~~ the ~~three-month periods~~three months ended March 31, ~~2019~~2020 and ~~2018~~2019, respectively, and ~~$0.3~~$0.3 million ~~and $0.2~~ for each of the six months ended March 31, ~~2019~~2020 and ~~2018, respectively~~2019.

Directors 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 subsequent deferral elections updated~~ quarterly. During the six months ended March 31, 2020 and 2019, 1,846 and ~~2018,~~ 1,422 ~~and 1,432~~ units, respectively, were issued with a total fair value of less than $0.1 million in each period. ~~As of March 31, 2019 and September 30, 2018, outstanding,~~Outstanding, fully vested DSUs totaled ~~28,413~~31,375 and ~~26,991,~~29,729 as of March 31, 2020 and September 30, 2019, respectively. Stock-based compensation expense related to DSU awards totaled less than $0.1 million for both the ~~three-month periods~~three months ended March 31, 2020 and 2019 and ~~2018 and~~ ~~$0.1~~$0.1 million for ~~both~~each the ~~six-month periods~~six months ended March 31, 2020 and 2019.

Under the amended 1999 Employee Stock Purchase Plan (“Employee 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 contribute up to 10% of their annual compensation, with a limit of $25,000, to purchase the Company’s common stock at purchase prices defined within the provisions of the Employee Stock Purchase Plan. As of March 31, 2020 and September 30, 2019, there was less than $0.1 million of employee contributions to the Employee Stock Purchase Plan included in accrued liabilities in the condensed consolidated balance sheets. Stock-based compensation expense recognized related to the Employee Stock Purchase Plan for the three and ~~2018~~.six months ended March 31, 2020 and 2019 totaled less than $0.1 million in each respective period. The stock-based compensation expense table includes the Employee Stock Purchase Plan expenses.

Basic net income ~~(loss)~~ per common share is calculated by dividing net income ~~(loss)~~ by the weighted average number of common shares outstanding during the period. Diluted net income ~~(loss)~~ per common share is computed by dividing net income ~~(loss)~~ 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. However, these shares have been excluded from the calculation of diluted net loss per share as their effect is antidilutive for the six months ended March 31, 2018, as a result of the net loss incurred for the period. Therefore, diluted weighted average number of shares outstanding and diluted net loss per share were the same as basic weighted average number of shares outstanding and net loss per share for the six months ended March 31, 2018.

The calculation of weighted average diluted shares outstanding excludes outstanding stock options associated with the right to purchase less than 0.1 million and 0.2 million shares of common stock for the three ~~and six~~ months ended March 31, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$0.2~~less than 0.1 million and 0.2 million shares of common stock infor the six months ended March 31, 2020 and 2019, respectively, as their inclusion would have had an antidilutive effect on diluted net income per share for those periods.

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

	Three Months Ended				Six Months Ended					Three Months Ended				Six Months Ended
	March 31,				March 31,					March 31,				March 31,
	2019		2018		2019		2018			2020		2019		2020		2019
Net income (loss) available to common shareholders	$	1,262	$	1,534	$	2,572	$	(22	)
Net income available to common shareholders										$	1,462	$	1,262	$	1,610	$	2,572
Basic weighted average shares outstanding		13,390		13,102		13,379		13,078			13,507		13,390		13,474		13,379
Dilutive effect of outstanding stock options, non-vested restricted stock, restricted stock units, deferred stock units and performance shares		395		363		437		—
Dilutive effect of outstanding stock options, nonvested restricted stock, restricted stock units, deferred stock units and performance shares											244		395		305		437
Diluted weighted average shares outstanding		13,785		13,465		13,816		13,078			13,751		13,785		13,779		13,816

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~~The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), enacted on March 27, 2020, includes significant business tax provisions. In particular, the CARES Act modified the rules associated with net operating losses (“NOLs”) and made technical corrections to tax depreciation methods for qualified improvement property. Under the temporary provisions of CARES Act, NOL carryforwards and carrybacks may offset 100% of taxable income ~~tax reporting,~~for taxable years beginning before 2021. In addition, NOLs arising in 2018, 2019 and 2020 taxable years may be carried back to each of the ~~Company estimates its annual effective tax rate and applies it~~preceding five years to ~~year-to-date pretax income (loss), excluding unusual or infrequently occurring discrete items. Tax jurisdictions with losses for which tax benefits cannot be realized are excluded.~~ generate a refund.

The Company recorded an income tax benefit of ~~$0.2~~$1.9 million and ~~$1.2~~$0.2 million for the three months ended March 31, 2020 and 2019, respectively, and ~~2018, respectively. The Company recorded income tax benefit of $0.3~~$2.2 million and ~~$0.2~~$0.3 million for the six months ended March 31, 2020 and 2019, respectively. In the three and ~~2018. In December 2017,~~six months ended March 31, 2020, the ~~Tax Cuts and Jobs~~income tax benefit includes a discrete tax benefit of $1.8 million as result of our ability under the CARES Act ~~tax legislation was signed into law, which reduced~~to carry back NOLs incurred to periods when the ~~U.S. Federal~~ statutory tax rate ~~from~~was 35% to 21%, among other changes. As a result of the enactment of this legislation, the tax provision for the first six months of fiscal 2018 included discrete tax expense of $1.2 million from the Company’s net deferred tax assets revaluation based on the enactedversus our current tax rate of 21%~~, as compared with the previous rate of 35%~~.

The effective income tax rate for the three and six months ended March 31, 2020 and 2019 differs from the U.S. federal statutory tax rate of 21% primarily due to the discrete tax benefits recognized under the CARES Act, favorable impacts of ~~increased~~the U.S. federal research and development tax credits in both periods, ~~as well as~~ stock award activity in the six-month ~~period. These benefits were partly offset by non-deductible acquired intangible asset amortization, as well as~~period, and operating ~~losses incurred in Ireland,~~results of our Irish subsidiary, where tax ~~benefits are~~benefit is offset by a valuation allowance. The ~~effective income tax rate for the three and six months ended March 31, 2018 differs from the U.S. federal statutory tax rate of 24.5%~~

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 losses on Euro-denominated contingent consideration liabilities. These increases to the effective income tax rate were partially offset by the U.S. federal research and development income tax credit~~. The effective income tax rate for the three months ended March 31, 2019 and 2018 was impacted by~~Company recognized discrete tax benefits ~~of less than $0.1 million and $0.2 million, respectively,~~ related to ~~share~~stock-based compensation awards vested, expired, cancelled and exercised ~~during the periods. The effective income tax rate for~~of less than $0.1 million in each of three months ended March 31, 2020 and 2019 and $0.3 million and $0.5 million in the six months ended March 31, 2020 and 2019, ~~and 2018 was impacted by discrete tax benefits of $0.5 million and $0.4 million, respectively, related to~~ ~~share awards vested, expired, cancelled and exercised~~ ~~during the periods.~~respectively.

The total amount of unrecognized tax benefits, excluding interest and penalties that, if recognized, would affect the effective tax rate is ~~$1.7~~$2.7 million and ~~$1.4~~$2.1 million as of March 31, ~~2019~~2020 and September 30, ~~2018,~~2019, respectively. Interest and penalties related to unrecognized tax benefits are recorded in the income tax ~~(benefit) provision.~~benefit.

