UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended~~ended~~ June 30, ~~2021~~2022

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-23837

Surmodics, Inc.

(Exact name of registrant as specified in its charter)

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

9924 West 74th Street, Eden Prairie, Minnesota 55344

(Address of principal executive offices) (Zip Code)

(952) 500-7000

(Registrant’s telephone number, including area code)

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

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

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, 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 July ~~30, 2021~~25, 2022 was ~~13,872,000.~~14,005,000.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1920
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2930
Item 4.	Controls and Procedures	2930
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	3031
Item 1A.	Risk Factors	3031
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3031
Item 3.	Defaults Upon Senior Securities	3031
Item 4.	Mine Safety Disclosures	3031
Item 5.	Other Information	3031
Item 6.	Exhibits	3132
SIGNATURES		3233

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

Surmodics, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

	June 30,		September 30,		June 30,			September 30,
	2021		2020		2022			2021
(In thousands, except per share data)	(Unaudited)				(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	62,177	$	30,785	$	20,074		$	31,153
Available-for-sale securities		5,741		30,313		2,012			7,717
Accounts receivable, net of allowances of $118 and $130 as of June 30, 2021 and September 30, 2020, respectively		8,601		7,675
Accounts receivable, net of allowances of $84 and $119 as of June 30, 2022 and September 30, 2021, respectively						9,382			9,169
Contract assets — royalties and license fees		7,043		6,108		7,584			7,091
Inventories, net		6,316		5,966		10,926			6,760
Income tax receivable		1,136		2,391		2,409			1,912
Prepaids and other		3,098		3,370		7,648			6,453
Total Current Assets		94,112		86,608		60,035			70,255
Property and equipment, net		29,112		30,103		28,289			30,090
Available-for-sale securities		4,050		—		—			2,002
Deferred income taxes		6,368		7,315		8,479			5,867
Intangible assets, net		11,482		13,283		30,752			37,054
Goodwill		27,379		27,185		42,590			45,606
Other assets		4,696		4,269		5,507			3,718
Total Assets	$	177,199	$	168,763	$	175,652		$	194,592
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,519	$	1,515	$	1,928		$	1,783
Accrued liabilities:
Compensation		6,689		6,630		7,595			8,480
Accrued other		4,303		5,547		5,857			4,905
Short-term borrowings						10,000			10,000
Deferred revenue		5,151		5,200		4,007			4,647
Total Current Liabilities		17,662		18,892		29,387			29,815
Deferred revenue, less current portion		11,035		10,796		7,402			10,301
Deferred income taxes						2,227			2,742
Other long-term liabilities		7,670		8,020		11,524			11,649
Total Liabilities		36,367		37,708		50,540			54,507
Commitments and Contingencies (Note 17)
Commitments and Contingencies (Note 10)
Stockholders’ Equity:
Series A Preferred stock — $.05 par value, 450 shares authorized; 0 shares issued and outstanding		—		—		—			—
Common stock — $.05 par value, 45,000 shares authorized; 13,872 and 13,672 shares issued and outstanding as of June 30, 2021 and September 30, 2020, respectively		694		684
Common stock — $.05 par value, 45,000 shares authorized; 13,999 and 13,899 shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively						700			695
Additional paid-in capital		20,025		15,369		26,612			21,598
Accumulated other comprehensive income		3,759		3,174
Accumulated other comprehensive (loss) income						(5,719	)		1,727
Retained earnings		116,354		111,828		103,519			116,065
Total Stockholders’ Equity		140,832		131,055		125,112			140,085
Total Liabilities and Stockholders’ Equity	$	177,199	$	168,763	$	175,652		$	194,592

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

Table of Contents

Surmodics, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

	Three Months Ended							Nine Months Ended						Three Months Ended							Nine Months Ended
	June 30,							June 30,						June 30,							June 30,
	2021			2020				2021			2020			2022			2021				2022			2021
(In thousands, except per share data)	(Unaudited)						(Unaudited)							(Unaudited)						(Unaudited)
Revenue:
Product sales	$	12,084		$	11,987			$	33,969		$	33,731		$	13,919		$	12,084			$	40,227		$	33,969
Royalties and license fees		8,796			12,398				38,182			30,767			8,795			8,796				26,738			38,182
Research, development and other		2,993			2,498				9,014			7,823			2,140			2,993				6,998			9,014
Total revenue		23,873			26,883				81,165			72,321			24,854			23,873				73,963			81,165
Operating costs and expenses:
Product costs		5,105			4,443				13,018			11,415			5,141			5,105				14,745			13,018
Research and development		12,246			13,324				36,003			37,401			12,975			12,246				38,350			36,003
Selling, general and administrative		7,885			7,416				22,815			21,092			12,854			7,885				33,159			22,815
Acquired intangible asset amortization		560			536				1,676			1,671			1,024			560				3,184			1,676
Acquisition transaction, integration and other costs		461			—				461			—			—			461				—			461
Contingent consideration expense															3			—				9			—
Total operating costs and expenses		26,257			25,719				73,973			71,579			31,997			26,257				89,447			73,973
Operating (loss) income		(2,384	)		1,164				7,192			742			(7,143	)		(2,384	)			(15,484	)		7,192
Other (expense) income:
Other expense:
Investment income, net		26			124				95			584			22			26				73			95
Interest expense		(59	)		(29	)			(178	)		(99	)		(145	)		(59	)			(410	)		(178	)
Foreign exchange loss		(94	)		(48	)			(201	)		(125	)
Impairment loss on strategic investment and other		—			—				—			(478	)
Other (expense) income		(127	)		47				(284	)		(118	)
Foreign exchange gain (loss)															85			(94	)			120			(201	)
Other expense															(38	)		(127	)			(217	)		(284	)
(Loss) income before income taxes		(2,511	)		1,211				6,908			624			(7,181	)		(2,511	)			(15,701	)		6,908
Income tax (provision) benefit		(776	)		1,248				(2,382	)		3,445
Income tax benefit (provision)															1,530			(776	)			3,155			(2,382	)
Net (loss) income	$	(3,287	)	$	2,459			$	4,526		$	4,069		$	(5,651	)	$	(3,287	)		$	(12,546	)	$	4,526

Basic net (loss) income per share	$	(0.24	)	$	0.18			$	0.33		$	0.30
Diluted net (loss) income per share	$	(0.24	)	$	0.18			$	0.32		$	0.30
Basic net loss (income) per share														$	(0.41	)	$	(0.24	)		$	(0.90	)	$	0.33
Diluted net loss (income) per share														$	(0.41	)	$	(0.24	)		$	(0.90	)	$	0.32

Weighted average number of shares outstanding:
Basic		13,837			13,601				13,740			13,577			13,929			13,837				13,907			13,740
Diluted		13,837			13,786				13,959			13,775			13,929			13,837				13,907			13,959

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

Table of Contents

Surmodics, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive (Loss) Income

	Three Months Ended					Nine Months Ended					Three Months Ended						Nine Months Ended
	June 30,					June 30,					June 30,						June 30,
	2021			2020		2021			2020		2022			2021			2022			2021
(In thousands)	(Unaudited)					(Unaudited)					(Unaudited)						(Unaudited)
Net (loss) income	$	(3,287	)	$	2,459	$	4,526		$	4,069	$	(5,651	)	$	(3,287	)	$	(12,546	)	$	4,526
Other comprehensive income:
Other comprehensive (loss) income:
Net changes related to available-for-sale securities, net of tax		4			185		(3	)		6		4			4			(7	)		(3	)
Foreign currency translation adjustments		524			794		588			1,067		(4,289	)		524			(7,439	)		588
Other comprehensive income		528			979		585			1,073
Other comprehensive (loss) income												(4,285	)		528			(7,446	)		585
Comprehensive (loss) income	$	(2,759	)	$	3,438	$	5,111		$	5,142	$	(9,936	)	$	(2,759	)	$	(19,992	)	$	5,111

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

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Surmodics, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

	Three Months Ended June 30, 2021 and 2020																	Three Months Ended June 30, 2022 and 2021
	(Unaudited)									Accumulated								(Unaudited)									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			(Loss) Income			Earnings			Equity
Balance at March 31, 2022																			13,990		$	700		$	24,827		$	(1,434	)	$	109,170		$	133,263
Net loss																			—			—			—			—			(5,651	)		(5,651	)
Other comprehensive loss, net of tax																			—			—			—			(4,285	)		—			(4,285	)
Issuance of common stock																			9			—			—			—			—			—
Common stock options exercised, net																			1			—			22			—			—			22
Purchase of common stock to pay employee taxes																			(1	)		—			(36	)		—			—			(36	)
Stock-based compensation																			—			—			1,799			—			—			1,799
Balance at June 30, 2022																			13,999		$	700		$	26,612		$	(5,719	)	$	103,519		$	125,112

Balance at March 31, 2021		13,868		$	693		$	18,516		$	3,231	$	119,641		$	142,081			13,868		$	693		$	18,516		$	3,231		$	119,641		$	142,081
Net loss		—			—			—			—		(3,287	)		(3,287	)		—			—			—		—				(3,287	)		(3,287	)
Other comprehensive income, net of tax		—			—			—			528		—			528			—			—			—			528		—				528
Issuance of common stock		2			1			—			—		—			1			2			1		—			—			—				1
Common stock options exercised, net		2			—			90			—		—			90			2		—				90		—			—				90
Purchase of common stock to pay employee taxes		—			—			(37	)		—		—			(37	)	—			—				(37	)	—			—				(37	)
Stock-based compensation		—			—			1,456			—		—			1,456		—			—				1,456		—			—				1,456
Balance at June 30, 2021		13,872		$	694		$	20,025		$	3,759	$	116,354		$	140,832			13,872		$	694		$	20,025		$	3,759		$	116,354		$	140,832

Balance at March 31, 2020		13,609		$	680		$	11,481		$	490	$	112,315		$	124,966
Net income		—			—			—			—		2,459			2,459
Other comprehensive income, net of tax		—			—			—			979		—			979
Issuance of common stock		3			—			—			—		—			—
Common stock options exercised, net		33			2			849			—		—			851
Purchase of common stock to pay employee taxes		—			—			(12	)		—		—			(12	)
Stock-based compensation		—			—			1,340			—		—			1,340
Balance at June 30, 2020		13,645		$	682		$	13,658		$	1,469	$	114,774		$	130,583


	Nine Months Ended June 30, 2021 and 2020																	Nine Months Ended June 30, 2022 and 2021
	(Unaudited)									Accumulated								(Unaudited)									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 (Loss)			Earnings			Equity
Balance at September 30, 2021																			13,899		$	695		$	21,598		$	1,727		$	116,065		$	140,085
Net loss																			—			—			—			—			(12,546	)		(12,546	)
Other comprehensive loss, net of tax																			—			—			—			(7,446	)		—			(7,446	)
Issuance of common stock																			100			5			367			—			—			372
Common stock options exercised, net																			21			1			390			—			—			391
Purchase of common stock to pay employee taxes																			(21	)		(1	)		(941	)		—			—			(942	)
Stock-based compensation																			—			—			5,198			—			—			5,198
Balance at June 30, 2022																			13,999		$	700		$	26,612		$	(5,719	)	$	103,519		$	125,112

Balance at September 30, 2020		13,672		$	684		$	15,369		$	3,174	$	111,828		$	131,055			13,672		$	684		$	15,369		$	3,174		$	111,828		$	131,055
Net income		—			—			—			—		4,526			4,526		—			—			—			—				4,526			4,526
Other comprehensive income, net of tax		—			—			—			585		—			585		—			—			—				585		—				585
Issuance of common stock		91			5			292			—		—			297			91			5			292		—			—				297
Common stock options exercised, net		127			6			2,324			—		—			2,330			127			6			2,324		—			—				2,330
Purchase of common stock to pay employee taxes		(18	)		(1	)		(2,278	)		—		—			(2,279	)		(18	)		(1	)		(2,278	)	—			—				(2,279	)
Stock-based compensation		—			—			4,318			—		—			4,318		—			—				4,318		—			—				4,318
Balance at June 30, 2021		13,872		$	694		$	20,025		$	3,759	$	116,354		$	140,832			13,872		$	694		$	20,025		$	3,759		$	116,354		$	140,832

Balance at September 30, 2019		13,504		$	675		$	10,740		$	396	$	110,705		$	122,516
Net income		—			—			—			—		4,069			4,069
Other comprehensive income, net of tax		—			—			—			1,073		—			1,073
Issuance of common stock		133			7			211			—		—			218
Common stock options exercised, net		53			2			949			—		—			951
Purchase of common stock to pay employee taxes		(45	)		(2	)		(2,279	)		—		—			(2,281	)
Stock-based compensation		—			—			4,037			—		—			4,037
Balance at June 30, 2020		13,645		$	682		$	13,658		$	1,469	$	114,774		$	130,583

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

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Surmodics, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

	Nine Months Ended						Nine Months Ended
	June 30,						June 30,
	2021			2020			2022			2021
(In thousands)	(Unaudited)						(Unaudited)
Operating Activities:
Net income	$	4,526		$	4,069
Adjustments to reconcile net income to net cash provided by operating activities:
Net (loss) income							$	(12,546	)	$	4,526
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		5,610			5,390			6,902			5,610
Stock-based compensation		4,318			4,037			5,198			4,318
Payment of contingent consideration obligations in excess of acquisition-date value		—			(608	)
Noncash lease expense								371			223
Provision for credit losses								8			(11	)
Deferred taxes		947			592			(2,996	)		947
Loss on strategic investment		—			479
Provision for credit losses		(11	)		30
Other		260			176			257			37
Change in operating assets and liabilities:
Accounts receivable and contract asset		(1,809	)		4,303
Accounts receivable and contract assets								(847	)		(1,809	)
Inventories		(338	)		(1,333	)		(4,167	)		(338	)
Prepaids and other		(59	)		(432	)		(1,998	)		(59	)
Accounts payable		(27	)		(489	)		349			(27	)
Accrued liabilities		(435	)		116			(1,039	)		(435	)
Income taxes		1,327			(4,105	)		(676	)		1,327
Deferred revenue		191			471			(3,539	)		191
Net cash provided by operating activities		14,500			12,696
Net cash (used in) provided by operating activities								(14,723	)		14,500
Investing Activities:
Purchases of property and equipment		(2,874	)		(2,627	)		(2,798	)		(2,874	)
Payment for acquisition of intangible assets		(1,000	)		—			—			(1,000	)
Purchases of available-for-sale securities		(22,799	)		(45,766	)		—			(22,799	)
Maturities of available-for-sale securities		43,317			46,522			7,600			43,317
Net cash provided by (used in) investing activities		16,644			(1,871	)
Net cash provided by investing activities								4,802			16,644
Financing Activities:
Issuance of common stock		2,627			1,169			763			2,627
Payments for taxes related to net share settlement of equity awards		(2,279	)		(2,385	)		(936	)		(2,279	)
Payment of contingent consideration obligations		—			(2,592	)
Payments for acquisition of in-process research and development		(150	)		(1,000	)		(500	)		(150	)
Net cash provided by (used in) financing activities		198			(4,808	)
Net cash (used in) provided by financing activities								(673	)		198
Effect of exchange rate changes on cash		50			8			(485	)		50
Net change in cash and cash equivalents		31,392			6,025			(11,079	)		31,392
Cash and Cash Equivalents:
Beginning of period		30,785			30,361			31,153			30,785
End of period	$	62,177		$	36,386		$	20,074		$	62,177
Supplemental Information:
Cash paid for income taxes	$	35		$	9		$	395		$	35
Cash paid for interest								256			—
Noncash investing and financing activities:
Acquisition of property and equipment, net of refundable credits in other current assets and liabilities		345			395			90			345
Right-of-use assets obtained in exchange for new operating lease liabilities		234			1,012			1,732			234

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

Table of Contents

Surmodics, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

Period Ended June 30, ~~2021~~2022

(Unaudited)

1. Basis of Presentation

Overview

Surmodics, Inc. and subsidiaries (“Surmodics,” the “Company,” “we,” “us,” “our” and other like terms) is a leading provider of surface modification technologies for intravascular medical devices and chemical components for in vitro diagnostic (“IVD”) immunoassay tests and microarrays. Surmodics is pursuing development and commercialization of highly differentiated medical devices that are designed to address unmet clinical needs and engineered to the most demanding requirements. This key growth strategy leverages the combination of the Company’s expertise in proprietary surface technologies, along with enhanced device design, development, and manufacturing capabilities. The Company mission remains to improve the detection and treatment of disease. Surmodics is headquartered in Eden Prairie, Minnesota.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include all accounts and wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). All intercompany transactions have been eliminated. The Company operates on a fiscal year ending on September 30. 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, ~~2020,~~2021, and notes thereto included in our Annual Report on Form 10-K as filed with the SEC.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent ~~assets and~~ liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from those estimates. The results of operations for the three and nine months ended June 30, ~~2021~~2022 are not necessarily indicative of the results that may be expected for the entire ~~2021~~2022 fiscal year.