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 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 ~~2015~~2016 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 March 31, 2019 and September 30, 2018, there~~There were no undistributed earnings in foreign ~~subsidiaries.~~ ~~The Internal Revenue Service (“IRS”) completed an examination~~subsidiaries as of ~~our fiscal 2016 U.S. federal income tax return in the third quarter of fiscal 2018, with an immaterial payment made associated primarily with timing adjustments.~~March 31, 2020 and September 30, 2019.

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.

~~The tables below present segment~~Segment revenue, operating (loss) income, ~~(loss)~~ and depreciation and amortization, were as follows:

	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	March 31,						March 31,						March 31,						March 31,
(Dollars in thousands)	2019			2018			2019			2018			2020			2019			2020			2019
Revenue:
Medical Device	$	17,301		$	14,052		$	34,559		$	26,826		$	16,304		$	17,301		$	33,708		$	34,559
In Vitro Diagnostics		5,375			5,006			10,358			9,245			6,518			5,375			11,730			10,358
Total revenue	$	22,676		$	19,058		$	44,917		$	36,071		$	22,822		$	22,676		$	45,438		$	44,917

Operating income (loss):
Operating (loss) income:
Medical Device	$	(23	)	$	232		$	334		$	(157	)	$	(1,453	)	$	(23	)	$	(1,876	)	$	334
In Vitro Diagnostics		2,915			2,423			5,370			4,093			3,462			2,915			6,061			5,370
Total segment operating income		2,892			2,655			5,704			3,936			2,009			2,892			4,185			5,704
Corporate		(2,027	)		(2,130	)		(4,127	)		(4,044	)		(2,165	)		(2,027	)		(4,607	)		(4,127	)
Total operating income (loss)	$	865		$	525		$	1,577		$	(108	)
Total operating (loss) income													$	(156	)	$	865		$	(422	)	$	1,577

Depreciation and amortization:
Medical Device	$	1,447		$	1,324		$	2,835		$	2,596		$	1,439		$	1,447		$	2,894		$	2,835
In Vitro Diagnostics		117			100			233			190	��		109			117			219			233
Corporate		255			162			507			320			248			255			487			507
Total depreciation and amortization	$	1,819		$	1,586		$	3,575		$	3,106		$	1,796		$	1,819		$	3,600		$	3,575

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 net present value of future minimum lease payments recorded upon lease commencement is reduced by the discounted value of any leasehold improvement incentives payable to the Company considered to be in-substance fixed payments. 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 right-of-use assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluates renewal options, and when they are reasonably certain to be exercised, the renewal period is included in the lease term.

Operating lease cost was $0.1 million and $0.3 million for the three and six months ended March 31, 2020, respectively. Cash paid for operating lease liabilities approximated operating lease cost for the three and six months ended March 31, 2020.

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

As of March 31, 2020, the weighted average remaining lease term for operating leases was 7.9 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.

In April 2018, a customer notified the Company that it believed it overpaid hydrophilic coating royalties to the Company from January 2009 through December 2017. During fiscal 2018, the Company recorded $1.0 million in selling, general and administrative expenses related to this claim, which was included in other accrued liabilities as of September 30, 2018. During the quarter ended March 31, 2019, the Company settled this claim and made a payment to the customer totaling $0.4 million, resulting in a reduction of selling, general and administrative expenses of $0.6 million for the three and six months ended March 31, 2019.

InnoCore Technologies BV. In ~~March~~fiscal 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 the Company to make an annual minimum payment of 200,000 euros (equivalent to ~~$224,000~~$220,000 using a euro to US dollar exchange rate of ~~$1.1217~~$1.0999 to the Euro as of March 31, ~~2019)~~2020) until the last patent expires, which is currently estimated to be September 2027. The total minimum future payments associated with this license are approximately ~~$2.0~~$1.6 million as of March 31, ~~2019.~~2020. The license is currently utilized by one of the Company’s drug delivery customers.

~~Operating Leases.~~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 and six months ended March 31, 2019 was $0.1~~SurVeil DCB, including pass-through expenses paid by the CROs, of up to $25 million ~~and $0.2 million, respectively. Rent expense for~~in the three and six months ended March 31, 2018 was $0.1 million and $0.2 million, respectively. In November 2017, 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. Payments under the lease agreement over the ten-year lease term commenced in May 2018. In connection with this lease, the Company deposited $0.4 million into a restricted cash account, which was returned to the Company during the six months ended March 31, 2019. Annual commitments pursuant to operating lease agreements in place asaggregate. As of March 31, ~~2019~~ 2020, an estimated $10.5 million remains to be paid by the Company on these contracts, which may vary depending on actual pass-through expenses incurred to execute the trial. The Company estimates that the total cost of the 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 ~~remainder~~terminated trial.

Asset Acquisitions. In the fourth quarter of fiscal 2019, ~~and each of the next five fiscal years are as follows~~ ~~(in thousands)~~:

~~Asset Acquisition.~~ ~~In May 2018,~~ the Company ~~entered into an asset purchase agreement with Embolitech, LLC to acquire~~acquired certain intellectual property assets supporting ongoing development of the Company’s medical device pipeline and paid the sellers $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 2021.

In fiscal 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~~in fiscal ~~2018. Additionally,~~2018 and $1.0 million in the second quarter of fiscal 2020. The Company is obligated to pay ~~$3.5~~additional installments totaling $2.5 million in ~~several installments beginning January 2020 and ending December 2023.~~fiscal 2022 through 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 March 31, ~~2019 and September 30, 2018, $2.1~~2020, $0.1 million and ~~$2.9~~$2.2 million ~~respectively,~~related to these asset acquisitions is included in other accrued liabilities and other long-term liabilities, respectively, on the condensed consolidated balance ~~sheets~~sheets. As of September 30, 2019, $1.0 million and $2.1 million related to ~~the Embolitech Transaction. As of March 31, 2019 $1.0 million~~these asset acquisitions is included in other ~~current~~accrued liabilities and other long-term liabilities, respectively, on the ~~condensed~~ consolidated balance ~~sheets related to the Embolitech Transaction.~~sheets.

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 Quarterly Report on 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, ~~2018.~~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 2019,~~industry, with the mission of improving the detection and treatment of disease. We remain committed to developing medical device products and platforms leveraging the technologies and manufacturing capabilities in our ~~revenue performance continues to be driven by our core Medical Device and In Vitro Diagnostics (“IVD”) businesses. Revenue in the~~ Medical Device business ~~is comprised of product sales, hydrophilic coatings royalties and license fees, and contract research and development services. Medical Device segment revenue increased 23%~~unit for the ~~second quarter~~treatment of ~~fiscal 2019 as compared with the same prior-year period. Medical Device revenue was favorably impacted by increased medical device product sales, license fee revenue from our Abbott Vascular, Inc.~~peripheral arterial disease (“~~Abbott”~~PAD”) agreement described below, and contract research and development services. Our IVD business derives its revenue from diagnostic technology product sales. Revenue from the IVD segment increased 7% in the second quarter of fiscal 2019 as compared with the same prior-year period, driven by growth across several product categories.

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; and (3) ~~contract coating, design, research and commercial development fees generated on customer projects~~. Revenue fluctuates from quarter to quarter depending on, among other factors: orders of our medical device and diagnostics products; our customers’ success in selling products incorporating our technologies; the timing of introductions of licensed products by us and our customers; the timing of introductions of products that compete with our customers’ products; the number of 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, medical device, diagnostic and other ~~products sold to customers.~~

~~Since fiscal 2013, with our investment in~~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.

A novel strain of coronavirus was first identified in Wuhan, China in December 2019. The disease caused by it, COVID-19, was declared a global pandemic by the World Health Organization in March 2020. On March 18, 2020, the Centers for Medicare & Medicaid Services (“CMS”) released guidance for U.S. healthcare providers to limit all elective medical procedures in order to conserve personal protective equipment and limit exposure to COVID-19 during the pendency of the pandemic. In addition to limiting elective medical procedures, many hospitals and other healthcare providers have strictly limited access to their facilities during the pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and healthcare delivery, led to social distancing recommendation, and created significant volatility in financial markets.

In response to the pandemic and business disruptions, first and foremost, we have ~~been focused on a strategy~~prioritized the health and safety of our employees, customers, suppliers and others with whom we partner in our business activities. We have instructed employees to ~~develop~~work from home when possible and to maintain recommended physical distancing when working in our facilities. We also have eliminated non-essential in-person contact with customers, suppliers and other third parties.

Many of our customers use our licensed technology and purchased materials to manufacture ~~proprietary medical~~products used in procedures impacted by the CMS guidance to limit elective procedures. In addition, our customers and business partners need access to healthcare providers and facilities to effectively market, distribute and sell products incorporating our coating and device technologies, as well as our whole-product solutions. Likewise, we and our business partners need access to healthcare providers and facilities to conduct clinical trials and other activities required to achieve regulatory clearing for our products ~~that combine our surface modification coatings with medical devices or~~under development. We are carefully monitoring rapidly evolving changes in healthcare delivery systems ~~(“whole-product solutions”). Our aim is~~and may adjust our operating and product development plans accordingly.

Given the unprecedented and dynamic nature of the COVID-19 pandemic, we cannot reasonably estimate the impacts it may have on our financial condition, results of operations or cash flows in the future. However, we expect that reductions in elective procedures in response to provide customers earlier access to highly differentiated whole-product solutions that address unmet clinical needs. On February 26, 2018, we entered into an agreement with Abbott (the “Abbott Agreement”) whereby AbbottCMS guidance will have ~~exclusive worldwide commercialization rights for Surmodics’ SurVeil®~~ ~~DCB to treat~~an adverse impact, which may be material, on our future revenues, profitability and cash flows. The extent and duration of that impact will depend upon the ~~superficial femoral artery~~ ~~(the “SurVeil~~ ~~DCB”), 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~~extent of procedure postponements and ~~arteriovenous (AV) fistula DCB products, which are currently in pre-clinical development and a first-in human clinical study, respectively. Upon~~ the ~~regulatory approval~~duration of the ~~SurVeil~~ DCB, Surmodics will be responsible for the manufacture and supply of clinical and commercial quantities of the product and will realize revenue from product sales to Abbott, which will include a share of profits resulting from third-party sales. In the quarter ended March 31, 2019, we recognized revenue of $1.6 million related to the Abbott Agreement, which is included in royalties and license fees in our medical device segment. Revenue from the upfront fee is recognized as regulatory and clinical activities, primarily the TRANSCEND clinical trial, are performed. Variable consideration from the contingent milestones is excluded from revenue until the underlying contingencies are resolved, at which point the milestone will be recognized as the promised regulatory and clinical activities are performed. In December 2018, we commenced a first-in-human clinical study of our Avess™ DCB for treatment of AV fistulae~~, commonly associated with hemodialysis. We expect to complete enrollment in this study by the end of fiscal 2019.~~pandemic.

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 datesProduct Development

Our business model 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 fourth-generation~~ ~~PhotoLink~~ technology is protected by a family of patents that begin to expire in November 2019. The royalty revenue associated with our fourth-generation technology was approximately 21% of our consolidated fiscal 2018 revenue. Of the license agreements using our fourth-generation technology, most continue to generate royalty revenue at a reduced royalty rate beyond patent expiration. We also continue to generate significant royalty

revenue from license agreements leveraging our earlier generation coating technologies that continue to provide royalties for our “know-how” or other proprietary rights. Our remaining hydrophilic royalty revenue is primarily derived from other Surmodics coating technologies that are protected by a number of patents extending to fiscal 2035. While we are actively seeking to convert our customers to an advanced generation 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.

~~We continue to invest in~~ our whole-product solutions strategy ~~through research~~is to design, develop and ~~development (“R&D”) activities in~~manufacture highly differentiated products that incorporate our proprietary ~~products pipeline, including~~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 ~~activities necessary~~capabilities, and in fiscal 2020, we intend to ~~bring these~~make additional investments to obtain clinical data, reduce the time from product development to commercialization, and drive clinician engagement with our products after approval to ~~market.~~optimize adoption.

~~The continued~~Below is a brief summary of our pipeline of medical device products under development ~~of new products is critical~~and recently commercialized, grouped by product family.

In fiscal 2019, we submitted all required modules to ~~our strategy to offer whole-product solutions~~the European Notified Body for the ~~medical device industry.~~Conformité Européenne Mark (“CE Mark”) approval prerequisite for commercialization in the European Union. In our first quarter of fiscal 2020, due to an ongoing regulatory matter concerning the long-term mortality signal from paclitaxel-coated devices, the European Notified Body temporarily paused CE Mark review of all new paclitaxel-coated devices. As of the second quarter of fiscal 2020, the European Notified Body has resumed review of our application and is moving steadily through the latter stages of the approval process. We remain confident in the capability of our devices and the quality of the data that supports regulatory approval.

For more information regarding our product development and ~~18 outside~~commercialization strategy, see Part I, Item 1 of our Annual Report on Form 10-K for the ~~U.S. The trial’s primary efficacy endpoint~~fiscal year ended September 30, 2019.

Our fourth-generation PhotoLink hydrophilic technology is ~~primary patency, defined as~~protected by a ~~composite~~family 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 began enrollment in the TRANSCEND clinical trialpatents that expired in the first quarter of fiscal ~~2018. Until regulatory approvals have been obtained, the~~ ~~SurVeil~~ ~~DCB is not approved~~2020 in all countries where patent coverage existed for commercial sale. 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 total cost of the TRANSCEND clinical trial will range between $32 million to $40 million from inception to completion. ~~To the extent that we achieve certain agreed-upon milestones in connection~~this technology. The Medical Device business royalty revenue associated with ~~the TRANSCEND clinical trial, we may receive up to $67 million of additional milestone payments pursuant to the Abbott Agreement.~~