~~Risk and Uncertainties~~

~~The COVID-19 pandemic is having, and may continue~~Certain reclassifications have been made to ~~have, an adverse effect on our business, results of operations, financial condition, and cash flows, and its future impacts remain highly uncertain and unpredictable. The Company has considered~~ the disruptions caused by COVID-19, including lower than forecasted sales and customer demand and macroeconomic factors, that may impact its estimates. The Company has assessed the potential impact of the pandemic on certain accounting matters including, but not limited to, estimated sales-based royalties revenue; allowance for credit losses; inventory reserves; and the valuation of goodwill, intangible assets, other long-lived assets and investments, as of June 30, 2021 and through the date of this Quarterly Report on Form 10-Q. As of the date of issuance of these unaudited condensedprior year's consolidated financial statements to conform to 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 our Annual Report on Form 10-K for the fiscalcurrent year ~~ended September 30, 2020.~~presentation.

New Accounting Pronouncements

~~Recently Adopted~~

~~In June 2016, the FASB issued ASU 2016-13,~~ ~~Financial Instruments – Credit Losses, Measurement of Credit Losses on Financial Statements~~. This ASU requires a financial asset (or a group of financial assets) measured at an 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. We adopted this guidance using the modified retrospective method in the first quarter of fiscal 2021. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

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~~In December 2019, the FASB issued ASU 2019-12,~~ ~~Simplifying the Accounting for Income Taxes~~, which eliminates certain exceptions related to the approach for intraperiod tax allocation and to the methodology for calculating taxes during the quarters, as well as clarifies the accounting for enacted changes in tax laws. We adopted this guidance using a prospective approach in the first quarter of fiscal 2021. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.

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.

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2. Revenue

The following table presents the Company’s revenues disaggregated by product classification and by reportable segment.

	Three Months Ended				Nine Months Ended
	June 30,				June 30,				Three Months Ended June 30,				Nine Months Ended June 30,
(In thousands)	2021		2020		2021		2020		2022		2021		2022		2021
Medical Device
Product sales	$	5,493	$	5,763	$	15,464	$	16,240	$	6,741	$	5,493	$	19,970	$	15,464
Royalties		7,752		4,752		23,135		20,365		7,771		7,752		23,015		23,135
License fees										1,024		1,044		3,723		15,047
Research, development and other		2,466		2,353		7,212		7,215		1,992		2,466		6,181		7,212
License fees		1,044		7,646		15,047		10,402
Total Revenue — Medical Device		16,755		20,514		60,858		54,222
Medical Device Revenue										17,528		16,755		52,889		60,858
In Vitro Diagnostics
Product sales		6,591		6,224		18,505		17,491		7,178		6,591		20,257		18,505
Research, development and other		527		145		1,802		608		148		527		817		1,802
Total Revenue — In Vitro Diagnostics		7,118		6,369		20,307		18,099
In Vitro Diagnostics Revenue										7,326		7,118		21,074		20,307
Total Revenue	$	23,873	$	26,883	$	81,165	$	72,321	$	24,854	$	23,873	$	73,963	$	81,165

Contract assets totaled ~~$7.0~~$7.6 million and ~~$6.1~~$7.1 million as of June 30, ~~2021~~2022 and September 30, ~~2020, respectively.~~2021, respectively, on the condensed consolidated balance sheets. Fluctuations in the balance of contract assets result primarily from changes in sales-based and minimum royalties earned, but not collected, at each balance sheet date due to payment timing and contractual changes in the normal course of business. For discussion of contract liability (deferred revenue) balances and remaining performance obligations, see Note 3 Collaborative ~~Arrangements.~~Arrangement.

3. Collaborative Arrangement

On February 26, 2018, the Company entered into an agreement with Abbott Vascular, Inc. (“Abbott”) whereby Abbott has exclusive worldwide commercialization rights for Surmodics' SurVeil^TM drug-coated balloon (“DCB”) to treat the superficial femoral artery (the “Abbott Agreement”). ~~Our~~A premarket approval (“PMA”) application for the SurVeilDCB ~~is used to treat peripheral arterial disease in the upper leg (superficial femoral artery) and is currently~~was being evaluated ~~in our TRANSEND pivotal clinical trial. Abbott also received~~by the ~~option to negotiate an agreement for Surmodics' below-the-knee Sundance~~^TM ~~DCB product, which is currently being evaluated in a first-in-human trial.~~ U.S. Food and Drug Administration (“FDA”) as of June 30, 2022.

Surmodics is responsible for conducting all necessary clinical trials and other activities required to achieve U.S. regulatory clearance for the SurVeil DCB, including completion of the ongoing TRANSCEND pivotal clinical trial. Abbott and Surmodics participate on a joint development committee charged with providing guidance on the Company’s clinical and regulatory activities with regard to the SurVeil DCB product. Upon receipt of regulatory approval for ~~the~~our SurVeil DCB, Abbott will have the right to purchase commercial units from the Company and Surmodics will realize revenue from product sales to Abbott at an agreed-upon transfer price, as well as a share of net profits resulting from third-party product sales by Abbott. 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.

As of June 30, ~~2021,~~2022, the Company has received payments totaling $60.8 million under the Abbott Agreement, which consist of the following: (i) $25 million upfront fee in fiscal 2018, (ii) $10 million milestone payment in fiscal 2019, (iii) $10.8 million milestone payment in ~~the third quarter of~~ fiscal 2020, and (iv) $15 million milestone payment in the second quarter of fiscal 2021 upon receipt by Abbott of the clinical study report and related materials from the TRANSCEND pivotal trial that demonstrated the primary safety and primary clinical endpoints are non-inferior to the control device.2021. As of June 30, ~~2021,~~2022, the Company may receive an additional contingent milestone payment upon PMA of ~~up to~~our SurVeil DCB of $30 million (if PMA is received prior to December 31, 2022) or $27 million (if PMA is received after December 31, 2022), pursuant to the terms of the Abbott ~~Agreement, upon premarket approval (“PMA”) of our~~ ~~SurVeil~~ ~~DCB by the U.S. Food and Drug Administration.~~Agreement. As of June 30, ~~2021,~~2022, consideration from this potential regulatory milestone was ~~fully constrained and~~ excluded from the contract price (i.e., deemed fully constrained), due to the high level of uncertainty of achievement as of June 30, ~~2021.~~2022.

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Revenue recognized from the Abbott agreement totaled $~~1.0~~$1.0 million ~~and $7.6 million~~ for both the three months ended June 30, 2022 and 2021 and ~~2020, respectively, and $14.8~~$3.6 million and ~~$10.4~~$14.8 million for the nine months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. The amount of revenue recognized from the Abbott Agreement that was included in the respective beginning of fiscal year balances of deferred revenue on the condensed consolidated balance sheets totaled ~~$3.8~~ $3.6million and ~~$3.7~~$3.8 million for the nine months ended June 30, 2022 and 2021, ~~and 2020,~~ respectively.

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As of June 30, ~~2021~~2022 and September 30, ~~2020,~~2021, deferred revenue ~~from~~on the ~~upfront~~condensed consolidated balance sheets included $11.3 million and ~~milestone~~$14.9 million, respectively, related to payments received under the Abbott ~~Agreement of $16.1 million and $15.9 million, respectively, was recorded in the condensed consolidated balance sheets.~~

AsAgreement. The $11.3 deferred revenue as of June 30, ~~2021,~~2022, which represents the ~~estimated revenue expected to be recognized in future periods related to~~Company’s performance obligations that are unsatisfied for executed contracts with an original duration of one year, ~~or more totaled $16.1 million. These remaining performance obligations relate to the Abbott Agreement, exclude the potential contingent milestone payment under the Abbott Agreement, and are~~is expected to be recognized as revenue over the next ~~five~~four years through fiscal 2025 as services, principally the TRANSCEND clinical trial, are completed.

4. Fair Value Measurements

~~Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:~~

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

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.

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. 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.

Assets measured at fair value on a recurring basis by level of the fair value hierarchy were as follows:

	June 30, 2021								June 30, 2022
(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		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(1)	$	—	$	5,226	$	—	$	5,226	$	—	$	16	$	—	$	16
Available-for-sale securities(1)		—		9,791		—		9,791		—		2,012		—		2,012
Total assets	$	—	$	15,017	$	—	$	15,017	$	—	$	2,028	$	—	$	2,028

Liabilities
Contingent consideration (2)									$	—	$	—	$	826	$	826
Total liabilities									$	—	$	—	$	826	$	826

	September 30, 2020								September 30, 2021
(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		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(1)	$	—	$	18,634	$	—	$	18,634	$	—	$	5,308	$	—	$	5,308
Available-for-sale securities		—		30,313		—	$	30,313
Available-for-sale investments (1)										—		9,719		—		9,719
Total assets	$	—	$	48,947	$	—	$	48,947	$	—	$	15,027	$	—	$	15,027

Liabilities
Contingent consideration (2)									$	—	$	—	$	817	$	817
Total liabilities									$	—	$	—	$	817	$	817

(1)

Fair value of cash equivalents (money market funds) and available-for-sale investments (commercial paper and corporate bond securities) is based on quoted vendor prices and broker pricing where all significant inputs are observable.

(2)

Fair value of contingent consideration liabilities was determined based on discounted cash flow analyses that included probability and timing of development and regulatory milestone achievements and a discount rate, which are considered significant unobservable inputs as of the acquisition date and as of both June 30, 2022 and September 30, 2021.

Contingent consideration liabilities are remeasured to fair value each reporting period using discount rates, probabilities of payment and projected payment dates. Increases or decreases in the fair value of the contingent consideration liability can result from changes in the timing or likelihood of achieving milestones and changes in discount periods and rates. Projected contingent payment amounts are discounted back to the current period using a discount cash flow model. Interest accretion and fair value adjustments associated with contingent consideration liabilities are reported in contingent consideration expense (gain) on the condensed consolidated statements of operations.

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~~There were 0 transfers of assets between amounts~~Changes in the contingent consideration liabilities measured at fair value using Level 3 ~~fair value measurements during~~inputs were as follows:

(In thousands)
Contingent consideration liability at September 30, 2021	$	817
Additions		—
Fair value adjustments		—
Settlements		—
Interest accretion		9
Foreign currency translation		—
Contingent consideration liability at June 30, 2022	$	826

Contingent consideration liabilities were associated with the ~~nine months ended June 30,~~fiscal 2021 acquisition of Vetex Medical Limited and ~~2020.~~were included in other long-term liabilities on the condensed consolidated balance sheets; see Note 11 Acquisitions for further disclosures.

5. Supplemental Balance Sheet Information

Investments

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

	June 30, 2021													June 30, 2022
	Valuation									Balance Sheet Classification				Valuation									Balance Sheet Classification
(In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Current Assets		Noncurrent Assets		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Current Assets		Noncurrent Assets
Commercial paper and corporate bonds	$	9,794	$	1	$	(4	)	$	9,791	$	5,741	$	4,050	$	2,018	$	—	$	(6	)	$	2,012	$	2,012	$	—
Total	$	9,794	$	1	$	(4	)	$	9,791	$	5,741	$	4,050	$	2,018	$	—	$	(6	)	$	2,012	$	2,012	$	—

	September 30, 2020													September 30, 2021
	Valuation									Balance Sheet Classification				Valuation									Balance Sheet Classification
(In thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Current Assets		Noncurrent Assets		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Current Assets		Noncurrent Assets
Commercial paper and corporate bonds	$	30,313	$	19	$	(19	)	$	30,313	$	30,313	$	—	$	9,718	$	2	$	(1	)	$	9,719	$	7,717	$	2,002
Total	$	30,313	$	19	$	(19	)	$	30,313	$	30,313	$	—	$	9,718	$	2	$	(1	)	$	9,719	$	7,717	$	2,002

6. Inventories

Inventories consisted of the following components:

	June 30,		September 30,		June 30,		September 30,
(In thousands)	2021		2020		2022		2021
Raw materials	$	3,812	$	3,758	$	6,252	$	4,165
Work-in process		1,263		817		1,943		1,295
Finished products		1,241		1,391		2,731		1,300
Total	$	6,316	$	5,966	$	10,926	$	6,760

~~7. Other Assets~~

~~Other assets consisted of the following:~~

June 30,

September 30,

(In thousands)

2021

2020

Operating lease right-of-use assets

2,519

2,508

Other noncurrent assets

2,177

1,761

Other assets

$
4,696

$
4,269

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

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Prepaids and Other Assets, Current

Prepaids and other current assets consisted of the following:

	June 30,		September 30,
(In thousands)	2022		2021
Prepaid expenses	$	3,208	$	1,712
Irish research and development credits receivable		1,006		1,164
CARES Act employee retention credit receivable		3,434		3,577
Prepaids and other	$	7,648	$	6,453

In the fourth quarter of fiscal 2021, a benefit of $3.6 million was recorded to reduce operating costs and expenses as a result of our eligibility for the employee retention credit under the provisions of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") enacted in March 2020. This benefit and corresponding receivable reflected anticipated reimbursement of personnel expenses we incurred in fiscal 2021 and 2020.

Intangible Assets

Intangible assets consisted of the following:

	June 30, 2021									June 30, 2022
(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	$	13,516	$	(8,724	)	$	4,792		8.9	$	12,032	$	(9,039	)	$	2,993
Developed technology		11.5		9,723		(4,913	)		4,810		11.9		33,613		(7,565	)		26,048
Patents and other		14.1		3,551		(2,251	)		1,300		14.1		3,551		(2,420	)		1,131
Total definite-lived intangible assets				26,790		(15,888	)		10,902				49,196		(19,024	)		30,172
Unamortized intangible assets:
Trademarks and trade names				580		—			580				580		—			580
Total intangible assets			$	27,370	$	(15,888	)	$	11,482			$	49,776	$	(19,024	)	$	30,752

	September 30, 2020									September 30, 2021
(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	$	13,356	$	(7,594	)	$	5,762		8.9	$	13,216	$	(8,878	)	$	4,338
Developed technology		11.5		9,685		(4,200	)		5,485		11.9		36,531		(5,652	)		30,879
Patents and other		14.1		3,551		(2,095	)		1,456		14.1		3,551		(2,294	)		1,257
Total definite-lived intangible assets				26,592		(13,889	)		12,703				53,298		(16,824	)		36,474
Unamortized intangible assets:
Trademarks and trade names				580		—			580				580		—			580
Total intangible assets			$	27,172	$	(13,889	)	$	13,283			$	53,878	$	(16,824	)	$	37,054

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Intangible asset amortization expense was $1.1 million and $0.6 million for ~~both~~ the three months ended June 30, 2022 and 2021, respectively, and ~~2020~~$3.4 million and $1.9 ~~million and $1.8~~ million for the nine months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively. Based on the intangible assets in service as of June 30, ~~2021,~~2022, estimated amortization expense for ~~the remainder of fiscal 2021 and each of the next five~~future fiscal years is as follows:

(In thousands)
Remainder of 2021	$	620
2022		2,471
Remainder of 2022			$	1,063
2023		1,858		3,739
2024		1,764		3,656
2025		1,725		3,622
2026		757		2,754
2027				2,510
Thereafter				12,828
Definite-lived intangible assets			$	30,172

Future amortization amounts presented above are estimates. Actual future amortization expense may be different as a result of future acquisitions, impairments, changes in amortization periods, foreign currency translation rates, or other factors.