On March 15, 2019, the FDA issued a communication (the “March 15 communication”) to healthcare providers about the potential for increased long-term mortality after use of paclitaxel-coated balloons and paclitaxel-eluting stents (collectively “paclitaxel-coated products”) to treat peripheral arterial disease (“PAD”) in the femoropopliteal artery. The communication updates a previous notification from the FDA on the same topic, whichour fourth-generation hydrophilic coating technology was in response to meta-analysis of randomized trials published in the Journal of the American Heart Association in December 2018. Following the March 15 communication, the Company temporarily paused patient enrollment in TRANSCEND and sought guidance from the FDA regarding the recommendations contained in the communication and their impact on the TRANSCEND trial. Based on discussions with FDA, the Company took several actions in response to the FDA’s recommendations, including updates to investigator communications, patient Informed Consent Forms (“ICF”), and data safety review and patient follow-up procedures. Many of the TRANSCEND clinical trial sites have secured Institutional Review Board or Ethics Committee approval of the updated ICF and are actively enrolling and randomizing patients. The March 15 communication and ensuing developments have resulted in uncertainty regarding our goal to complete enrollment in the TRANSCEND clinical trial before the endapproximately 21% of our fiscal ~~year. As~~2019 revenue. Of the license agreements using our early-generation technologies, most continue to generate royalty revenue for know-how and other proprietary rights, at a ~~result, we anticipate fiscal 2019 revenue from the $25 million upfront payment of $7.0 to $7.5 million from the Abbott Agreement, of which $4.0 million has been recognized through March 31, 2019.~~

We are executing on our plan to develop and commercialize 12-15 medical device products by the end of fiscal 2023. Additional planned activities include initiation of surface modification experiments that improve medical device performance, as well as incorporationreduced royalty rate, beyond patent expiration. The remainder of our ~~catheter and thrombectomy technology platforms into various~~royalty revenues are derived from our other ~~devices intended for the emerging peripheral vascular treatment market. We~~coatings that are also continuing to develop other products that utilize our DCB platform, including DCB’s for treatment of PAD below-the-knee and AV fistulae. We may also acquire technologies, when appropriate, to complement or integrate with our existing proprietary products.

~~We prioritize our internal R&D programs based on~~protected by a number of factors, including a program’s strategic fit, commercial impact and market size, potential competitive advantages, technical feasibility, and the amount of investment required. The measures and metrics usedpatents that extend 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 to complete development.

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 internal R&D and customer 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 and internal project activity increases or decreases.at least fiscal 2035.

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, and are updated at least quarterly.~~conditions. For the six months ended March 31, ~~2019,~~2020, there were no significant changes in our critical accounting ~~policies, other than those required by the adoption of ASC Topic 606 -~~ ~~Revenue from Contracts with Customers~~. See Notes 1 and 2 to our Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for disclosure of these policies, as well as a summary of the impact of the adoption of ASC Topic 606 on the opening consolidated balance sheet as of October 1, 2018, as compared with the consolidated balance sheet previously presented as of September 30, 2018.

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, ~~2018.~~2019.

Revenue. Revenue for the second quarter of fiscal ~~2019~~2020 was ~~$22.7~~$22.8 million, an increase of ~~$3.6 million, or 19.0%~~0.6%, as compared with the second quarter of fiscal ~~2018.~~ 2019. Revenue for the ~~first~~ six months ~~of fiscal 2019~~ended March 31, 2020 was ~~$44.9~~$45.4 million, an increase of ~~$8.8 million, or 24.5%~~1.2%, as compared with the ~~first~~ six months ~~of fiscal 2018. T~~heended March 31, 2019. The following is a summary of revenue by operating segment.

															Three Months Ended March 31,								Six Months Ended March 31,
	Three Months Ended March 31,				%			Six Months Ended March 31,				%								%							%
(Dollars in thousands)	2019		2018		Change			2019		2018		Change			2020		2019			Change			2020		2019		Change
Revenue
Medical Device	$	17,301	$	14,052		23.1	%	$	34,559	$	26,826		28.8	%	$	16,304	$	17,301			(5.8	)%	$	33,708	$	34,559		(2.5	)%
In Vitro Diagnostics		5,375		5,006		7.4	%		10,358		9,245		12.0	%		6,518		5,375	��		21.3	%		11,730		10,358		13.2	%
Total Revenue	$	22,676	$	19,058		19.0	%	$	44,917	$	36,071		24.5	%	$	22,822	$	22,676			0.6	%	$	45,438	$	44,917		1.2	%

Medical Device. Medical Device revenue was ~~$17.3~~$16.3 million in the second quarter of fiscal ~~2019, an increase~~2020, a decrease of ~~23.1%~~5.8% as compared with ~~$14.1~~$17.3 million for the second quarter of fiscal ~~2018.~~ 2019. Medical Device revenue for the six months ended March 31, 2020 was $33.7 million, a decrease of 2.5% as compared with $34.6 million infor the six months ended March 31, 2019.

Product sales increased 19.7%, or $0.9 million, for the second quarter of fiscal 2020 as compared with the prior-year quarter and increased 12.2%, or $1.1 million, for the first six months of fiscal ~~2019, an~~2020 compared to the same prior-year period. This increase ~~of 29%~~was due primarily to increased demand for coatings reagents, as ~~compared with $26.8~~well a modest impact from recently commercialized products.

Royalties and license fee revenue decreased 17.2%, or $1.7 million, for the second quarter of fiscal 2020 and decreased 8.3%, or $1.7 million, for the first six months of fiscal ~~2018.~~

~~Product sales increased 23.6%, or $0.9 million, in the current quarter~~2020, as compared with the ~~prior-year quarter, due primarily to a $0.8 million increase in balloon catheter sales. Additionally, royalties and license fee revenue increased 17.9%, or $1.5 million, in~~same prior year periods. Revenue for the ~~current-year~~ second quarter of fiscal 2020 was negatively impacted by the previously communicated expiration of our fourth-generation hydrophilic patents, as ~~compared with~~well as by the ~~prior-year second quarter,~~postponement of procedures as a result of ~~a $1.1 million increase in~~COVID-19. Additionally, Abbott Agreement license fee revenue ~~from~~for the first six months of fiscal 2020 declined by $1.2 million due to relatively higher necessary spending early in fiscal 2019 to support the TRANSCEND clinical trial during the active trial enrollment phase. For the second quarter of fiscal 2020, Abbott Agreement ~~as well as growth in royalties from our hydrophilic coatings customers. Additionally, a $0.9~~license fee revenue was declined slightly by $0.1 million ~~increase in research,~~compared to the same prior-year period.

Research, development and other revenue indecreased $0.2 million for the ~~fiscal 2019~~ second quarter asof fiscal 2020 and decreased $0.3 million for the first six months of fiscal 2020 compared ~~with~~to the same prior year ~~period resulted from increased revenue from~~periods. These decreases were due to the timing of new product development projects with several of our contract R&D customers.

~~Product sales~~In Vitro Diagnostics. In Vitro Diagnostics revenue increased ~~23.9%~~21.3%, or ~~$1.8~~$1.1 million, for the second quarter of fiscal 2020 and increased 13.2%, or $1.4 million, for the first six months of fiscal ~~2019~~2020, as compared with the same ~~prior-year period, due primarily to a $1.9 million increase~~prior year periods. Order volume from core customers of our distributed antigen products, which fluctuates quarter-to-quarter, was strong in ~~balloon catheter sales. Additionally, royalties and license fee revenue increased 29.2%, or $4.5 million, for~~ the ~~first six months~~second quarter of fiscal ~~2019 as~~2020 compared ~~with~~to the same prior-year ~~period,~~period. Additionally, demand expansion continues for our microarray DNA slide products.