9. Goodwill

Changes in the carrying amount of goodwill by segment were as follows:

(In thousands)	In Vitro Diagnostics		Medical Device		Total		In Vitro Diagnostics		Medical Device			Total
Goodwill as of September 30, 2020	$	8,010	$	19,175	$	27,185
Goodwill as of September 30, 2021							$	8,010	$	37,596		$	45,606
Currency translation adjustment		—		194		194		—		(3,293	)		(3,293	)
Goodwill as of June 30, 2021	$	8,010	$	19,369	$	27,379
Measurement period adjustment (1)								—		277			277
Goodwill as of June 30, 2022							$	8,010	$	34,580		$	42,590

(1)

During the third quarter of fiscal 2022, measurement period adjustments were recorded to finalize the allocation of purchase consideration for the fiscal 2021 Vetex acquisition (Note 11).

12Other Assets, Noncurrent

Other noncurrent assets consisted of the following:

	June 30,		September 30,
(In thousands)	2022		2021
Operating lease right-of-use assets	$	3,796	$	2,435
Other		1,711		1,283
Other assets	$	5,507	$	3,718

Other noncurrent assets include prepaid expenses and receivables related to refundable Irish research and development tax credits.

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~~10.~~ Accrued Other Liabilities

Accrued other liabilities consisted of the following:

	June 30,		September 30,
(In thousands)	2022		2021
Accrued professional fees	$	370	$	489
Accrued clinical study expense		1,876		1,667
Accrued purchases		1,198		1,195
Acquisition of in-process research and development (1)		975		494
Operating lease liability, current portion		897		518
Other		541		542
Total accrued other liabilities	$	5,857	$	4,905

(1)

Acquisition of in-process research and development consists of the present value of guaranteed payments to be made (current portion) in connection with an asset acquisition in fiscal 2018 (Note 10).

Other Long-term Liabilities

Other long-term liabilities consisted of the following:

June 30,

September 30,

(In thousands)

2021

2020

Accrued professional fees

$
439

$
239

Accrued clinical study expense

1,393

2,206

Accrued purchases

734

647

Acquisition of in-process research and development and
intangible assets

488

1,148

Due to customers

512

321

Construction-in-progress

—

272

Operating lease liability, current portion

510

436

Other

227

278

Total accrued other liabilities

$
4,303

$
5,547

	June 30,		September 30,
(In thousands)	2022		2021
Deferred consideration (1)	$	4,235	$	5,106
Contingent consideration (2)		826		817
Unrecognized tax benefits (3)		2,359		2,538
Operating lease liabilities (4)		4,104		3,188
Other long-term liabilities	$	11,524	$	11,649

(1)

Deferred consideration consists of the present value of guaranteed payments to be made (noncurrent portion) in connection with the fiscal 2021 Vetex acquisition (Note 11) and with an asset acquisition in fiscal 2018 (Note 10).

(2)

Contingent consideration consists of the fair value of contingent consideration liabilities associated with the fiscal 2021 Vetex acquisition (Note 11).

(3)

Balance of unrecognized tax benefits (Note 9) includes accrued interest and penalties, if applicable.

(4)

Operating lease liabilities consist of the non-current portion of the net present value of future minimum lease payments, reduced by the discounted value of leasehold improvement incentives paid or payable to the Company.

~~11.~~6. Debt

On September 14, 2020, the Company entered into a secured revolving credit facility pursuant to a Loan and Security Agreement, ~~(the~~which was amended by a First Amendment on July 2, 2021 and by a Second Amendment on March 7, 2022 (as amended, the "Loan Agreement") with Bridgewater Bank (“Bridgewater”). The Loan Agreement provides for availability under a secured revolving line of credit of up to $25 million (the "Revolving ~~Line of Credit"~~Credit Facility"). The outstanding balance on the Revolving ~~Line of~~ Credit Facility was 0$10.0 million as of both June 30, ~~2021~~2022 and September 30, ~~2020.~~2021.

~~Availability under the Revolving Line of Credit is subject to a borrowing base that equals 80% of the margin value of securities collateral that has been pledged to the Bank.~~ The Revolving ~~Line of~~ Credit ~~will initially~~Facility was scheduled to mature on September 14, 2021, but the Company extended the maturity to September 14, 2022, as permitted under the Loan Agreement. The maturity date may be extended by the Company for up to ~~two~~one additional extension ~~periods~~period of twelve months subject to certain conditions set forth in the Loan Agreement. The Company's obligations under the Loan Agreement are secured by substantially all of the Company’s and its material subsidiaries' assets, other than intellectual property, real estate and foreign assets, including equity in foreign subsidiaries. The Company has also pledged the stock of certain of its subsidiaries to secure such obligations. Interest under the Loan Agreement accrues at a rate per annum equal to the greater of (i) 3.25% per annum and (ii) the 90-day interest rate yield for U.S. Government Treasury Securities plus 2.75% per annum. A facility fee is payable on unused commitments at a rate of 0.075% quarterly. ~~For the nine months ended~~As of June 30, 2022 and September 30, 2021, ~~unused~~the weighted average interest rate on outstanding borrowings on the Revolving Credit Facility was 4.5% and 3.3%, respectively. Unused commitment fees, reported within interest expense on the condensed consolidated statements of operations, totaled 0 and less than $0.1 ~~million.~~million for the nine months ended June 30, 2022 and 2021, respectively.

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The Loan Agreement contains affirmative and negative covenants customary for a ~~transaction~~facility of this type which, among other things, require the Company to meet certain financial tests, including (i) minimum liquidity, (ii) minimum current ratio, (iii) minimum ~~adjusted EBITDA,~~quarterly revenue, and (iv) minimum tangible net worth. The Loan Agreement also contains covenants which, among other things, limit the Company's ability to incur additional debt, make certain investments, create or permit certain liens, create or permit restrictions on the ability of subsidiaries to pay dividends or make other distributions, consolidate or merge, and engage in other activities customarily restricted in such agreements, in each case subject to exceptions permitted by the Loan Agreement. The Loan Agreement also contains customary events of default, the occurrence of which would permit ~~the Bank~~Bridgewater to terminate its commitment and accelerate the Revolving ~~Line of Credit.~~Credit Facility.

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~~12.~~7. Stock-based Compensation Plans

The Company has stock-based compensation plans approved by its shareholders under which it grants stock options, restricted stock awards, restricted stock units and deferred stock units to officers, directors and key employees. Stock-based compensation expense was reported as follows in the condensed consolidated statements of operations:

	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	June 30,				June 30,				June 30,				June 30,
(In thousands)	2021		2020		2021		2020		2022		2021		2022		2021
Product costs	$	23	$	34	$	92	$	82	$	62	$	23	$	170	$	92
Research and development		329		189		918		619		355		329		1,086		918
Selling, general and administrative		1,104		1,117		3,308		3,336		1,382		1,104		3,942		3,308
Total	$	1,456	$	1,340	$	4,318	$	4,037	$	1,799	$	1,456	$	5,198	$	4,318

As of June 30, ~~2021, approximately $9.0 million of total~~2022, unrecognized compensation costs related to non-vested awards totaled approximately $11.7 million, which is expected to be recognized over a weighted average period of approximately ~~2.3~~2.4 years.

Stock Option Awards

~~During the nine months ended June 30, 2021 and 2020, the~~The Company ~~awarded 244,000 and 291,000~~awards stock options to officers, directors and key employees ~~with a weighted average grant date~~and uses the Black-Scholes option pricing model to determine the fair value ~~per~~of stock options as of the date of each grant. Stock option ~~of $14.08 and $14.12, respectively.~~grant activity was as follows:

	Nine Months Ended June 30,
	2022		2021
Stock option grant activity:
Stock options granted		312,000		244,000
Weighted average grant date fair value	$	16.11	$	14.08
Weighted average exercise price	$	42.78	$	39.24

Restricted Stock Awards

During the nine months ended June 30, ~~2021~~2022 and ~~2020,~~2021, the Company awarded ~~68,000~~90,000 and ~~64,000~~68,000 restricted stock shares, respectively, to certain key employees and officers with a weighted average grant date fair value per share of $43.02 and $38.06, ~~and $41.50,~~ respectively. Restricted Stock is valued based on the market value of the shares as of the date of grant.

Restricted Stock Unit Awards

During the nine months ended June 30, ~~2021~~2022 and ~~2020,~~2021, the Company awarded ~~12,000~~14,000 and ~~18,000~~12,000 restricted stock units, respectively, (“RSUs”) to directors and to key employees in foreign jurisdictions with a weighted average grant date fair value per unit of $42.79 and $45.13, ~~and $40.36,~~ respectively. RSUs are valued based on the market value of the shares as of the date of grant.

Employee Stock Purchase Plan

Our U.S. employees are eligible to participate in the amended 1999 Employee Stock Purchase Plan (“ESPP”) approved by our shareholders. ~~Shares issued under the ESPP totaled 8,000 and 7,000 for~~During the nine months ended June 30, 2022 and 2021, 10,000 and ~~2020,~~8,000 shares were issued under the ESPP, respectively.

~~13.~~15

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8. Net (Loss) Income Per Share Data

Basic net (loss) income per common share is calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per common share is computed by dividing net (loss) income by the weighted average number of common and common equivalent shares outstanding during the period. The Company’s potentially dilutive common shares are those that result from dilutive common stock options and non-vested stock relating to restricted stock awards and restricted stock units. However, these items have been excluded from the calculation of diluted net loss per share for the three and nine months ended June 30, 2022 and for the three months ended June 20, 2021 as their effect was anti-dilutive as a result of the net loss incurred for ~~that period.~~those periods. 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 three and nine months ended June 30, 2022 and for the three months ended June 30, 2021.

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The following table ~~sets forth~~presents the ~~calculation~~denominator for the computation of diluted weighted average shares outstanding:

	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	June 30,				June 30,				June 30,				June 30,
(In thousands)	2021		2020		2021		2020		2022		2021		2022		2021
Basic weighted average shares outstanding		13,837		13,601		13,740		13,577		13,929		13,837		13,907		13,740
Dilutive effect of outstanding stock options, non-vested restricted stock, and non-vested restricted stock units		—		185		219		198		—		—		—		219
Diluted weighted average shares outstanding		13,837		13,786		13,959		13,775		13,929		13,837		13,907		13,959

The calculation of weighted average diluted shares outstanding excludes outstanding stock options associated with the right to purchase less than 0.1 million shares of common stock for the ~~three months ended June 30, 2020 and less than 0.1 million shares of common stock for both the~~ nine months ended June 30, 2021, ~~and 2020~~ as their inclusion would have had an ~~anti-dilutive~~antidilutive effect on diluted net income per share for ~~the period.~~those periods.

~~14.~~9. Income Taxes

For interim income tax reporting, the Company estimates its annual effective tax rate and applies it to fiscal 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 reported income tax ~~expense~~benefit of ~~$(0.8)~~$1.5 million and income tax ~~benefit~~expense of ~~$1.2~~$(0.8) million for the three months ended June 30, 2022 and 2021, respectively, and ~~2020, respectively,~~income tax benefit of $3.2million and income tax expense of $(2.4) ~~million and income tax benefit of $3.4~~ million for the nine months ended June 30, 2022 and 2021, ~~and 2020,~~ respectively. For the nine months ended June 30, 2020, the income tax benefit includes a discrete tax benefit of $1.8 million as a result of our ability under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), enacted in March 2020, to carry back net operating losses (“NOLs”) incurred to periods when the statutory rate was 35% versus the current tax rate of 21%.

The effective income tax rate for the three and nine months ended June 30, ~~2021~~2022 and ~~2020~~2021 differs from the U.S. federal statutory tax rate of 21% primarily due to ~~the discrete tax benefits recognized under the CARES Act in the second quarter of fiscal 2020,~~ favorable impacts of the U.S. federal research and development tax credits, ~~in both the three-and nine-month periods, stock award activity in the three-month period, and~~ operating results of one of our Irish ~~subsidiary, where~~subsidiaries for which tax benefit is offset by a valuation ~~allowance.~~allowance, and the effects of equity compensation. The Company recognized discrete tax benefits related to stock-based compensation awards vested, expired, cancelled and exercised of less than $0.1 million infor both the three months ended June 30, 2022 and 2021 and ~~2020~~$0.1 million and $0.7 million ~~and $0.3 million in~~for the nine months ended June 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

The total amount of unrecognized tax benefits, excluding interest and penalties that, if recognized, would affect the effective tax rate was ~~$3.1~~$3.0 million and $2.7 million as of June 30, ~~2021~~2022 and September 30, ~~2020,~~2021, respectively. Interest and penalties related to unrecognized tax benefits are recorded in the income tax ~~benefit.~~benefit (provision).

The Company files income tax returns, including returns for its subsidiaries, in the U.S. federal jurisdiction and in various state jurisdictions, as well as several non-U.S. jurisdictions. Uncertain tax positions are related to tax years that remain subject to examination. The Internal Revenue Service commenced an examination of the Company’s fiscal 2019 U.S. federal tax return in the second quarter of fiscal 2022; the examination has not been completed. U.S. federal income tax returns for years prior to fiscal ~~2017~~2018 are no longer subject to examination by federal tax authorities. For tax returns for U.S. state and local jurisdictions, the Company is no longer subject to examination for tax years generally before fiscal ~~2009.~~2011. For tax returns for non-U.S. jurisdictions, the Company is no longer subject to income tax examination for years prior to ~~fiscal 2016.~~2017. Additionally, the Company has been indemnified of liability for any taxes relating to Creagh Medical, NorMedix and ~~NorMedix~~Vetex for periods prior to ~~their~~the respective acquisition dates, pursuant to the terms of the related share purchase agreements. There were 0 undistributed earnings in foreign subsidiaries as of June 30, ~~2021~~2022 and September 30, ~~2020.~~

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~~15. Segment Information~~

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, who is the Company’s Chief Executive Officer, in deciding how to allocate resources and in assessing performance. We operate 2 reportable segments:

•

~~Medical Device:~~ Surface modification coating technologies to improve access, deliverability, and predictable deployment of medical devices, as well as drug-delivery coating technologies to provide site-specific drug-delivery from the surface of a medical device, with end markets that include coronary, peripheral, neurovascular, and structural heart, among others; and the design, development, and manufacture of interventional medical devices, primarily balloons and catheters, including drug-coated balloons, for peripheral arterial disease treatment and other applications; and

•

~~In Vitro Diagnostics (“IVD”):~~ Design, development and manufacture of component products and technologies for diagnostic immunoassay, as well as molecular tests and biomedical research applications, with products that include protein stabilization reagents, substrates, surface coatings and antigens.

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

Three Months Ended

Nine Months Ended

June 30,

June 30,

(In thousands)

2021

2020

2021

2020

Revenue:

Medical Device

$
16,755

$
20,514

$
60,858

$
54,222

In Vitro Diagnostics

7,118

6,369

20,307

18,099

Total revenue

$
23,873

$
26,883

$
81,165

$
72,321

Operating (loss) income:

Medical Device

$
(2,491
)

$
532

$
5,480

$
(1,344
)
In Vitro Diagnostics

3,378

3,254

10,407

9,315

Total segment operating income

887

3,786

15,887

7,971

Corporate

(3,271
)

(2,622
)

(8,695
)

(7,229
)
Total operating (loss) income

$
(2,384
)

$
1,164

$
7,192

$
742

Depreciation and amortization:

Medical Device

$
1,631

$
1,424

$
5,004

$
4,318

In Vitro Diagnostics

121

112

314

331

Corporate

92

254

292

741

Total depreciation and amortization

$
1,844

$
1,790

$
5,610

$
5,390

The Corporate category includes expenses that are not fully allocated to Medical Device and In Vitro Diagnostics segments. These Corporate costs are related to administrative corporate 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 segment is not presented because the Company does not provide its chief operating decision maker assets by segment, as the data is not readily available.~~2021.

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~~16. Leases~~

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

June 30,

September 30,

2021

2020

Right-of-use assets:

Other assets

$
2,519

$
2,508

Operating lease liabilities:

Other accrued liabilities

$
510

$
436

Other long-term liabilities

3,321

3,340

Total operating lease liabilities

$
3,831

$
3,776

~~As of June 30, 2021, operating lease maturities for the remainder of fiscal 2021 and each of the next five fiscal years were as follows:~~

(In thousands)

Remainder of 2021

$
162

2022

657

2023

671

2024

685

2025

699

2026

604

Thereafter

894

Total expected operating lease payments

4,372

Less: Imputed interest

(541
)
Total operating lease liabilities

$
3,831

Operating lease cost was $0.2 million for both the three months ended June 30, 2021 and 2020 and $0.6 million and $0.5 million for the nine months ended June 30, 2021 and 2020, respectively. Cash paid for operating lease liabilities approximated operating lease cost for the three and nine month periods ended June 30, 2021 and 2020.

~~17.~~10. Commitments and Contingencies

~~InnoCore Technologies BV~~. In 2006, the Company entered into a license agreement whereby the Company obtained an exclusive license to a drug-delivery coating for licensed products within the vascular field, which included peripheral, coronary and neurovascular biodurable stent products. The license requires an annual, minimum payment of approximately $0.2 million (at the Euro to US dollar exchange rate as of June 30, 2021) until the last patent expires, which is currently estimated to be May 2027. The total minimum future payments associated with this license are approximately $1.4 million as of June 30, 2021. The license is currently utilized by one of the Company’s drug delivery customers.

Clinical Trials. The Company 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 SurVeil DCB, including pass-through expenses paid by the CROs, of up to approximately ~~$29~~$30 million in the aggregate. As of June 30, ~~2021,~~2022, an estimated $8 million remains to be paid 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~~$37 million to $40 million from inception to completion. In the event the Company were to terminate any trial, it may incur certain financial penalties which would become payable to the CRO for costs to wind down the terminated trial.

Asset Acquisitions. In the fiscal 2019, the Company acquired certain intellectual property assets supporting ongoing development of the Company’s medical device pipeline and paid the sellers $0.8 million in fiscal 2019 and $0.2 million in the first quarter of fiscal 2021. An additional $1.1 million in payments is contingent upon achievement of certain strategic milestones within a contingency period ending in 2022.

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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 in fiscal 2018, $1.0 million in ~~the second quarter of~~ fiscal 2020, ~~and~~ $1.0 million in the first quarter of fiscal ~~2021.~~2021, and $0.5 million in the second quarter of fiscal 2022. The Company is obligated to pay additional installments totaling $~~2.5~~$2.0 million in fiscal ~~2022~~2023 through fiscal 2024. These payments may be accelerated upon the occurrence of certain sales and regulatory milestones. An additional $~~1.0~~$1.0 million payment is contingent upon the achievement of certain regulatory milestones within a contingency period ending in 2033.

AsBusiness Combinations. See Note 11 Acquisitions for disclosure of ~~June 30,~~the fiscal 2021 ~~$0.5 million~~acquisition of Vetex Medical Limited and ~~$1.8 million related to these asset acquisitions was recorded in other accrued liabilities~~associated deferred and ~~other long-term liabilities, respectively, on the condensed consolidated balance sheets.~~contingent consideration liabilities.As of September 30, 2020, $1.1 million and $2.2 million related to these asset acquisitions was reported in other accrued liabilities and other long-term liabilities, respectively, on the condensed consolidated balance sheets.

~~18. Subsequent Events~~11. Acquisitions

~~Acquisition of~~ Vetex Medical Limited

On July 2, 2021, Surmodics ~~completed~~acquired all of the ~~acquisition of all~~ outstanding shares of Vetex Medical Limited (“Vetex”). Vetex, which was formerly privately held and is based in Galway, Ireland, develops and manufactures medical devices focused on venous clot removal solutions. The transaction ~~expands~~expanded Surmodics’ thrombectomy portfolio with a second ~~Food and Drug Administration (“FDA”)~~FDA 510(k)-cleared device, a mechanical venous thrombectomy device. The acquisition was accounted for as a business combination. The acquired assets, liabilities and operating results of Vetex have been included on our condensed consolidated financial statements within the Medical Device segment from the date of acquisition.

Surmodics acquired Vetex with an upfront cash payment of $39.9 million funded using cash on hand and $10.0 million from the Revolving Credit Facility. The Company is obligated to pay additional installments totaling $3.5 million in fiscal 2024 through fiscal 2027. These payments may be accelerated upon the occurrence of certain product development and regulatory milestones. An additional $3.5 million in payments is contingent upon the achievement of certain product development and regulatory milestones within a contingency period ending in fiscal 2027.

The acquisition date fair value of purchase consideration was as follows:

(In thousands)
Consideration paid at closing	$	39,985
Deferred consideration		3,257
Contingent consideration		814
Total purchase consideration		44,056
Less: Cash acquired		(432	)
Total purchase consideration, net of cash acquired	$	43,624

The fair value of contingent consideration was derived using a discounted cash flow approach based on Level 3 inputs. See Note 4 Fair Value Measurements for additional disclosures regarding contingent consideration.

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The final allocation of purchase consideration as of the acquisition date was as follows:

(In thousands)
Asset (Liability)
Current assets	$	18
Property and equipment		37
Intangible assets		27,600
Other non-current assets		37
Accrued compensation		(236	)
Other accrued liabilities		(111	)
Deferred income taxes		(3,087	)
Net assets acquired		24,258
Goodwill		19,366
Total purchase consideration, net of cash acquired	$	43,624

During the third quarter of fiscal 2022, the Company recorded measurement adjustments to provisional amounts previously recognized, which resulted in a $0.3increase in goodwill and a corresponding decrease in net identifiable assets acquired. The Company ~~recognized $0.5 million in acquisition transaction, integration and other costs related to~~finalized the accounting for the Vetex acquisition in the ~~three~~third quarter of fiscal 2022.

Acquired intangible assets consist of developed technology. We used the income approach, specifically the discounted cash flow method and ~~nine months ended June 30, 2021 in~~ the ~~condensed consolidated statements~~incremental cash flow approach using Level 3 inputs, to derive the fair value of ~~operations.~~the developed technology. The developed technology is amortized on a straight-line basis over its estimated useful life of 12 years. The amortization of the acquired intangible assets is tax deductible.

The ~~estimated purchase consideration and~~ allocation is preliminary as the acquisition was recently completed. The preliminary estimated total purchase consideration is approximately $45 million, which consisted of $40 million of cash paid at closing, less than $1 million operating liabilities assumed, $3 million deferred consideration, and $1 million contingent consideration. Deferred consideration and contingent consideration are stated at their respective acquisition date estimated fair values. The Company expects to recognize approximately $28 million in intangible assets, approximately $3 million in deferred tax liabilities, and approximately $19 million in goodwill ~~within the Medical Device operating segment. The goodwill to be~~ recorded from the Vetex acquisition is a result of expected synergies from integrating the Vetex business into the Company’s Medical Device segment and from acquiring and retaining the existing Vetex workforce. The goodwill is not deductible for tax purposes.

~~Amendment to Loan Agreement~~

On July 2, 2021, the Company entered into a First Amendment to Loan and Security Agreement (the “Amendment”) with Bridgewater amending the Loan Agreement. Among other things, the Amendment modifies certain affirmative and negative covenants, specifically the amount the Company may pay for permitted acquisitions and the terms of the required minimum current ratio. See Note 11 Debt for additional information regarding the Loan Agreement.

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12. Segment Information

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

	Three Months Ended						Nine Months Ended
	June 30,						June 30,
(In thousands)	2022			2021			2022			2021
Revenue:
Medical Device	$	17,528		$	16,755		$	52,889		$	60,858
In Vitro Diagnostics		7,326			7,118			21,074			20,307
Total revenue	$	24,854		$	23,873		$	73,963		$	81,165

Operating (loss) income:
Medical Device	$	(7,308	)	$	(2,491	)	$	(16,712	)	$	5,480
In Vitro Diagnostics		3,387			3,378			10,262			10,407
Total segment operating (loss) income		(3,921	)		887			(6,450	)		15,887
Corporate		(3,222	)		(3,271	)		(9,034	)		(8,695	)
Total operating (loss) income	$	(7,143	)	$	(2,384	)	$	(15,484	)	$	7,192

Depreciation and amortization:
Medical Device	$	2,020		$	1,631		$	6,347		$	5,004
In Vitro Diagnostics		88			121			260			314
Corporate		98			92			295			292
Total depreciation and amortization	$	2,206		$	1,844		$	6,902		$	5,610

The Corporate category includes expenses that are not fully allocated to the Medical Device and In Vitro Diagnostics segments. These Corporate costs are related to administrative corporate functions, such as executive management, corporate accounting, information technology, legal, human resources and Board of Directors. Corporate may also include expenses, such as acquisition-related costs and litigation, which are not specific to a segment and thus not allocated to the reportable segments.

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

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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. 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, ~~2020.~~2021. 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.

Overview

Surmodics, Inc. and subsidiaries (referred to as “Surmodics,” the “Company,” “we,” “us,” “our” and other like terms) is a leading provider of surface modification technologies for intravascular medical devices and chemical components for in vitro diagnostic (“IVD”) immunoassay tests and microarrays. Surmodics is pursuing development and commercialization of highly differentiated medical devices that are designed to address unmet clinical needs and engineered to the most demanding requirements. This key growth strategy leverages the combination of the Company’s expertise in proprietary surface technologies, along with enhanced device design, development, and manufacturing capabilities. The Company mission remains to improve the detection and treatment of disease.

Acquisition of Vetex Medical Limited

~~On July 2,~~In the fourth quarter of fiscal 2021, Surmodics completed the acquisition of all outstanding shares of Vetex Medical Limited (“Vetex”). Vetex, which was formerly privately held and is based in Galway, Ireland, develops and manufactures medical devices focused on venous clot removal solutions. Surmodics acquired Vetex with an upfront cash payment of $39.9 million funded using cash on hand and $10 million from the Company’s $25 million revolving credit facility. Additional payments of up to $7 million, $3.5 million of which are guaranteed, may be made upon achievement of certain product development and regulatory milestones.

The transaction expands Surmodics’ thrombectomy portfolio with a second Food and Drug Administration (“FDA”) 510(k)-cleared device, ~~a mechanical thrombectomy catheter~~which is marketed as our Pounce^TM Venous Thrombectomy Catheter, for use in venous vascular beds that is specifically designed to remove large, mixed-morphology blood clots commonly found with venous thromboembolism (“VTE”). The ~~Vetex venous thrombectomy catheter~~Pounce Venous Thrombectomy Catheter has also received Conformité Européenne Mark (“CE Mark”) approval, which is a prerequisite for commercialization in the ~~E.U~~European Union (“E.U.”). The device’s dual action technology efficiently removes mixed-morphology clot in a single session, minimizing the need for thrombolytics and without capital equipment. ~~Refer to the Product Development discussion below for next steps in preparation for commercialization of the venous thrombectomy catheter.~~

~~Product Development~~Vascular Intervention Device Platforms

~~Our business model for our whole-product solutions strategy within~~Within our Medical Device segment, ~~is to design,~~we develop and manufacture ~~highly differentiated~~our own proprietary vascular intervention medical device products, ~~that incorporate~~which leverage our ~~proprietary catheter, balloon, thrombectomy and/or~~expertise in surface modification coating technologies, ~~to improve patient outcomes~~product design and ~~reduce procedure costs, while maintaining patient safety.~~engineering capabilities. We ~~are focused on~~believe our strategy of developing devices that meet the needs of a spectrum of care settings ranging from hospitals, to ambulatory surgery centers, to office-based interventional labs in order to provide improved care and address unmet needs in the treatment of peripheral artery disease (“PAD”) and other vascular diseases.

~~Below is a brief summary of~~ our ~~pipeline of~~own medical device products ~~under~~has increased, and will continue to increase, our relevance in the medical device industry. This strategy is key to our future growth and profitability, providing us with the opportunity to capture more revenue and operating margin with vascular intervention products than we would by licensing our device-enabling technologies.

Highlighted below are select medical device products within our development pipeline that are a focus for fiscal 2022 development and ~~recently commercialized, grouped~~commercialization efforts. For both our thrombectomy and radial access platforms, we are pursuing commercialization in fiscal 2022 via a direct sales strategy leveraging a small team of experienced sales professionals and clinical specialists. We have begun to see modest, but meaningful and growing revenue associated with the adoption, utilization, and sales of our Pounce and Sublime^TM platform products.

Pounce Thrombectomy Platform

We have successfully developed, internally and through acquisitions, two FDA 510(k) approved mechanical thrombectomy devices for the non-surgical removal of thrombi and emboli (clots) from the peripheral vasculature (legs). In addition to FDA clearance, our Pounce Venous Thrombectomy Catheter has received the CE Mark approval prerequisite for commercialization in the E.U. We believe that the ease of use, intuitive design and efficient performance of our thrombectomy products make these devices viable first-line treatment options for interventionalists. These devices include:

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•

Pounce Arterial Thrombo-embolectomy System for removal of clots from arteries in the legs associated with peripheral arterial disease (“PAD”). Clinical product evaluations began in the second half of fiscal 2021 and continued into fiscal 2022. Commercial sales began in the first quarter of fiscal 2022.

•

Pounce Venous Thrombectomy Catheter for removal of clots from veins in the legs generally associated with VTE. Process and manufacturing validations for our Pounce venous thrombectomy catheter are expected to continue into fiscal 2023, followed by clinical product evaluation activities, which are an important precursor to commercialization.

Sublime Radial Access Platform

We have successfully developed and secured FDA 510(k) regulatory approval for a suite of devices that enable vascular intervention via radial (wrist) access. These devices include:

•	Sublime guide sheath to provide the conduit for peripheral intervention with an access point at the wrist that enables treatment all the way to the pedal loop of the foot;

•	Sublime .014 RX PTA Dilatation Catheter for treatment of lesions in arteries below the knee all the way to the patient’s foot and around the pedal loop; and

•	Sublime .018 RX PTA Dilatation Catheter for treatment of lesions in arteries above and below the knee.

Commercial sales began in the fourth quarter of fiscal 2021 for our Sublime guide sheath and Sublime .014 RX PTA dilatation catheter. For our Sublime .018 RX PTA dilatation catheter product, ~~platform.~~commercial sales began in the first quarter of fiscal 2022.

Drug-coated ~~Balloons~~Balloon Platform

Surmodics’ drug-coated balloons (“DCBs”) are designed for vascular interventions to treat ~~peripheral arterial disease (“PAD”)~~PAD, a condition that causes a narrowing of the blood vessels supplying the extremities.

•

SurVeil™ DCB – paclitaxel-coated DCB to treat PAD in the upper leg (superficial femoral artery). In fiscal 2018, we entered into an agreement (the “Abbott Agreement”) with Abbott Vascular, Inc. (“Abbott”) that provides Abbott with exclusive worldwide commercialization rights to the SurVeil DCB product. Our SurVeil DCB utilizes a proprietary paclitaxel drug-excipient formulation for a durable balloon coating and is manufactured using an innovative process to improve coating uniformity.

~~We announced~~The SurVeil DCB has the necessary regulatory approval for commercialization in ~~January~~the E.U., and timing of commercialization in the E.U. is at the discretion of our exclusive distribution partner, Abbott. In fiscal 2021, ~~that our~~the TRANSCEND pivotal clinical trial ~~the pivotal trial for the~~of our SurVeilDCB met both the primary safety and primary efficacy endpoints and ~~the~~ ~~SurVeil~~ ~~DCB~~ was found to be non-inferior to the control device in those ~~endpoints to the Medtronic IN.PACT® Admiral® DCB, while delivering a substantially lower drug dose.~~

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In the second quarter of fiscal 2021, we delivered to Abbott the written clinical report and related materials that demonstrated the primary safety endpoint and primary efficacy endpoint for the TRANSCEND clinical study were met. As a result, we received a $15 million milestone payment from Abbott in the second quarter of fiscal 2021, of which $10.8 million was recognized as license fee revenue in the second quarter of fiscal 2021.endpoints.