Operating costs and expenses. Major costs and expenses as a ~~result~~percentage of ~~a $3.5 million increase in license fee~~total revenue ~~from~~were as follows:

Product costs. Product gross margin (defined as product revenue less related product costs) was 68.0% and 68.7% of product revenue for the ~~Abbott Agreement, as well as growth in royalties from our hydrophilic coatings customers.~~

~~Additionally, a $1.4 million increase in research, development~~second quarter of fiscal 2020 and ~~other~~2019, respectively, and 67.9% and 66.3% of product revenue for the first six months of fiscal 2020 and 2019, respectively. For both the second quarter and first half of fiscal 2020, product gross margin was unfavorably impacted by product mix within our IVD business, partly offset by the favorable impact of both medical device product mix and leverage on volume. Product gross margin for the first six months of fiscal 2020 was impacted by these same factors, with a greater degree of favorable impact from medical device product mix.

Research and development (R&D) expenses. R&D expenses decreased $1.6 million to 52% of revenue in the second quarter of fiscal 2020, as compared with 60% of revenue for the same ~~prior year period resulted~~prior-year period. For the first six months of fiscal 2020, R&D expenses decreased $1.0 million to 53% of revenue, as compared to 56% of revenue for the same prior-year period. This decrease is principally due to lower clinical trial spending principally for the SurVeil TRANSCEND clinical trial with the progression from active enrollment in fiscal 2019 to patient follow up in fiscal 2020. This was partly offset by personnel investments in quality, technical, regulatory, and proprietary product development.

Selling, general and administrative (SG&A) expenses. SG&A expenses increased $1.9 million to 30% of revenue ~~from projects~~for the second quarter of fiscal 2020, as compared with ~~several~~22% of ~~our contract R&D customers.~~

~~In Vitro Diagnostics. In Vitro Diagnostics~~ revenue for the same prior-year period. For the first six months of fiscal 2020, SG&A expenses increased ~~7.4%~~$2.9 million to ~~$5.4~~30% of revenue, as compared with 24% of revenue for the same prior-year period. Contributing to the increase in SG&A expense was a $0.6 million reduction to expense in the second quarter of fiscal 2019 as compared with $5.0 million for the second quarter of fiscal 2018, primarily due to an increase in sales of our chemical components used in diagnostics tests and microarray slides, partly offset by a decline in sales of distributed antigens. In Vitro Diagnostics revenue increased 12.0% to $10.4 million for the first six months of fiscal 2019 as compared with $9.2 million in the same prior-year period, primarily due to an increase in sales across several product categories, partly offset by a decline in sales of distributed antigens.

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

~~Product costs~~. Product gross margin (defined as product sales less related product costs) was 68.7% and 66.5% of product sales for the second quarter of fiscal 2019 and 2018, respectively. Product gross margin was 66.3% and 65.4% of product sales for the first six months of fiscal 2019 and 2018, respectively. The increase in product gross margin percentage in the three and six months ended March 31, 2019, as compared with the same prior-year periods, was due to increased revenue and product mix changes in our IVD business, as well as favorable impacts of production volume increases in our Irish manufacturing facility. As previously disclosed, the scale-up of our Irish manufacturing facility and growth in sales from that facility are expected to negatively impact product gross margins in our Medical Device business in fiscal 2019 relative to prior years.

~~Research and development (R&D) expenses~~. R&D expenses increased $2.8 million in the second quarter of fiscal 2019, as compared with the same prior-year period. R&D expenses in the first six months of fiscal 2019 increased $6.4 million as compared with the same prior-year period. These increases were primarily the result of higher planned spending for our DCB and proprietary product development and clinical activities, including our TRANSCEND clinical trial. We plan to continue current levels of R&D spending throughout the remainder of fiscal 2019 to support our whole-product solutions strategy, including similar levels of clinical and regulatory costs as we continue enrollment in the TRANSCEND clinical trial for our ~~SurVeil~~ ~~DCB and the first-in-human trial for our~~ ~~Avess~~ ~~DCB. We anticipate fiscal 2019 R&D expense will be in the mid-fifties as a percent of fiscal 2019 revenue.~~

~~Selling, general and administrative (SG&A) expenses~~. SG&A expenses decreased $1.6 million in the second quarter of fiscal 2019 as compared with the same prior-year period. SG&A expenses decreased $0.8 million in the first six months of fiscal 2019, as compared with the same prior-year period. The decreases in SG&A expenses from the prior-year periods is primarily due to a $0.6 million benefitresulting from a ~~customer~~ claim ~~settlement in the second quarter of fiscal 2019 which~~that was settled for less than the amount ~~previously accrued. The prior-year periods included a $1.0 million charge~~we had reserved. Current year personnel and other investments to ~~SG&A~~support product pipeline development and preparation for product market evaluations also contributed to the ~~estimated customer claim accrual. We expect fiscal 2019 SG&A expenses will range between 24% and 26%, as a percent of revenue.~~increase.

~~Intangible~~Acquired intangible asset ~~amortization~~amortization.. As part of our 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 fiscal 2007 BioFx ~~acquisition in fiscal 2007. We recognized $0.6 million in amortization~~acquisition. Amortization expense ~~related to these acquisitions in~~was consistent with the ~~three months ended March 31, 2019~~prior year period for both the second quarter and ~~2018. We recognized $1.2 million and $1.3 million in amortization expense related to these acquisitions in the~~ first six months of fiscal ~~2019 and 2018, respectively. Acquired intangible asset amortization is estimated to total $2.4 million in fiscal 2019.~~2020.

Contingent consideration ~~gain~~gain.~~. For the three months ended March 31, 2019 and 2018, we~~ We recorded net gains of $0.3 million and ~~$2.2~~$0.4 million in the three and six months ended March 31, 2019, respectively, related to ~~our~~ contingent consideration liabilities from prior-year acquisitions. ~~For the first six months of fiscal~~Fiscal 2019 ~~and 2018, we recorded net~~ gains ~~of $0.4 million and $1.1 million, respectively, related to our contingent consideration liabilities from prior-year acquisitions. The contingent consideration gains in each period are~~ related to changes in estimated probabilities of achievement of certain revenue and strategic milestones, partly offset by ~~normally scheduled~~ accretion ~~expense related to the passage of time.~~ expense. In fiscal 2019, if there are changes in the amount, probability or timing of achievement of contingent consideration milestones, there may be material adjustments in the consolidated statements of operations to reflect changes in the fair value of contingent consideration liabilities. All remaining contingent consideration obligations are expected to be paid in December 2019.

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

The increase in investment income in the second quarter and first six months of fiscal 2019, as compared with the prior-year periods, is the result of higher interest rates on debt investments, as well as an increase in investment principal. Interest expense in the fiscal 2019 periods is related to the outstanding obligations stemming from our acquisition of technology from Embolitech in the third quarter of fiscal 2018. The foreign exchange gain (loss) in the six months ended March 31, 2019 and the three and six months ended March 31, 2018 are primarily related to the change in exchange rates associated with the Euro-denominated contingent consideration liability from the Creagh Medical acquisition, which was paid in the first quarter of fiscal ~~2019. As these amounts have now been settled,~~2020, we ~~do not expect foreign currency exchange gains or losses~~completed the final contingent consideration payment of $3.2 million to ~~be significant~~NorMedix.