In June 2021, we submitted the fourth and final module of our ~~PMA submission~~application to the FDA for premarket approval (“PMA”) of our SurveilDCB, including certain long-term vital status data required by the FDA. ~~We are targeting the second~~ ~~quarter of fiscal 2022 for receipt~~The Agency has requested certain additional data, and we continue to work closely with the Agency to fulfill requirements regarding our PMA application. Receipt of PMA from the FDA, ~~which is~~if granted, would be expected to fulfill the requirements for a $30 million (if received by December 31, 2022) or $27 million (if received after December 31, 2022) milestone payment pursuant to the Abbott Agreement.

•

Sundance™ DCB – sirolimus-coated DCB ~~to treat~~for the treatment of below-the-knee PAD. We ~~commenced~~completed six-month patient follow-up visits in the fourth quarter of fiscal 2021 for the SWING first-in-human, 35-patient clinical study of our Sundance DCB. In fiscal 2022, we finalized the clinical report for the SWING trial, which demonstrated promising early safety data and performance insights. Pursuant to the Abbott Agreement, Abbott had an exclusive option period to negotiate for a commercialization agreement for the Sundance DCB product, and this option period has expired. We are assessing next steps in the ~~third quarter~~clinical development and future commercialization of ~~fiscal 2020. In~~ the ~~second quarter of fiscal 2021, we completed enrollment in the SWING clinical study. We expect six-month results from the SWING clinical study to be available in the first quarter of fiscal 2022.~~Sundance DCB.

•

~~Avess™~~Avess^TM DCB – paclitaxel-coated DCB for the treatment of arteriovenous (“AV”) fistulae commonly associated with hemodialysis. In fiscal 2019, we commenced and completed enrollment in a first in-human, 12-patient clinical study of our AvessDCB. In fiscal 2020, initial study results were received and demonstrated promising early safety data and performance insights, with greater than 90% of treated patients free from revascularization at six months. AsWe continue to evaluate our strategy for further clinical development and future commercialization of the ~~third quarter of fiscal 2021, we have completed the build out of the full matrix sizes for the base balloon used in the~~ ~~Avess~~ DCB. In the second half of fiscal 2021, process validation, design verification, and product validation efforts are underway as we continue to assess the optimal regulatory and clinical strategy for our Avess DCB.

~~Thrombectomy~~

Surmodics’ thrombectomy products are mechanical devices designed for the removal of clots from venous and arterial vascular beds without the need for capital equipment, while minimizing the need for thrombolytics.

•

~~Arterial Clot Removal~~– ~~In the fourth quarter of fiscal 2020, we received FDA 510(k) clearance on our first thrombectomy device, the Pounce~~^TMThrombectomy System, intended for the non-surgical removal of thrombi and emboli (clots) from the peripheral arterial vasculature. In the fourth quarter of fiscal 2021, we received FDA 510(k) clearance for an indication expansion to use the ~~Pounce~~ Thrombectomy System in smaller vessels down to 3.5 mm, which expands the therapeutic applicability of the device to include both superficial femoral arteries and infrapopliteal (below-the-knee) arteries. Clinical product evaluations are an important precursor to commercialization and provide product performance experience from physicians in real-world case settings. Clinical product evaluations of our ~~Pounce~~ ~~Thrombectomy System began in the third quarter of fiscal 2021 and are expected to continue through early fiscal 2022.~~

•

~~Venous Clot Removal~~ – On July 2, 2021, we completed the acquisition of Vetex and expanded our thrombectomy portfolio to include a second FDA 510(k)-cleared device, a venous thrombectomy catheter specifically designed to remove large, mixed-morphology blood clots commonly found with VTE. Process and manufacturing validations for our venous thrombectomy catheter are underway and are expected to continue through the second quarter of fiscal 2022. We expect to initiate clinical product evaluation activities for our venous thrombectomy catheter in calendar 2022.

~~Radial Access~~

~~Surmodics’ Sublime~~^TM ~~radial access and therapeutic devices are designed to provide wrist access to the peripheral vasculature.~~

•	~~Sublime~~ ~~Guide Sheath~~ ~~– In fiscal 2019, we received FDA 510(k) clearance for our~~ ~~Sublime~~ ~~guide sheath, which enables the performance of lower extremity interventions from the radial artery.~~

•	~~Sublime~~ ~~.014 RX PTA Dilatation Catheter~~ ~~– In the third quarter of fiscal 2020, we received FDA 510(k) clearance for the~~ ~~Sublime~~ ~~radial-access .014 RX percutaneous transluminal angioplasty (“PTA”) dilatation catheter for treatment of lesions in arteries below the knee.~~

•	~~Sublime~~ ~~.018 RX PTA Dilatation Catheter~~ ~~– In the third quarter of fiscal 2021, we received FDA 510(k) clearance for the~~ ~~Sublime~~ ~~radial-access .018 RX PTA dilatation catheter for treatment of lesions above the knee.~~

~~Clinical product evaluations of both our~~ ~~Sublime~~ guide sheath and .014 RX PTA dilatation catheter products began in the second quarter of fiscal 2021 and are expected to continue through the second half of fiscal 2021. We are targeting the first half of fiscal 2022 to initiate clinical product evaluation activities for our ~~Sublime~~ ~~.018 RX PTA dilatation catheter product.~~

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~~Specialty Catheters~~

•

~~Telemark™~~– coronary/peripheral support microcatheter. This product was commercialized in fiscal 2020 pursuant to an agreement with Medtronic plc (“Medtronic”) for distribution in the U.S. and Europe for coronary applications. Shipment of initial U.S. orders of our ~~Telemark~~ ~~microcatheter commenced early in fiscal 2020. In the third quarter of fiscal 2020, we obtained CE Mark for our~~ ~~Telemark~~ ~~microcatheter and shipped initial European orders.~~

•

~~.014 and .018 Low-profile PTA Balloon Dilation Catheters~~ – specialty PTA balloon catheters for difficult-to-treat lesions. These products were commercialized in fiscal 2020 pursuant to an agreement with Cook Medical for worldwide distribution, excluding Japan. Shipment of initial orders and the U.S. commercial launch commenced in the third quarter of fiscal 2020.

For more information regarding our ~~product development and commercialization strategy,~~vascular intervention medical devices, see Part I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2020.~~2021.

~~Coating Technology Patents~~21

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We generate royalties revenue from licensing our proprietary surface coating technology to customers. Medical Device royalties revenue was 30%, 35% and 38% of our total revenue for fiscal 2020, 2019 and 2018, respectively. The most significant source of royalties revenue was derived from our hydrophilic coating technology. The latest generation of our hydrophilic coating technology, our Serene™ hydrophilic coating, is protected by a family of patents that begin to expire in 2033. Royalties revenue associated with our ~~Serene~~COVID Pandemic Update hydrophilic coating technology increased approximately 27% in fiscal 2020, compared to the prior year, driven by customer product launches and resulting market share increases associated with customer device applications that incorporate this next-generation coating technology.

The family of patents that protected our fourth-generation PhotoLink™ hydrophilic coating technology expired in the first quarter of fiscal 2020 in all countries where patent coverage existed for the technology, except in Japan, where the relevant patent expired in the first quarter of fiscal 2021. Medical Device royalties revenue associated with our fourth-generation hydrophilic coating technology was approximately 14%, 21% and 21% of our total revenue for fiscal 2020, 2019 and 2018, respectively. Of the license agreements using our fourth-generation and early-generation ~~Photolink~~ technologies, most continue to generate royalties revenue for know-how and other proprietary rights, at a reduced royalty rate, beyond patent expiration. The amount of the decline in royalties and license fee revenue in fiscal 2020, compared to the prior year, related specifically to the expiration of fourth-generation hydrophilic coating patents was approximately $5.5 million. In fiscal 2021, we expect a decline of approximately $1.0 million to $1.5 million in royalties and license fee revenue, compared to the prior year, specific to the tail-end impact of these fourth-generation patent expirations, which reflects the mitigating impact of growth among our fourth-generation coating customers. In addition, we expect the decline in fourth-generation coating royalties to be more than offset by continued growth in our next-generation ~~Serene~~ ~~hydrophilic coating royalties portfolio.~~

~~COVID-19 Pandemic~~

Our business, operations and financial condition and results have been and may continue to be impacted by the ~~COVID-19~~COVID pandemic. In fiscal 2020, we experienced significant and unpredictable reductions in both royalties and license fee revenue and product sales, primarily in our Medical Device business, as our customers were negatively impacted by the decline in the volume of elective procedures that resulted from the global healthcare system’s response to ~~COVID-19.~~COVID. As fiscal 2021 ~~has~~ progressed, we ~~are seeing~~observed a diminishing degree of COVID-related impacts to our reported revenue. However, ~~the~~in fiscal 2022, we are continuing to see COVID-related macroeconomic impacts to our reported revenue, as our customers are affected by supply chain disruptions and pressures on procedure volumes. In fiscal 2022, our operations have also been affected by supply chain disruptions. The extent to which the ~~COVID-19~~COVID pandemic continues to impact the Company’s results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and longevity of ~~COVID-19~~COVID and its variants, ~~the resurgence~~regional waves of ~~COVID-19 in regions that have begun to recover from the initial impact of the pandemic,~~COVID, the impact of ~~COVID-19~~COVID on economic activity, the emergence of new variants of COVID, and the actions to contain its impact on public health and the global economy. For further information, refer to “Risk Factors” in Part ~~II,~~I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2020.~~

~~Table of Contents~~2021.

Results of Operations

Three and Nine Months Ended June 30, ~~2021~~2022 and ~~2020~~2021

Revenue. Revenue for the third quarter of fiscal ~~2021~~2022 was ~~$23.9~~$24.9 million, ~~a decrease~~an increase of ~~11.2%,~~4.1% compared to the ~~third quarter of fiscal 2020.~~same prior-year period. Revenue for the first nine months of fiscal ~~2021~~2022 was ~~$81.2~~$74.0 million, ~~an increase~~a decrease of ~~12.2%,~~8.9% compared to the same prior-year period. The following is a summary of revenue ~~by operating segment:~~streams within each reportable segment.

	Three Months Ended June 30,							Nine Months Ended June 30,							Three Months Ended June 30,										Nine Months Ended June 30,
(In thousands)	2021		2020		% Change			2021		2020		% Change			2022		2021		$ Change			% Change			2022		2021		$ Change			% Change
Revenue
Medical Device	$	16,755	$	20,514		(18.3	)%	$	60,858	$	54,222		12.2	%
Product sales															$	6,741	$	5,493	$	1,248			23	%	$	19,970	$	15,464	$	4,506			29	%
Royalties																7,771		7,752		19			0	%		23,015		23,135		(120	)		(1	)%
License fees																1,024		1,044		(20	)		(2	)%		3,723		15,047		(11,324	)		(75	)%
R&D and other																1,992		2,466		(474	)		(19	)%		6,181		7,212		(1,031	)		(14	)%
Medical Device Revenue																17,528		16,755		773			5	%		52,889		60,858		(7,969	)		(13	)%
In Vitro Diagnostics		7,118		6,369		11.8	%		20,307		18,099		12.2	%
Product sales																7,178		6,591		587			9	%		20,257		18,505		1,752			9	%
R&D and other																148		527		(379	)		(72	)%		817		1,802		(985	)		(55	)%
In Vitro Diagnostics Revenue																7,326		7,118		208			3	%		21,074		20,307		767			4	%
Total Revenue	$	23,873	$	26,883		(11.2	)%	$	81,165	$	72,321		12.2	%	$	24,854	$	23,873	$	981			4	%	$	73,963	$	81,165	$	(7,202	)		(9	)%

Medical Device. Medical Device revenue was ~~$16.8 million in the third quarter of fiscal 2021, a decrease of 18.3%, compared to $20.5~~$17.5 million for the third quarter of fiscal ~~2020.~~2022, an increase of 4.6% compared to $16.8 million for the same prior-year period. Medical Device revenue ~~for the first nine months of fiscal 2021~~ was ~~$60.9 million, an increase of 12.2%, compared to the same prior-year period.~~

~~Medical Device royalties and license fee revenue was $8.8 million for the third quarter of fiscal 2021, a decline of 29.1% or $3.6 million, and was $38.2~~$52.9 million for the first nine months of fiscal ~~2021, an increase~~2022, a decrease of ~~24.1% or $7.4 million,~~13.1% compared to ~~the same respective prior-year periods. License fee revenue under the Abbott Agreement was $1.0 million and $7.6~~$60.9 million for the same prior-year period.

•

Medical Device product sales increased 22.7% to $6.7 million for the third quarter of fiscal 2022, compared to $5.5 million for the third quarter of fiscal 2021. Medical Device product sales increased 29.1% to $20.0 million in the first nine months of fiscal 2022, compared to $15.5 million for the same prior-year period. For both the third quarter and first nine months of fiscal 2022, broad-based growth in sales of medical device products and coating reagent products drove the increase in revenue year-over-year. Sales of medical device products includes contract-manufactured balloon catheters, proprietary specialty catheters distributed by strategic partners, and recently commercialized Pounce and Sublime products. Sales of contract-manufactured balloon catheters for the third quarter and first nine months of fiscal 2022 were adversely impacted by supply chain challenges related to certain packaging components, and in the same prior-year periods, sales of contract-manufactured balloon catheters were adversely impacted by a product replacement matter.

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Medical Device coatings royalties revenue was $7.8 million for both the third quarter of fiscal 2022 and 2021. For the first nine months of fiscal 2022, Medical Device coatings royalties revenue was $23.0 million, compared to $23.1 million for the same prior-year period. For the third quarter and first nine months of fiscal 2022, we continued to see solid growth in royalties revenue from customers utilizing our Serene^TM coating. This was offset by several macroeconomic factors, including pressure on procedure volumes from hospital capacity constraints and customer supply chain disruptions, as well as by customer devices maturing through their product life cycles.

Table of ~~fiscal 2021 and 2020, respectively,~~Contents

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License fee revenue from the Abbott Agreement for our SurVeil DCB was $1.0 million for both the third quarter of fiscal 2022 and 2021. For the first nine months of fiscal 2022 and 2021, license fee revenue from the Abbott Agreement was $3.6 million and $14.8 million, respectively. The first nine months of fiscal 2021 included $11.0 million ~~and $10.4 million for the first nine months of fiscal 2021 and 2020, respectively. The fluctuations~~ in license fee revenue recognized from the $15 million milestone payment received in the second quarter of fiscal 2021.

Abbott Agreement license fee revenue ~~were primarily due~~is recognized as costs are incurred on a proportional basis to total expected costs for the TRANSCEND pivotal clinical trial. The percentage of costs incurred relative to total estimated costs for the TRANSCEND pivotal clinical trial of our SurVeil DCB was approximately 81% and 76% as of June 30, 2022 and September 30, 2021, respectively. We estimate this percentage will be approximately 83% by the end of fiscal 2022, with the remaining 17% of costs incurred and revenue recognized over the subsequent final three years of the TRANSCEND trial follow-up and clinical reporting period.