Other (expense) income. Other (expense) income totaled ($0.3) million and $0.2 million for the ~~remainder~~second quarter of fiscal ~~2019. We recognized a gain on a previously sold strategic investment in~~2020 and 2019, respectively, and ($0.2) million and $0.7 million for the first six months of fiscal ~~2018 as additional consideration was released from escrow.~~2020 and 2019, respectively. In the second quarter of fiscal 2020, we recognized a $0.5 million impairment loss on our investment in ViaCyte, Inc. to reduce the carrying value to zero. For the first six months of fiscal 2020, the impact of U.S. dollar to Euro foreign currency fluctuations resulted in losses in the current fiscal year and gains in the same prior-year period. Additionally, investment income declined commensurate with lower current-year interest rates.

Income tax ~~provision.~~benefit ~~The~~. For the second quarter of fiscal 2020 and 2019, we recorded an income tax benefit ~~was $0.2 million and $1.2 million for three months ended March 31, 2019 and 2018, respectively.~~ ~~The income tax benefit was $0.3~~of $1.9 million and $0.2 million, ~~for~~respectively. For the first six months ~~ended~~of fiscal 2020 and 2019, we recorded an income tax benefit of $2.2 million and $0.3 million, respectively. The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted on March ~~31, 2019~~27, 2020 and ~~2018, respectively.~~includes significant business tax provisions. In ~~December 2017,~~particular, the ~~Tax Cuts and Jobs~~CARES Act modified the rules associated with net operating losses (“NOLs”). In the second quarter of fiscal 2020, we recorded a discrete tax ~~legislation was signed into law, which reduced~~benefit of $1.8 million as result of our ability under the ~~U.S. Federal~~CARES Act to carry back NOLs incurred to periods when the statutory tax rate ~~from~~was 35% toversus our current tax rate of 21%, among other changes. As a result of the enactment of this legislation, the Company’s net loss for the six months ended March 31, 2018 included discrete tax expense of $1.2 million from our net deferred tax assets revaluation based on the change in the statutory tax rate. .

The Company’s effective tax rate reflects the impact of state income taxes, permanent tax items and discrete tax benefits, as well as operating results in Ireland, where tax expense or benefit is offset by a valuation allowance.

The tax benefits recognized in the three and six months ended March 31, ~~2019~~2020 and ~~2018~~2019 reflect expected full-year pre-tax operating results, impacted by our estimated U.S. federal R&D tax ~~credit. The tax benefits recognized in the six months ended March 31, 2019~~credit and ~~2018 reflect expected full-year pre-tax operating results, impacted~~ by excess tax benefits related to stock-based compensation due to equity award exercise ~~activity~~activity.

Medical Device. Medical Device business operating losses were $1.5 million and estimated U.S. federal R&D tax credit. In the six months ended March 31, 2018, the tax benefit was reduced by the aforementioned $1.2 million revaluation of deferred tax assets as a result of the tax rate.

~~Discrete tax benefit from excess tax benefits~~ ~~realized from share awards vested, expired, cancelled and exercised of~~ less than $0.1 ~~and $0.2~~ million ~~were recognized in~~for the second quarter of fiscal 2020 and 2019, respectively, representing (8.9)% and ~~2018, respectively, and $0.5 and $0.4 million in~~(0.1)% of revenue, respectively. For the first six months of fiscal ~~2019 and 2018, respectively.~~

~~We expect income tax benefit to be in~~2020, the range of $0.4 million to $0.8 million for fiscal 2019. 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, where the statutory tax rate is 12.5%, will result in no reported tax benefit or expense in fiscal 2019. 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.

~~Medical Device.~~ ~~In the second quarter of fiscal 2019, our~~ Medical Device business ~~incurred~~reported an operating loss of ~~less than $0.1~~$1.9 million, or (5.6)% of revenue, as compared with operating income of ~~$0.2~~$0.3 million, or 1.0% of revenue, in the same prior-year ~~quarter.~~period.

Medical Device operating results were unfavorably impacted by the decline in revenue volume during the second quarter and first six months of fiscal 2020. Product gross margins improved to 66.9% and 66.5% for the second quarter and first six months of fiscal 2020, respectively, as compared with 64.3% and 60.7% in the same prior-year respective periods, due primarily to leverage on volume and favorability in fiscal 2020 product mix. Operating expenses, excluding product costs, increased $0.3 million and $1.5 million for the second quarter and first six months of fiscal 2020, respectively. This reflects the impacts of the prior-year $0.6 million expense reduction from a claim settlement and the prior-year $0.3 contingent consideration gain. For the second quarter of fiscal 2020, increases in SG&A to support our whole product solutions strategy were offset by a decline in R&D from higher clinical study costs in fiscal 2019. SG&A increased in fiscal 2020 as we invest in development of our medical device pipeline and related sales and marketing infrastructure, including additional headcount, to support our whole-products solutions strategy.

In Vitro Diagnostics. Our In Vitro Diagnostics business reported operating income inof $3.5 million and $2.9 million for the second quarter of fiscal 2020 and 2019, respectively, representing 53.1% and 54.2% of revenue, respectively. For the first six months of fiscal 2020 and 2019, ~~improved by $0.5~~In Vitro Diagnostics operating income totaled $6.1 million ~~to $0.3~~and $5.4 million, ~~from an operating loss of $0.2 million in the same prior-year period. Operating (loss) income as a percentage~~respectively, representing 51.7% and 51.8% of revenue, ~~was (0.1)%~~respectively. Product gross margins were to 68.9% and ~~1.7%~~69.3% in the second quarter ~~of fiscal 2019~~ and ~~2018, respectively. Operating income (loss) as a percentage of revenue was 1.0% and (0.6)% in the~~ first six months of fiscal ~~2019~~2020, respectively, compared to 72.5% and ~~2018, respectively. Impacting operating results~~71.4% in the second quarter were a $2.8 million increase in R&D expenses related to our planned investment in our DCB and proprietary medical device product development and clinical programs, as well as a $1.9 million reduction in the gain related to our contingent consideration obligations as compared with the prior-year quarter. These items were partly offset by a $3.3 million increase in revenue and a $1.5 million reduction in SG&A expenses related to the aforementioned customer claim settlement.

Operating results improved in the first six months of fiscal 2019 from the comparable prior-year period as a result of a $7.7 million increase in revenue and a $0.7 million reduction of SG&A expenses, partly offset by a $6.4 million increase in R&D expenses related to our planned investment in our DCB and proprietary medical device product development and clinical programs. Additionally, we recognized a gain of $0.4 million related to our contingent consideration obligations in the first six months of fiscal 2019, as compared with a gain of $1.1 million in the prior-year period.

~~In Vitro Diagnostics~~. Operating income improved by $0.5 million in the second quarter of fiscal 2019, as compared with the prior-year quarter. Operating income improved by $1.3 million in the first six months of fiscal 2019, as compared with the same prior-year period. Operating income as a percentage of revenue was 54.2% and 48.4% in the second quarter of fiscal 2019 and 2018 respectively. Operating income as a percentage of revenue was 51.8% and 46.8% in the first six months of fiscal 2019 and 2018 respectively. respective periods. Product gross margins ~~increased to 72.5% and 71.9%~~were impacted by a shift in ~~the three and six months ended March 31, 2019, respectively, from 71.4% and 68.4%, in the respective prior-year periods.~~ ~~Product~~revenue mix towards products with relatively lower gross ~~margins and operating income have increased in fiscal 2019 due to increased revenue, favorable product mix and manufacturing leverage.~~margins.