Future license fee revenue related to the Abbott Agreement will depend extensively on whether and when we receive the milestone payment of up to $30 million associated with receipt of ~~milestone payments. In~~ the ~~second quarter~~PMA of ~~fiscal 2021, a $15.0~~the SurVeil DCB. Approximately $25 million of the $30 million milestone payment ~~was received on which $11.0 million in Abbott Agreement~~would be recognized as license fee revenue ~~was recognized~~ in the ~~first nine months of fiscal 2021. In~~period in which it is received. If PMA is received after December 31, 2022, the ~~third quarter of fiscal 2020, a $10.8 million~~ milestone payment ~~was received on which $6.7~~is reduced to $27 million ~~in Abbott Agreement license fee revenue was recognized in~~pursuant to the third quarter and first nine months of fiscal 2020. Royalties revenue increased 63.1% to $7.8 million for the third quarter of fiscal 2021, compared to $4.8 million in the prior-year quarter, and increased 13.6% to $23.1 million for the first nine months of fiscal 2021, compared to $20.4 million in the same prior-year period. With respect to COVID-19, the third quarter of fiscal 2020 provides a favorable comparison as it was the most significantly impacted period since the onsetterms of the ~~pandemic. Fiscal 2021 royalties revenue benefited from broad-based, year-over-year growth, most notably from our~~ ~~Serene~~ coating customers. For the first nine months of fiscal 2021, the year-over-year impact of the expiration our fourth-generation hydrophilic coatings was approximately $1.2 million, largely in the first quarter.Abbott Agreement.

Medical Device product sales declined 4.7% to $5.5 million for the third quarter of fiscal 2021, compared to the prior-year quarter. For the first nine months of fiscal 2021, Medical Device product sales declined 4.8% to $15.5 million, compared to the same prior-year period. For both the third quarter and first nine months of fiscal 2021, product sales were unfavorably impacted by softness in legacy balloon catheter sales volume due in part to a product replacement matter for one of our contract manufactured products. For the third quarter of fiscal 2021, this was offset, in part, by growth in product sales of chemical reagents, compared the prior year.

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Medical Device R&D and other revenue declined by $(0.5) million and $(1.0) million for the third quarter and first nine months of fiscal 2022, respectively, compared to the same respective prior-year periods, driven by lower coating services volume from supply chain challenges related to customer supplied components.

In Vitro Diagnostics. In Vitro Diagnostics revenue increased ~~11.8%~~2.9% to $7.3 million for the third quarter of fiscal 2022, compared to $7.1 million for the third quarter of fiscal ~~2021 and~~2021. In Vitro Diagnostics revenue increased ~~12.2%~~3.8% to ~~$20.3~~$21.1 million for the first nine months of fiscal ~~2021,~~2022, compared to $20.3 million for the same ~~respective~~ prior-year periods. For the third quarter of fiscal 2021, IVD product sales benefited from favorable order timing for our distributed antigen products. For the first nine months of fiscal 2021, the growth in IVD revenue was driven by broad-based demand across all IVD product offerings, notably for our microarray slide/surface products and development projects.period.

~~Table of Contents~~

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IVD product revenue was $7.2 million for the third quarter of fiscal 2022, an increase of 8.9% compared to the same prior-year period. For the first nine months of fiscal 2022, IVD product revenue was $20.3 million, an increase of 9.5% compared to the same prior-year period. For the third quarter of fiscal 2022, sales of microarray slide/surface, protein stabilization, and distributed antigen products contributed to product revenue growth year-over-year. For the first nine months of fiscal 2022, sales of distributed antigen, protein stabilization, and colorimetric substrate products contributed to product revenue growth year-over-year.

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IVD R&D and other revenue declined by $(0.4) million and $(1.0) million for the third quarter and first nine months of fiscal 2022, respectively, compared to the same respective prior-year periods. The decline in R&D and other revenue was primarily related to the completion of a customer development program.

Operating costs and expenses. Major costs and expenses as a percentage of total revenue were as follows:

	Three Months Ended June 30,										Nine Months Ended June 30,												Three Months Ended June 30,										Nine Months Ended June 30,
	2021					2020					2021						2020						2022					2021					2022					2021
(In thousands)	Amount		% Total Revenue			Amount		% Total Revenue			Amount			% Total Revenue			Amount			% Total Revenue			Amount		% Total Revenue			Amount		% Total Revenue			Amount		% Total Revenue			Amount		% Total Revenue
Product costs	$	5,105		21	%	$	4,443		17	%		$	13,018		16	%		$	11,415		16	%	$	5,141		21	%	$	5,105		21	%	$	14,745		20	%	$	13,018		16	%
Research and development		12,246		51	%		13,324		50	%			36,003		44	%			37,401		52	%		12,975		52	%		12,246		51	%		38,350		52	%		36,003		44	%
Selling, general and administrative		7,885		33	%		7,416		28	%			22,815		28	%			21,092		29	%		12,854		52	%		7,885		33	%		33,159		45	%		22,815		28	%
Acquired intangible asset amortization		560		2	%		536		2	%			1,676		2	%			1,671		2	%		1,024		4	%		560		2	%		3,184		4	%		1,676		2	%
Acquisition transaction, integration and other costs		461		2	%		—		—				461		1	%			—		—			—		—	%		461		2	%		—		—	%		461		1	%
Contingent consideration expense																								3		—	%		—		—	%		9		—	%		—		—	%

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Product costs. Product gross margins (defined as product sales less related product costs, as a percentage of product sales) were ~~58%~~63.1% and ~~63%~~57.8% for the third quarter of fiscal ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~62%~~63.3% and ~~66%~~61.7% for the first nine months of fiscal 2022 and 2021, respectively. Prior-year gross margins for the third quarter and ~~2020, respectively. For both the three- and nine-month periods in~~first nine months of fiscal 2021 ~~product gross margins~~ were unfavorably impacted by $0.7 million in charges related to a product replacement matter for one of the ~~contract manufactured~~contract-manufactured products in our Medical Device ~~business,~~business. The benefit to product gross margins for the third quarter and first nine months of fiscal 2022 from leverage on higher sales volume, compared to the same respective prior-year periods, was partly offset by ~~the~~a net ~~favorable~~unfavorable impact from product mix, as well as by certain manufacturing inefficiencies associated with ~~as a result~~ramp up of ~~growth in IVD product sales and a decline in legacy balloon catheter product sales.~~production of new products.

Research and development (“R&D”) expense. For the third quarter of fiscal ~~2021,~~2022, R&D expense ~~declined 8%~~increased 6.0%, or ~~$(1.1)~~$0.7 million, compared to the prior-year quarter. For the first nine months of fiscal ~~2021,~~2022, R&D expense ~~declined 4%~~increased 6.5%, or ~~$(1.4)~~$2.3 million, compared to the same prior-year period. R&D expense as a percentage of revenue was ~~51%~~52.2% and ~~50%~~51.3% for the third quarter of fiscal ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~44%~~51.9% and ~~52%~~44.4% for the first nine months of fiscal 2022 and 2021, respectively. R&D expense as a percentage of revenue for the first nine months of fiscal 2021 ~~and 2020, respectively. Clinical trial spending and other costs related to our~~ ~~SurVeil~~ ~~DCB declined for both~~reflected the impact of the $11.0 million in revenue recognized on the previously discussed Abbott milestone payment. For the third quarter and first nine months of fiscal 2022, the fiscal 2021 Vetex acquisition added $0.4 million and $1.3 million in R&D expense, respectively, compared to the same respective prior-year ~~periods, with~~periods. The year-over-year increase in R&D expense for the ~~progression~~third quarter and first nine months of ~~the TRANSCEND clinical trial from patient follow up in~~ fiscal ~~2020~~2022 was primarily related to ~~preparation~~medical device product development, including support for commercialization of ~~the clinical report~~our Pounce and ~~submission of the final PMA modules in fiscal 2021.~~Sublime platforms.

Selling, general and administrative (“SG&A”) expense. For the third quarter of fiscal ~~2021,~~2022, SG&A expense increased 6%63.0%, or ~~$0.5~~$5.0 million, compared the prior-year quarter. For the first nine months of fiscal ~~2021,~~2022, SG&A expense increased 8%45.3%, or ~~$1.7~~$10.3 million, compared the same prior-year period. The increase in SG&A expense year-over-year for the third quarter and first nine months of fiscal 2022 was related to sales and marketing activities, including new hires and infrastructure investments, to support the commercialization of our Pounce and Sublime products. SG&A expense as a percentage of revenue was ~~33%~~51.7% and ~~28%~~33.0% for the third quarter of fiscal ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~28%~~44.8% and ~~29%~~28.1% for the first nine months of fiscal 2022 and 2021, respectively. SG&A expense as a percentage of revenue for the first nine months of fiscal 2021 reflected the impact of the $11.0 million in revenue recognized on the previously discussed Abbott milestone payment. We expect SG&A expenditures to continue to increase, as we continue to invest in sales and ~~2020, respectively. Personnel~~marketing personnel and ~~other investments~~infrastructure to support ~~product development~~ commercialization of our Sublime and ~~strategic initiatives drove the increase in SG&A expense in the third quarter and first nine months of fiscal 2021, compared to the prior year.~~Pounce platforms.

Acquired intangible asset amortization. We have previously acquired certain intangible assets through business ~~combinations. Amortization expense on~~combinations, which are amortized over periods ranging from six to 14 years. For the third quarter and first nine months of fiscal 2022, acquired intangible ~~assets was consistent for both~~asset amortization increased by $0.5 million and $1.5 million, respectively, compared to the same respective prior-year periods, as a result of the developed technology associated with the fiscal 2021 Vetex acquisition.

Acquisition transaction, integration and other costs. Both the third quarter and first nine months of fiscal 2021 ~~compared the same respective prior-year periods.~~

~~Acquisition transaction, integration and other costs.~~ ~~In the third quarter of fiscal 2021, we incurred~~included $0.5 million in legal, accounting and other due diligence costs specifically related to the ~~acquisition of Vetex.~~ fiscal 2021 Vetex acquisition.

Contingent consideration expense. We ~~expect~~have contingent consideration obligations related to ~~report a similar amount of acquisition costs~~business combinations. Expense (gain) recognized is related to changes in the ~~fourth quarter~~probability and timing of achieving certain contractual milestones, as well as accretion expense for the passage of time. In fiscal ~~2021.~~2022, contingent consideration expense consisted of accretion for liabilities associated with the fiscal 2021 Vetex acquisition.

Other ~~(expense) income.~~expense. ~~Other~~We reported other expense ~~was~~of $(0.1) million for both the third quarter of fiscal 2022 and 2021 ~~compared to~~and other ~~income~~expense of ~~less than $0.1 million for the third quarter of fiscal 2020.Other expense was $(0.3)~~$(0.2) million and ~~$(0.1)~~$(0.3) million for the first nine months of fiscal 2022 and 2021, ~~and 2020,~~ respectively. ~~The first nine months of fiscal 2020 included a $0.5 million impairment loss on a strategic investment to reduce the carrying value to zero. Investment income declined in~~Interest expense increased for the third quarter and first nine months of fiscal ~~2021 relative~~2022, compared to the ~~prior year commensurate with a decline~~same respective prior-year periods, due to utilization of our revolving credit facility. Foreign currency gains largely offset the increase in interest ~~rates. Foreign currency losses totaled $(0.1) million in both~~expense year-over-year for the third quarter ~~of fiscal 2021~~ and ~~2020 and $(0.2) million and $(0.1) million for the~~ first nine months of fiscal ~~2021 and 2020. respectively.~~2022. Foreign currency gains (losses) ~~gains~~ result primarily from the impact of U.S. to Euro exchange rate fluctuations on certain intercompany obligations. Foreign currency gains (losses) ~~gains reflect~~reflected weakening (strengthening) ~~weakening~~ of the Euro relative to the U.S. dollar in each respective period. We expect interest expense to increase in future periods. The weighted average interest rate on outstanding borrowings under our Revolving Credit Facility increased from 3.3% as of September 30, 2021 to 4.5% as of June 30, 2022. Further increases in interest rates on our borrowings, or additional borrowings, will increase quarterly interest expense above the level for the third quarter of fiscal 2022.

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Income tax benefit (provision) ~~benefit~~. For the third quarter of fiscal ~~2021,~~2022, income tax ~~expense~~benefit was ~~$(0.8)~~$1.5 million, compared to income tax ~~benefit~~expense of ~~$1.2~~$(0.8) million in the prior-year quarter. For the first nine months of fiscal ~~2021,~~2022, income tax ~~expense~~benefit was ~~$(2.4)~~$3.2 million, compared to income tax ~~benefit~~expense of ~~$3.4~~$(2.4) million in the same prior-year period. ~~Reported income~~The prior-year fiscal 2021 tax ~~(expense) benefit reflects~~expense reflected the impact to pretax income of the ~~receipt of~~$11.0 million in license fee revenue recognized on the Abbott milestone ~~payments~~payment received in the second quarter of fiscal 2021 and the third quarter of fiscal 2020. In the third quarter of fiscal 2020, we recorded a discrete tax benefit of $1.8 million as result of our ability under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), enacted in March 2020, to carry back net operating losses incurred to periods when the statutory tax rate was 35% versus our current tax rate of 21%.

2021. The Company’s effective tax rate ~~reflects~~reflected the impact of state income taxes, permanent tax items and discrete tax benefits, as well as operating results infor one of our Ireland ~~where~~subsidiaries for which tax expense or benefit is offset by a valuation allowance. The tax benefit (expense) ~~benefit~~ recognized in the third quarter and first nine months of fiscal 2022 and 2021 ~~and 2020 reflect~~reflected expected full-year pre-tax operating results, impacted by our estimated U.S. federal R&D tax credit and ~~by excess tax benefits related to stock-based compensation due to~~the effects of equity ~~award exercise activity.~~compensation.

Segment Operating Results

Operating results for each of our reportable segments were as follows:

	Three Months Ended						Nine Months Ended
	June 30,						June 30,						Three Months Ended June 30,									Nine Months Ended June 30,
(In thousands)	2021			2020			2021			2020			2022			2021			$ Change			2022			2021			$ Change
Operating (loss) income:
Medical Device	$	(2,491	)	$	532		$	5,480		$	(1,344	)	$	(7,308	)	$	(2,491	)	$	(4,817	)	$	(16,712	)	$	5,480		$	(22,192	)
In Vitro Diagnostics		3,378			3,254			10,407			9,315			3,387			3,378			9			10,262			10,407			(145	)
Total segment operating income		887			3,786			15,887			7,971
Total segment operating (loss) income														(3,921	)		887			(4,808	)		(6,450	)		15,887			(22,337	)
Corporate		(3,271	)		(2,622	)		(8,695	)		(7,229	)		(3,222	)		(3,271	)		49			(9,034	)		(8,695	)		(339	)
Total operating (loss) income	$	(2,384	)	$	1,164		$	7,192		$	742		$	(7,143	)	$	(2,384	)	$	(4,759	)	$	(15,484	)	$	7,192		$	(22,676	)

Medical Device. Our Medical Device business reported an operating loss of ~~$(2.5)~~$(7.3) million and ~~operating income of $0.5~~$(2.5) million for the third quarter of fiscal ~~2021~~2022 and ~~2020,~~2021, respectively, representing ~~(14.9)~~(41.7)% and ~~2.6%~~(14.9)% of revenue, respectively. For the first nine months of fiscal ~~2021~~2022 and ~~2020,~~2021, our Medical Device business reported an operating loss of $(16.7) million and operating income of $5.5 million, ~~and an operating loss of $(1.3) million,~~ respectively, representing ~~9.0%~~(31.6)% and ~~(2.5)%~~9.0% of revenue, respectively. ~~The~~

•

Medical Device operating expenses, excluding product costs, increased $5.7 million and $13.2 million year-over-year ~~contribution to operating (loss) income from royalties and license fee revenue declined $(3.6) million~~ for the third quarter and first nine months of fiscal 2022, respectively, primarily driven by investments in sales and marketing personnel and infrastructure to execute our long-term growth strategy. The fiscal 2021 Vetex acquisition added $1.0 million and $3.0million in operating expenses, excluding product costs, for the third quarter and first nine months of fiscal 2022, respectively, primarily for R&D personnel and acquired intangible asset amortization. The third quarter of fiscal 2021 also included $0.5 million in Vetex acquisition-related costs.