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.

As of March 31, ~~2019, we had~~2020, working capital ~~of $51.2~~totaled $64.0 million, an increase of ~~$4.8~~$2.8 million from September 30, ~~2018.~~2019. Working capital is defined by us as current assets minus current liabilities. The increase from the prior year-end is a result of contract assets totaling $7.1 million recorded during fiscal 2019 as a result of the adoption of ASC Topic 606, as well as increases in operating income from the prior year, partly offset by payments for capital expenditures totaling $3.1 million. Our cashCash and cash equivalents and available-for-sale investments totaled ~~$46.5~~$48.4 million atas of March 31, ~~2019,~~2020, a decrease of ~~$18.5~~$6.9 million from ~~$65.0~~$55.3 million atas of September 30, ~~2018.~~2019. This change was primarily driven by the ~~$11.0~~$3.2 million contingent consideration payment related to the ~~Creagh Medical~~NorMedix acquisition, ~~as well as payment of accrued compensation liabilities totaling $4.1~~$2.3 million in capital expenditures, ~~of $3.1~~$2.4 million ~~and~~ ~~$2.7 million of~~ cash payments for taxes related to net share settlement of equity awards,~~. These outflows were partly offset by growth~~ and $1.0 million payment to Embolitech, LLC for acquisition of in ~~operating income in the current fiscal year to date, as compared with the same prior-year period.~~process R&D.

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.~~securities and are reported at fair value as available-for-sale investments totaling $33.2 as of March 31, 2020. 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~~(Barclays Short Treasury 1-3 Month ~~Index”)~~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 and the enhancement of liquidity for the ~~foreseeable future~~time being as it continues to assess ~~other investment opportunities~~the impact of the COVID-19 pandemic on the Company, its business and ~~uses of~~ its cash flows.

The following table is a summary of cash provided by (used in) operating, investing, and ~~securities investments, including those described below.~~

~~Summary~~financing activities, the effect of ~~Cash Flows~~exchange rate changes on cash and cash equivalents, and the net change in cash and cash equivalents:

	Six Months Ended						Six Months Ended
	March 31,						March 31,
(Dollars in thousands)	2019			2018			2020			2019
Cash (used in) provided by:
Cash provided by (used in):
Operating activities		(3,938	)		27,431			1,257			(3,938	)
Investing activities		14,272			(14,356	)		(10,749	)		14,272
Financing activities		(11,478	)		(1,680	)		(5,647	)		(11,478	)
Effect of exchange rates on changes in cash and cash equivalents		(54	)		133			(14	)		(54	)
Net change in cash and cash equivalents	$	(1,198	)	$	11,528		$	(15,153	)	$	(1,198	)

Operating Activities. ~~We used cash for~~Cash provided by operating activities ~~of approximately $3.9~~totaled $1.3 million infor the first six months ~~ended March 31, 2019 as~~of fiscal 2020, compared ~~with~~to cash ~~generated from operating activities~~used of ~~$27.4~~$3.9 million in the same prior-year period. ~~During~~Net income was $1.6 million and $2.6 million during the first six months ~~ended March 31,~~of fiscal 2020 and 2019, respectively. Net changes in operating assets and ~~2018, we had net income (loss)~~liabilities reduced cash flows from operating activities by $8.2 million and $9.8 million during the first six months of fiscal 2020 and 2019, respectively. Significant changes in operating assets and liabilities affecting cash flows during these periods included:

Income taxes also impacted cash provided by operating activities. As a result of the NOL carryback provisions of the CARES Act, income tax receivable increased to $4.3 million as aof March 31, 2020, as compared with $0.6 million as of September 30, 2019, and deferred income taxes decreased to $4.8 million, as compared with $6.2 million as of September 30, 2019.

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 six months of of fiscal 2020 and 2019, respectively, as it related to accretion expense, which increased these obligations from the acquisition date through ~~final~~ settlement. Net changes in operating assets and liabilities had a negative impact on cash flows of $9.8 million in the six months ended March 31, 2019 as compared with a positive impact of $22.3 million in the same prior-year period, which included the $25 million upfront payment received from Abbott. Significant changes in operating assets and liabilities during these periods included:

~~Investing Activities.~~ ~~We received cash from investing activities of $14.3~~and $11.5 million in the first six months of fiscal 2020 and 2019, ~~as compared with cash used in investing activities~~respectively. Contingent consideration payments of ~~$14.4~~$3.2 million in the first six months of fiscal ~~2018. We invested $3.1~~2020 related to the Normedix acquisition, with $0.6 million and ~~$4.0~~$2.6 million ~~in property~~classified as cash used by operating and ~~equipment in the first six months of fiscal 2019 and fiscal 2018, respectively.~~financing activities, respectively. In the first six months of fiscal 2019, ~~and 2018,~~ we ~~received $17.4~~paid contingent consideration of $11.0 million related to the Creagh Medical acquisition, with $2.0 million and $9.1 million classified as cash used ~~$10.5 million, respectively, from maturities of available-for-sale debt securities, net of purchases of other investments.~~

~~Financing Activities.~~ ~~We used cash in~~by operating and financing activities, ~~of $11.5 million and $1.7 million in~~respectively. In the first six months of fiscal ~~2019~~2020 and ~~2018, respectively.~~ ~~In the first~~ ~~six months~~ ~~of fiscal~~ 2019, ~~and 2018,~~ we paid ~~$2.7~~$2.4 million and ~~$1.1~~$2.7 million, respectively, to purchase common stock to pay employee taxes resulting from the exercise of stock options and vesting of other stock awards. ~~During~~In the first six months of fiscal ~~2019,~~2020, we paid ~~contingent consideration of $11.0~~$1.0 million to Embolitech, LLC related to ~~the~~ ~~Creagh Medical~~our fiscal 2018 acquisition ~~$9.1 million~~ of ~~which was recorded as cash from financing activities~~.in process R&D.

We believe that our existing cash, and cash equivalents and investments, which totaled ~~$46.5~~$48.4 million as of March 31, ~~2019,~~2020, 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~~historic levels. Uncertainty related to the COVID-19 pandemic may ~~negatively impact~~cause us to seek additional funding to meet our ~~ability~~operating needs. We cannot be certain that additional funding will be available on acceptable terms, if at all. If we do not have, or are not able to ~~access capital in a timely manner and on attractive terms.~~obtain, sufficient funds, we may have to delay development or commercialization of our products or otherwise curtail our operations.

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”)~~ are our largest customers, comprising ~~11%~~19% and ~~16%~~14%, respectively, of our consolidated revenue for fiscal ~~2018.~~2019. These same customers each comprised ~~15%~~16% and 12% of our consolidated revenue for the ~~first~~ six months ~~of fiscal 2019.~~ended March 31, 2020, respectively. Abbott has several separately licensed products, including the SurVeil~~SurVeil~~ DCB license, which generate royalty revenue for Surmodics, none of which represented more than 9%6% of total revenue for the ~~first~~ six months ~~of fiscal 2019.~~ended March 31, 2020. Medtronic has several separately licensed products that generate royalty revenue for Surmodics, none of which represented more than 3%5% of our total ~~revenue.~~revenue for the six months ended March 31, 2020. No other individual customer ~~using licensed technology~~ constitutes more than 10% of Surmodics’ total fiscal ~~2019~~2020 to date or fiscal ~~2018~~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 March 31, ~~2019~~2020 and September 30, ~~2018,~~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~~concerning: the impacts, duration and severity of the global COVID-19 pandemic and the effects of responses to it on healthcare systems, the general economy, our business partners, and our operations; clinical studies; our growth strategy, including our ability to sign new license agreements, bring new products to market, and broaden our hydrophilic coatings royalty ~~revenue,~~revenue; investments to obtain clinical data, reduce the time from product development to commercialization, and drive clinician engagement with our products after approval to optimize adoption; the development and receipt or pursuit of regulatory clearance for future products; the impact of patent expirations on our hydrophilic coatings royalty ~~revenue,~~revenue; product development ~~programs,~~programs; various milestone ~~achievements,~~achievements; research and development plans and expenses, including the estimated cost associated with the TRANSCEND clinical ~~trial,~~trial; future cash flow and sources of funding, ~~short-term requirements,~~and their ability together with existing cash, cash equivalents, and investments to provide liquidity sufficient to meet our cash needs and fund our operations and planned capital expenditures for the next twelve months; future property and equipment investment ~~levels,~~levels; plans regarding our securities investments; the impact of potential lawsuits or ~~claims,~~claims; the impact of Abbott, Medtronic, as well as other significant customers, including new diagnostic kit ~~customers,~~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,~~solutions; the timing, impact, and success of the clinical evaluation of the SurVeil ~~DCB,~~DCB; and ~~our expectations related to our~~fiscal 2020 income tax ~~expense for fiscal 2019.~~(benefit) expense. 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 II, Item 1A of this Quarterly Report on Form 10-Q and under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2018.~~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.

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 March 31, ~~2019,~~2020, we held ~~$24.0~~$33.2 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 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 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. 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 March 31, ~~2019.~~2020. Based on that evaluation, the ~~Company��s~~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 March 31, ~~2019~~2020 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.

InThe risks described below and those identified in our ~~report~~Annual Report on Form 10-K for the fiscal year ended September 30, ~~2018,~~2019, filed with the SEC on ~~November 30, 2018, we identify~~December 3, 2019, under “Part 1, Item 1A. Risk ~~Factors.” important factors which~~Factors” 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~~The COVID-19 pandemic has had an adverse effect on our business and results of operations and is expected to continue to have ~~been no~~further adverse effects, which could be material, ~~changes~~on our business, results of operations, financial condition, liquidity, and capital investments.

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted supply chains and created significant volatility in financial markets. We have implemented business policies intended to protect our employees from the spread of COVID-19. Those policies include employees working from home when possible and employees in our ~~risk factors subsequent~~facilities increasing physical distancing.

On March 18, 2020, the Centers for Medicare & Medicaid Services (“CMS”) released guidance for U.S. healthcare providers to limit all elective medical procedures in order to conserve personal protective equipment and limit exposure to COVID-19 during the pendency of the pandemic. Many of our customers use our licensed technology and purchased materials to manufacture products used in procedures impacted by the guidance. Based on the CMS guidance, we adjusted the assumptions used in our royalty revenue recognition for the quarter ended March 31, 2020, which resulted in a reduction in royalty revenues for the quarter. In addition to limiting medical procedures, many hospitals and other healthcare providers have strictly limited access to their facilities during the pandemic.

We cannot predict the duration or scope of the pandemic, actions that may be taken by governments and businesses in response to the ~~filing~~pandemic, or the impacts of the pandemic on healthcare systems. The impacts of the pandemic may include, but not be limited to:

~~Delays in clinical studies are common~~other factors relating to, or arising from, the pandemic could have material adverse effects on our business, results of operations, cash flows, financial condition, and ~~have many causes, and any significant delay in clinical studies being conducted by~~capital investments. Actual or anticipated adverse effects on our cash flows or financial condition may lead us ~~could result in delays in obtaining regulatory approvals and jeopardize the~~to seek additional funding. Any future debt financing into which we enter may impose upon us covenants that restrict our operations, including limitations on our ability to ~~proceed~~incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. We cannot be certain that additional funding will be available on acceptable terms, if at all. If we do not have, or are not able to obtain, sufficient funds, we may have to delay development or commercialization of our ~~SurVeil DCB and other products.~~

~~We began enrollment in the TRANSCEND clinical study for~~products or otherwise curtail our SurVeil DCB in the first quarter of fiscal 2018 and, in December 2018, we commenced a first-in-human clinical study of our Avess DCB. There are risks involved in these and other clinical studies, including that they may fail to enroll a sufficient number of patients for a variety of reasons or be completed on schedule, if at all. In the second quarter of fiscal year 2019, we temporarily paused patient enrollment in TRANSCEND, the pivotal clinical trial of our SurVeil DCB following the March 15, 2019 publication of a FDA letter to physicians relating to the FDA' s preliminary analysis of a potentially concerning signal of increased long-term mortality related to paclitaxel-coated devices. While we resumed patient enrollment in TRANSCEND shortly after making updates to informed consent forms, providing updates to investigator communications related to the FDA communication and taking certain other steps, there can be no assurance that we will not experience future similar delays in this or any other clinical trial. Clinical trials for any of our products could be delayed for a variety of reasons, including, but not limited to:

If the initiation or completion of any of the ongoing or planned clinical studies for our products is delayed for any of the above or other reasons, the regulatory approval process would be delayed and the ability to commercialize and commence sales of our products could be materially harmed. Additionally, clinical study delays may allow our competitors to bring products to market before we do, which could impair our ability to successfully commercialize our product candidates.operations. Any of these events could ~~have a material adverse effect on~~materially harm our business ~~financial condition~~ and ~~results of operations.~~operating results.

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 March 31, ~~2019,~~2020. As of March 31, 2020, 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.~~

MINNESOTA	41-1356149
(State or other jurisdiction of ~~incorporation)~~incorporation or organization)	(I.R.S. Employer Identification No.)

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


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

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	2422
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3230
Item 4.	Controls and Procedures	3331
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	3432
Item 1A.	Risk Factors	3432
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3533
Item 3.	Defaults Upon Senior Securities	3533
Item 4.	Mine Safety Disclosures	3533
Item 5.	Other Information	3533
Item 6.	Exhibits	3634
SIGNATURES		3735

(Dollars in thousands)	September 30, 2018, As Reported		Adjustments for Adoption of Topic 606			October 1, 2018 Opening Balance
Assets
Contract assets - royalties and license fees	$	—	$	6,904		$	6,904
Deferred income taxes		6,304		(1,215	)		5,089
Income tax receivable		1,152		(390	)		762

Liabilities and Stockholders' Equity
Deferred revenue, current portion		9,646		(18	)		9,628
Deferred revenue, less current portion		11,247		(181	)		11,066
Retained earnings		97,615		5,498			103,113

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐	Emerging Growth Company	☐

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)
1/1/19 — 1/31/19		—	N/A		—	$	25,298,238
2/1/19 — 2/28/19		—	N/A		—	$	25,298,238
3/1/19 — 3/31/19		—	N/A		—	$	25,298,238
Total		—	N/A		—	$	25,298,238