•

The year-over-year contribution to operating (loss) income from royalties and license fee revenue was consistent year-over-year for the third quarter of fiscal 2022 and declined $(11.4) million year-over-year for the first nine months of fiscal 2022. The decline in royalties and license fee revenue for the nine-month period was primarily driven by $11.0 million in license fee revenue recognized on the Abbott milestone payment received in the second quarter of fiscal 2021.

•

Medical Device product gross profit increased $1.3 million and $3.4 million year-over-year for the third quarter and first nine months of fiscal 2022, respectively, on broad-based product sales growth. Product gross margins were 61.3% and 51.0% for the third quarter of fiscal 2022 and 2021, respectively, and 59.5% and 54.5% for the first nine months of fiscal 2022 and 2021, respectively. Prior-year gross margins for the third quarter and first nine months of fiscal 2021 were unfavorably impacted by $0.7 million in charges related to a product replacement matter for one of our contract-manufactured products. For the third quarter and first nine months of fiscal 2022, gross margins benefited from leverage on higher sales volume, in particular from sales of coating reagents. This was offset, in part, by the net unfavorable impact of product mix, as well as certain manufacturing inefficiencies associated with ramp up of production of new products.

Table of fiscal 2021 and increased $7.4 million for the first nine months of fiscal 2021. Royalties revenue increased $3.0 million and $2.8 million for the third quarter and first nine months of fiscal 2021, respectively, primarily due to significant prior-year COVID-19 impacts and underlying growth. License fee revenue reflects the timing of Abbott milestone payments received and declined $(6.6) million for the third quarter of fiscal 2021 and increased $4.6 million for the first nine months of fiscal 2021, compared to the prior year, as a result of the $15.0 million milestone payment received in the second quarter of fiscal 2021 and the $10.8 million milestone payment received in the third quarter of fiscal 2020. Medical Device operating expenses, excluding product costs, declined $(0.8) million and $(1.1) million for the third quarter and first nine months of fiscal 2021 and 2020, respectively, compared to the prior year, primarily driven by a decline in SContents~~urVeil-related R&D expense.~~

~~Medical Device product gross margins were 51.0% and 54.2% for the third quarter of fiscal 2021 and 2020, respectively, and 54.5% and 62.1% for the fir~~st nine months of fiscal 2021 and 2020, respectively. For the third quarter of fiscal 2021, compared the prior year, product gross margins were unfavorably impacted by $0.7 million in charges related to a product replacement matter for one of our contract manufactured products, partly offset by the favorable impact of product mix with strong sales of coating reagents and a decline in legacy balloon catheter sales. For the first nine months of fiscal 2021, compared to the prior year, product gross margins were unfavorably impacted by both a product replacement matter for one of our contract manufactured products ~~and~~ ~~by leverage on lower sales volume of coating reagents early in fiscal 2021.~~

In Vitro Diagnostics. Our In Vitro Diagnostics business reported operating income of $3.4 million ~~and $3.3 million~~ for both the third quarter of fiscal 2022 and 2021, representing 46.2% and ~~2020, respectively, representing~~ 47.5% ~~and 51.1%~~ of revenue, respectively. For the first nine months of fiscal ~~2021~~2022 and ~~2020,~~2021, our In Vitro Diagnostics business reported operating income of ~~$10.4~~$10.3 million and ~~$9.3~~$10.4 million, respectively, representing ~~51.2%~~48.7% and ~~51.5%~~51.2% of revenue, respectively.~~Product gross margins~~ were 63.4% and 71.0% in the third quarter fiscal 2021 and 2020, respectively, and 67.6% and 69.9% for the first nine months of fiscal 2021 and 2020, respectively. For the both the third quarter and first nine months of fiscal 2021, product margins were unfavorably impacted by product mix from a relative increase in sales of our distributed antigen products.

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•

IVD product gross profit increased $0.5 million and $1.1 million year-over-year for the third quarter and first nine months of fiscal 2022, respectively. IVD product gross margins were 64.8% and 63.4% for the third quarter fiscal 2022 and 2021, respectively, and 67.1% and 67.6% for the first nine months of fiscal 2022 and 2021, respectively. Year-over-year growth in sales of distributed antigen products provided an unfavorable mix impact to product gross margins for both the third quarter and first nine months of fiscal 2022. For the third quarter of fiscal 2022, this impact was more than offset by the favorable impact of leverage on higher sales volume, which benefited gross margins for both the third quarter and first nine months of fiscal 2022.

•	IVD R&D and other revenue declined $0.4 million and $1.0 million year-over-year for the third quarter and first nine months of fiscal 2022, respectively, related to the completion of a customer development program.

Corporate. The Corporate category includes expenses for administrative corporate functions, such as executive management, corporate accounting, information technology, legal, human resources and Board of Directors related fees and expenses, which ~~have~~we do not ~~been~~ fully ~~allocated~~allocate to the Medical Device and IVD segments. Corporate also includes expenses, such as acquisition-related costs and litigation, which are not specific to a segment and thus not allocated to our reportable segments. The unallocated Corporate expense operating ~~expenses increased by $0.6~~loss was $(3.2) million and ~~$1.5~~$(3.3) million infor the third quarter of fiscal 2022 and 2021, respectively, and $(9.0) million and $(8.7) million for the first nine months of fiscal 2022 and 2021, respectively. For both the third quarter and first nine months of fiscal 2021, ~~respectively,~~Corporate expense included $0.5 million in legal, accounting and other due diligence costs specifically related to the fiscal 2021 Vetex acquisition.

Cash Flow Operating Results

The following is a summary of cash flow results:

	Nine Months Ended June 30,
(In thousands)	2022			2021
Cash (used in) provided by:
Operating activities	$	(14,723	)	$	14,500
Investing activities		4,802			16,644
Financing activities		(673	)		198
Effect of exchange rates on changes in cash and cash equivalents		(485	)		50
Net change in cash and cash equivalents	$	(11,079	)	$	31,392

Operating Activities. Cash used in operating activities totaled $(14.7) million for the first nine months of fiscal 2022, compared to cash provided of $14.5 million in the same prior-year period. Net loss was $(12.5) million for the first nine months of fiscal 2022, compared to net income of $4.5 million for the first nine months of fiscal 2021. Net changes in operating assets and liabilities reduced cash flows from operating activities by $(11.9) million and $(1.2) million during the first nine months of fiscal 2022 and 2021, respectively. Significant changes in operating assets and liabilities affecting cash flows during these periods ~~primarily due to $0.5~~included:

•

Cash used in inventories was $(4.2) million for the first nine months of fiscal 2022, compared to cash used of $(0.3) million in the same prior-year period. The current-year cash used in inventories was primarily driven by the commercialization of Pounce and Sublime platforms in our Medical Device business, as well as prudent management of safety stock to mitigate supply chain risks.

•

Cash used in deferred revenue was $(3.5) million for the first nine months of fiscal 2022, compared to cash provided of $0.2 million in the same prior-year period, due to the $15 million milestone payment received from Abbott in the second quarter of fiscal 2021, offset by related license fee revenue recognition.

•

Cash used in prepaids and other was $(2.0) million for the first nine months of fiscal 2022, compared to cash used of $(0.1) million in the same prior-year period. The current-year cash used in prepaids and other was primarily driven by an increase in prepaid software licenses and implementation costs related to sales infrastructure investments, as well as the renewal of annual insurance premiums. In the prior-year period, cash used in prepaids and other was primarily related to an increase in Irish R&D tax credits receivable and the renewal of annual insurance premiums, offset by receipt of a $0.8 million Irish Development Authority grant payment.

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Investing Activities. Cash provided by investing activities totaled $4.8 million and $16.6 million for the first nine months of fiscal 2022 and 2021, respectively. Maturities of available-for-sale investments, net of purchases, were a source of cash of $7.6million and $20.5 million in ~~Vetex acquisition-related costs,~~the first nine months of fiscal 2022 and 2021, respectively. In the first nine months of fiscal 2021, the Company paid $1.0 million for acquisition of intangible assets (patents) to the sellers of Embolitech, LLC as ~~well increases in compensation-related expenses.~~

~~Liquidity and Capital Resources~~

Asa result of ~~June 30, 2021, working capital totaled $76.5 million, an increase~~the achievement of $8.7 million from September 30, 2020. Working capital is defined by us as current assets minus current liabilities. Cash and cash equivalents and available-for-sale investments totaled $72.0 million as of June 30, 2021, an increase of $10.9 million from $61.1 million as of September 30, 2020. This change was primarily driven by the $15 million clinical reporta contingent milestone ~~payment received under the Abbott Agreement~~ in fiscal ~~2021, partly offset by~~2020. Capital expenditures for property, plant and equipment totaled $2.8 million and $2.9 million for the first nine months of fiscal 2022 and 2021, respectively.

Financing Activities. Cash used in ~~capital expenditures, $2.3~~financing activities totaled $(0.7) million for the first nine months of fiscal 2022, compared to cash provided of $0.2 million in the same prior-year period, primarily related to the purchase of common stock to pay employee taxes resulting from the exercise of stock options and vesting of other stock ~~awards, and~~awards. In the ~~$1.0~~first nine months of fiscal 2022, the Company paid $0.5 million for acquisition of in-process R&D to satisfy a guaranteed milestone payment to the sellers of Embolitech, ~~LLC~~LLC.

Liquidity and Capital Resources

As of June 30, 2022, working capital totaled $30.6 million, a decrease of $9.8 million from September 30, 2021. We define working capital as current assets minus current liabilities. Cash and cash equivalents and available-for-sale investments totaled $22.1 million as of June 30, 2022, a ~~result~~decrease of $18.8 million from $40.9 million as of September 30, 2021. This change was primarily driven by planned personnel, inventory and other operational expenditures related to commercialization of the ~~achievement~~Pounce and Sublime platforms in our Medical Device business, as well as payment of annual bonuses in the first quarter of fiscal 2022.

Subject to the terms of the Abbott Agreement, the Company is to receive a ~~contingent~~$30 million PMA milestone ~~in fiscal 2020.~~payment under the Abbott Agreement if the SurVeil DCB receives PMA on or before December 31, 2022. The PMA milestone payment is reduced to $27 million under the Abbott Agreement if PMA is received after December 31, 2022. The Company cannot be sure whether the PMA milestone payment will be received on or before December 31, 2022, if at all.

~~Surmodics maintains~~The Company proactively manages its access to capital to support liquidity and continued growth. ~~In fiscal 2020, the Company entered into~~Surmodics has access to a ~~secured~~ revolving credit facility, ~~pursuant to a Loan and Security Agreement (the ‘‘Loan Agreement’’). The Loan Agreement~~which provides for availability of up to $25 ~~million under a secured revolving line of credit.~~million. The outstanding balance on the revolving credit facility was ~~zero~~$10 million as of June 30, ~~2021. In fiscal 2020,~~2022. The current scheduled maturity date of the revolving credit facility is September 14, 2022, and the Company ~~filed a universal~~has one additional extension period remaining. If we elect to extend the maturity date at least 60 days prior to the scheduled maturity date, and if the extension conditions are met, which include no material adverse effect, default, or event of default under the revolving credit facility, the revolving credit facility will mature, and any outstanding balance will become payable, on September 14, 2023.

As of June 30, 2022, the Company’s shelf registration statement with the ~~SEC as a matter of standard corporate governance to provide the flexibility to access public capital markets in order to respond to future business needs~~Securities and ~~opportunities. The shelf registration statement became effective on May 29, 2020 and~~Exchange Commission allows the Company to offer potentially up to $200 million in debt securities, common stock, preferred stock, warrants, and other securities or any such combination of such securities in amounts, at prices, and on terms announced if and when the securities are ever offered.

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,~~commercial paper and corporate bond ~~and commercial paper~~ securities and are reported at fair value as available-for-sale investments ~~totaling $9.8~~and totaled $2.0 million as of June 30, ~~2021.~~2022. Our investment policy requires that no more than 5% of investments be held in any one credit or issue, excluding U.S. government and government agency obligations. The primary investment objective of the portfolio is to provide for the safety of principal and appropriate liquidity, while generating an above-benchmark (Barclays Short Treasury 1-3 Month Index) total rate of return on a pre-tax basis.

We expect that increasing SG&A expenditures in fiscal 2022 related to sales and marketing activities, including new hires, to support the commercialization of our Pounce and Sublime products will exceed any associated increases in revenues, and therefore will reduce our cash flow from operations. We also anticipate R&D expenses will continue to be significant fiscal 2022, primarily related to medical device product development, including readiness for commercialization of our Pounce and Sublime platforms. We believe that our existing cash and cash equivalents and available-for-sale investments, which totaled ~~$72.0~~$22.1 million as of June 30, ~~2021,~~2022, together with cash flow from operations and our revolving ~~line of~~ credit facility, will provide liquidity sufficient to meet our cash needs and fund our operations ~~the Vetex acquisition,~~ and planned capital expenditures ~~for the next twelve months.~~through fiscal 2022. There can be no assurance, however, that our business will continue to generate cash flows at historic levels.

~~Cash Flow Operating Results. Cash flow results were as follows:~~

Nine Months Ended

June 30,

(In thousands)

2021

2020

Cash provided by (used in):

Operating activities

$
14,500

$
12,696

Investing activities

16,644

(1,871
)
Financing activities

198

(4,808
)
Effect of exchange rates on changes in cash and cash equivalents

50

8

Net change in cash and cash equivalents

$
31,392

$
6,025

2527

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~~Operating Activities.~~Beyond fiscal 2022, our cash requirements will depend extensively on the timing of market introduction and extent of market acceptance of products in our medical device product portfolio, including our SurVeil ~~Cash provided~~DCB. Our cash requirements also will be significantly impacted by ~~operating activities totaled $14.5 million for~~ the ~~first nine months~~level of ~~fiscal 2021, compared~~our investment in commercialization of our vascular intervention products, which we expect to ~~cash provided~~continue, and whether we make future corporate transactions. We are evaluating and may seek additional sources of ~~$12.7 million in the same prior-year period. Net income was $4.5 million~~liquidity and $4.1 million for the first nine months of fiscal 2021 and 2020, respectively. Net changes in operating assets and liabilities reduced cash flows from operating activities by $1.2 million and $1.5 million during the first nine months of fiscal 2021 and 2020, respectively. Significant changes in operating assets and liabilities affecting cash flows during these periods included:

•

Cash (used in) provided by accounts receivable and contract asset was $(1.8) million cash used in the first nine months of fiscal 2021, compared to $4.3 million cash provided in the same prior-year period. Royalty payments receivable from customers (contract asset) increased in the current period, reflecting underlying growth and diminishing impacts from COVID-19, whereas the contract asset balance decreased substantially in the same prior-year period, as the third quarter of fiscal 2020 was the most significantly impacted period since the onset of the COVID-19 pandemic. In addition, timing fluctuations in accounts receivable balances were unfavorable to cash flow in the fiscal 2021 period and slightly favorable to cash flow in the same prior-year period.

•	Cash used by inventories was $(0.4) million for the first nine months of fiscal 2021, compared to cash used of $(1.3) million in the same prior-year period, due to planned increases in safety stock in the prior-year period.

In the prior-year period, income taxes also impacted cash provided by operating activities. As a result of the NOL carryback provisions of the CARES Act, enacted in March 2020, income tax receivable increasedcapital resources, including through borrowing, debt or equity financing or corporate transactions to ~~$4.9 million as of June 30, 2020, compared~~generate cashflow. There can be no assurance that such transactions will be available to $0.6 million as of September 30, 2019, and deferred income taxes decreased to $5.6 million as of June 30, 2020, compared to $6.2 million as of September 30, 2019. In the current-year fiscal 2021 period, income tax receivable decreased to $1.1 million as of June 30, 2021, compared to $2.4 million as of September 30, 2020, and deferred income taxes decreased to $6.4 million as of June 30, 2021, compared to $7.3 million as of September 30, 2020.

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

~~Investing Activities.~~ Cash provided by investing activities totaled $16.6 million for the first nine months of fiscal 2021, compared to cash used of $(1.9) million in the same prior-year period. Net purchases and maturities of available-for-sale investments were a source of cash of $20.5 million in the first nine months of fiscal 2021 as the Company managed liquidity in preparation for the Vetex acquisition, compared to a source of cash of $0.8 million in the first nine months of fiscal 2020. In the first quarter of fiscal 2021, the Company paid $1.0 million for acquisition of intangible assets (patents) to the sellers of Embolitech, LLC as a result of the achievement of a contingent milestone in fiscal 2020. Capital expenditures for property, plant and equipment totaled $2.9 million and $2.6 million for the first nine months of fiscal 2021 and 2020, respectively.

~~Financing Activities.~~ Cash provided by financing activities totaled $0.2 million for the first nine months of fiscal 2021, compared to cash used of $(4.8) million in the same prior-year period. Issuance of common stock upon the exercise of stock options and vesting of other stock awards was a source of cash of $2.6 million and $1.2 million for the first nine months of fiscal 2021 and 2020, respectively. In the first nine months of fiscal 2021 and 2020, we paid $2.3 million and $2.4 million, respectively, to purchase common stock to pay employee taxes resulting from the exercise of stock options and vesting of other stock awards. In the first nine months of fiscal 2020, contingent consideration payments totaled $3.2 million related to the acquisition of NorMedix, Inc., with $0.6 million and $2.6 million classified as cash used in operating and financing activities, respectively.us on favorable terms, if at all.

Customer Concentrations

We have agreements with a diverse base of customers and certain customers have multiple products using our technology. Abbott and Medtronic are our largest customers, comprising ~~19%~~21% and ~~14%~~13%, respectively, of our consolidated revenue for fiscal ~~2020.~~2021. These same customers, Abbott and Medtronic, each comprised ~~24%~~10% and ~~13%~~14%, respectively, of our consolidated revenue for the nine months ended June 30, ~~2021.~~2022. Revenue generated under our SurVeil DCB license agreement with Abbott represented ~~18%~~5% of total revenue for the nine months ended June 30, ~~2021.~~2022. Apart from the SurVeil DCB license, Abbott has several separately licensed products which generate ~~royalties~~ revenue for Surmodics, none of which represented more than 3%4% of total revenue for the nine months ended June 30, ~~2021.~~2022. Medtronic has several separately licensed products that generate ~~royalties~~ revenue for Surmodics, none of which represented more than 5% of our total revenue for the nine months ended June 30, ~~2021. No other individual customer constitutes more than 10% of Surmodics’ total fiscal 2021 to date or fiscal 2020 revenue.~~

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~~Share Purchase Activity~~

~~Our Board of Directors has authorized the repurchase~~ of up to an additional $25.3 million of the Company’s outstanding common 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. No shares were repurchased in the nine months ended June 30, 2021.

~~Off-Balance Sheet Arrangements~~

As of June 30, 2021 and September 30, 2020, 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.2022.

Critical Accounting Policies and Significant Estimates

Critical accounting policies are those policies that require the application of management’s most challenging subjective or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies involve judgments and uncertainties that are sufficiently likely to result in materially different results under different assumptions and conditions. For the nine months ended June 30, ~~2021,~~2022, there were no significant changes in our critical accounting policies. For a detailed description of our other critical accounting policies and significant estimates, see Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 in our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2020.~~2021.

Forward-looking Statements

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: the impacts, duration and severity of the global ~~COVID-19 pandemic;~~COVID pandemic and the effects of responses to it on healthcare systems, the general economy, our business partners, and our operations; our strategies for growth; the potential results of our strategies; potential clinical ~~studies,~~strategies for our products; our intent to evaluate further clinical investment in our products; our intent to pursue certain regulatory actions; the potential impact of U.S. Food and Drug Administration (“FDA”) communications; the expected timing and duration of ~~their results,~~process and ~~the potential timing~~manufacturing validations for our products; our expected initiations of future clinical studies; our business and growth strategy, including our ability to conduct market evaluations and bring new products to market; the development of future products and their anticipated attributes; anticipated regulatory submissions and approvals, including the expected timing thereof; the initiation or continuation of clinical product evaluation activities; the ~~initiation or continuation of manufacturing process validation activities;~~potential for a future milestone payment related to our SurVeil™ drug-coated balloon (“DCB”) and the revenue that would be recognized on that milestone payment; revenue potential related to the potential commercial launch of the ~~SurVeil™ drug-coated balloon (“DCB”) following its regulatory approval; estimated~~SurVeil DCB; anticipated future revenue ~~expected to be recognized in future periods;~~from particular products; future revenue growth, our longer-term valuation-creation strategy, and our future ~~success; future gross margins and operating expenses;~~potential; estimated future amortization expense; ~~future~~expectations regarding operating ~~lease maturities;~~expenses and interest expense; recognition of unrecognized compensation costs; anticipated patent expirations and their potential impacts on our royalties revenue; expectation regarding specific product royalties portfolios; potential future customer actions; the potential for a future milestone payment under our agreement with Abbott; research and development plans and expenses, including the estimated cost associated with the TRANSCEND clinical ~~trial;~~trial and the timing of those costs; anticipated cash requirements; the anticipated maturity date of our revolving credit facility; future cash flow and sources of funding, ~~including our revolving credit facility,~~ and their ability together with existing cash, cash equivalents, and investments to provide liquidity sufficient to meet our cash needs and fund our operations ~~acquisition-related spending,~~ and planned capital expenditures ~~for~~through fiscal 2022; future cash requirements; plans regarding our securities investments and the ~~next twelve months; extension of our revolving credit facility; the~~potential impact of interest rate ~~fluctuations on our results~~fluctuations; expectations regarding the maturity of ~~operations or cash flows;~~debt; the impact of potential change in raw material ~~prices;~~prices, sources of raw materials and our ability to manufacture raw materials ourselves; the impact of Abbott, Medtronic, as well as other significant customers; our ability to recognize the expected benefits of our acquisitions; our ~~estimated~~strategic transformation to become a provider of vascular intervention medical device products; expected future income tax ~~rate for fiscal 2021; the future impact of off-balance sheet arrangements and contractual obligations, including future payments~~(expense) benefit; whether changes in our internal control over financial reporting are reasonably likely to clinical research organizations; future payments related to completed acquisitions; the accounting treatment for the Vetex acquisition; future expenses related to acquisitions; estimated revenue expected to be recognized in future periods related to performance obligations that are unsatisfied for executed contracts;materially affect our internal control over financial reporting; and the impact of the adoption of new accounting pronouncements. 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 our expectations or beliefs concerning various future events, are based on current expectations that involve a number of risks and uncertainties that could cause actual results to differ materially from those of such forward-looking statements. We caution that undue reliance should not be placed on such forward-looking statements, which speak only as of the date made. Some of the factors which could cause results to differ from those expressed in any forward-looking statement are set forth under “Risk Factors” in Part I, Item 1A of our Annual Report on Form

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10-K for the fiscal year ended September 30, ~~2020.~~2021. We disclaim any intent or obligation to update publicly these forward-looking statements, whether because of new information, future events or otherwise.

~~Table of Contents~~

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:

•	the impacts, duration and severity of the global COVID-19 pandemic, which has impacted, and may continue to impact, our revenue, operations, the conduct of clinical studies, and our ability to access healthcare professionals and facilities;

•

our reliance on a small number of significant customers, including our largest customers, Abbott and Medtronic, which causes our financial results and stock price to be subject to factors affecting those significant customers and their products, the timing of market introduction of their or competing products, product safety or efficacy concerns and intellectual property litigation impacting such customers, which could adversely affect our growth strategy and the royalties revenue we derive;

•

clinical and regulatory developments relating to the evaluation of risks associated with paclitaxel-coated products, which developments may adversely impact our ability to complete our TRANSCEND clinical trial on any particular time frame, obtain marketing approval (or the timing of any such approval) for our SurVeilDCB and other paclitaxel-coated products, to treat peripheral artery disease in the femoral and/or popliteal arteries;

•

our ability to successfully develop, obtain regulatory approval for, and commercialize our SurVeilDCB product, including our reliance on clinical research organizations to manage the TRANSCEND clinical trial and uncertainty related to the impacts of any clinical research relative to drug-coated balloons, including our Avess™ DCB, other DCB products and other catheter and balloon-based products, which will impact our ability to receive additional milestone payments under our agreement with Abbott;

•

general economic conditions that are beyond our control, such as the impact of ~~recession,~~recessions, customer mergers and acquisitions, supply chain disruptions, business investment, changes in consumer confidence, and medical epidemics or pandemics such as the COVID-19 pandemic, which has negatively impacted, and will likely continue to negatively impact, our business and results from operations;

•	a decrease in our available cash or failure to generate cash flows from operations, which could impact short-term liquidity requirements and expected capital and other expenditures;

•	our ability to comply with the covenants in our credit facility;

•

the difficulties and uncertainties associated with the lengthy and costly new product development and foreign and domestic regulatory approval processes, such as delays, difficulties or failures in achieving acceptable clinical results or obtaining foreign or ~~United Stated (“~~U.S.~~”) Food and Drug Administration (“FDA”)~~ FDA marketing clearances or approvals, which may result in lost market opportunities, failure to bring new products to market or postpone or preclude product commercialization by licensees or ourselves;

•	whether operating expenses that we incur related to the development and commercialization of new technologies and products are effective;

•	our ability to successfully perform product development activities, the related R&D expense impact and governmental and regulatory compliance activities, which we have not previously undertaken in any significant manner;

•

our ability to identify and execute new acquisition opportunities and successfully managing the risks associated with acquisitions, which include the potential inability to integrate acquired operations, personnel, technology, information systems, and internal control systems and products; a lack of understanding of tax, legal and cultural differences for non-U.S. acquisitions; diversion of management’s attention; difficulties and uncertainties in transitioning the customers or other business relationships from the acquired entity to us; the loss of key employees of acquired companies; and potential impacts on cash flows; and

•	other factors described under “Risk Factors” in Part ~~II, Item 1A of this Quarterly Report on Form 10-Q and in Part~~ I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2020,~~2021, which you are encouraged to read carefully.

Many of these factors are outside our control and knowledge 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.~~Securities and Exchange Commission.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our investment policy requires investments with high credit quality issuers and limits the amount of credit exposure to any one issuer. Our investments consist principally of interest-bearing corporate debt securities with varying maturity dates, which generally are less than one year. Because of the credit criteria of our investment policies, the primary market risk associated with these investments is interest rate risk. We do not use derivative financial instruments to manage interest rate risk or to speculate on future changes in interest rates. As of June 30, ~~2021,~~2022, we held ~~$9.8~~$2.0 million in available-for-sale debt securities ~~of which $5.7 million had~~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 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.~~flows.

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 relative to the Euro, our revenue and expenses denominated in Euro currency are translated into U.S. dollars at a lower or higher value ~~respectively,~~ 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 royalties 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~~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 rates.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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 June 30, ~~2021.~~2022. Based on that evaluation, the Company’s Certifying Officers concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) were effective to ensure that information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Certifying Officers, as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Controls over Financial Reporting

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 June 30, ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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.

Item 1A. Risk Factors

The risks ~~described below and those~~ identified in our Annual Report on Form 10-K for the fiscal year ended September 30, ~~2020,~~2021, filed with the ~~SEC~~Securities and Exchange Commission on ~~December 2, 2020,~~November 24, 2021, under Part 1,I, Item 1A, “Risk 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.

~~Failure to successfully integrate the acquisition of Vetex Medical Limited or commercialize its product may limit our growth and adversely impact operating results, cash flows and liquidity.~~

On July 2, 2021, we completed the acquisition of all outstanding shares of Vetex Medical Limited (“Vetex”). Vetex holds a Food and Drug Administration 510(k) clearance, European Union CE Mark, and portfolio of patents related to its venous mechanical thrombectomy catheter product (the “Vetex Product”). However, Vetex had not initiated commercial production or established commercialization of the Vetex Product prior to the acquisition. We acquired Vetex with an upfront cash payment of $39.9 million and are obligated to pay additional installments totaling $3.5 million in fiscal 2024 through fiscal 2027. These payments may be accelerated upon the occurrence of certain product development and regulatory milestones. An additional $3.5 million in payments are contingent upon the achievement of certain product development and regulatory milestones within a contingency period ending in fiscal 2027. We expect to recognize approximately $28 million in intangible assets, approximately $3 million in deferred tax liabilities, and approximately $19 million in goodwill related to the acquisition.

For us to realize the anticipated benefits of the Vetex acquisition, we must successfully integrate the Vetex operations, establish commercial manufacturing for the Vetex Product, and successfully develop and execute a commercialization strategy for the Vetex Product. If we are unsuccessful, or encounter delays or cost overruns, in integrating the Vetex operations or establishing commercial manufacturing for the Vetex Product, or if potential customers do not adopt the Vetex Product at sufficient levels to make it a commercial success, our operating results, cash flows and liquidity may be adversely impacted. Further, the goodwill and intangible assets that we will recognize related to the acquisition may become impaired if the financial performance of the Vetex Product does not meet our expectations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~(c) Issuer Purchases~~The following table presents the information with respect to purchases made by or on behalf of ~~Equity~~Surmodics, Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities

~~The Company did not purchase any~~ Exchange Act of ~~its~~1934), of our common stock during the three months ended June 30, ~~2021.~~ 2022.

	Total Number of Shares Purchased (1)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Programs
Period:
April 1 – 30, 2022		—	$	—		—	$	25,300,000
May 1 – 31, 2022		718		34.62		—		25,300,000
June 1 – 30, 2022		282		38.91		—		25,300,000
Total		1,000	$	35.83		—

(1)	All shares reported were delivered by employees in connection with the satisfaction of tax withholding obligations related to the vesting of shares of restricted stock.

As of June 30, ~~2021,~~2022, the Company had an aggregate of $25.3 million available for future common stock repurchases under an authorization approved by the Board of Directors for up to $20.0 million on November 6, 2015, all of which is remaining, and an authorization approved by the Board of Directors on November 5, 2014 of which $5.3 million is remaining. These authorizations for share repurchases do not have a fixed expiration date.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

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Item 6. Exhibits		EXHIBIT INDEX
Exhibit		Description

2.1		Agreement of Merger dated January 18, 2005 among Surmodics, Inc., SIRx, InnoRx, et al. — incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated January 24, 2005.

2.2		Share Purchase Agreement by and among Surmodics, Inc. and the shareholders of Creagh Medical Ltd. dated as of November 20, 2015 — incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated November 27, 2015.

2.3		Stock Purchase Agreement, dated January 8, 2016, among Surmodics, Inc. and the shareholders of NorMedix, Inc. and Gregg Sutton as Seller’s Agent — incorporated by reference to Exhibit 2.1 to the Company’s Form Current Report on Form 8-K filed on January 13, 2016.

2.4		Share Purchase Agreement by and among Surmodics, Inc., SurModics MD, LLC, and the shareholders of Vetex Medical Limited named therein dated as of July 2, 2021 — incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated July 2, 2021.

2.5		Put and Call Option Agreement by and among SurModics MD, LLC and the shareholders of Vetex Medical Limited named therein dated as of July 2, 2021 — incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K dated July 2, 2021.

3.1		Restated Articles of Incorporation, as amended — incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q filed on July 29, 2016.

3.2		Restated Bylaws of Surmodics, Inc., as amended December 18, 2015 — incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K filed on December 23, 2015.

~~10.1~~		First Amendment to Loan and Security Agreement dated as of July 2, 2021 by and among Surmodics, Inc., the other loan parties party thereto, and Bridgewater Bank — incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated July 2, 2021.

31.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Sec. 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Sec. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File as its XBRL tags are embedded within the inline XBRL document.

101.SCH*		Inline XBRL Taxonomy Extension Schema.

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase.

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase.

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase.

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase.

104*		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

*	Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

~~August 4, 2021~~July 27, 2022	Surmodics, Inc.

	By:	/s/ Timothy J. Arens
		Timothy J. Arens
		Senior Vice President of Finance and Chief Financial Officer

		(duly authorized signatory and principal financial officer)

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