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

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

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

As of March 31, 2019, approximately $9.2 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 2.4 years. The unrecognized compensation costs above include $0.2 million, remaining to be expensed over the life of the awards, based on payout levels associated with performance share awards that are currently anticipated to be fully expensed because the performance conditions are expected to exceed minimum threshold levels.

The Company uses the Black-Scholes option pricing model to determine the weighted average grant date fair value of stock options granted. The weighted average per share fair values of stock options granted during the three months ended March 31, 2019 and 2018 were $18.12 and $9.00, respectively, and $18.28 and $10.32 during the six months ended March 31, 2019 and 2018, respectively.

	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2019			2018			2019			2018
Risk-free interest rates		2.5	%		2.6	%		2.8	%		2.1	%
Expected life (years)		4.5			4.8			4.5			4.8
Expected volatility		34.9	%		33.0	%		33.4	%		33.0	%
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%

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

Non-qualified stock options are granted at fair market value on the date of grant. Non-qualified stock options expire in seven years upon termination of employment or service as a Board member. With respect to members of our Board, non-qualified stock options generally become exercisable on a pro-rata basis within the one-year period following the date of grant. With respect to our employees, non-qualified stock options generally become exercisable with respect to 25% of the shares on each of the first four anniversaries following the grant date. The stock-based compensation table above includes stock option expenses recognized related to these awards, which totaled $0.5 million and $0.4 million for the three months ended March 31, 2019 and 2018, respectively, and $1.0 million and $0.8 million for the six months ended March 31, 2019 and 2018, respectively.

The total pre-tax intrinsic value of options exercised during the three months ended March 31, 2019 and 2018 was less than $0.1 million and $3.1 million, respectively, and $0.1 million and $3.3 million for the six months ended March 31, 2019 and 2018, respectively. The intrinsic value represents the difference between the Company’s common stock fair market value on the date of exercise and the option’s exercise price.

The Company has entered into restricted stock agreements with certain key employees, covering the issuance of common stock (“Restricted Stock”). Under accounting guidance, these shares are considered to be non-vested shares. The Restricted Stock is released to the key employees if they are employed by the Company at the end of the vesting period. Restricted Stock vesting periods range from one to three years. During the six months ended March 31, 2019 and 2018, the Company awarded 43,713 and 53,455 Restricted Stock shares, respectively, to certain key employees and officers. Forfeiture of 800 and 3,482 Restricted Stock shares occurred during the six months ended March 31, 2019 and 2018, respectively. As of March 31, 2019 and September 30, 2018, 94,971 and 85,424 Restricted Stock shares were outstanding, respectively. Compensation expense has been recognized for the estimated fair value of the common shares, net of estimated forfeitures, and is being charged to operating expenses over the vesting term. The stock-based compensation expense table includes Restricted Stock expenses recognized related to these awards, which totaled $0.4 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively, and $0.8 million and $0.5 million for the six months ended March 31, 2019 and 2018, respectively.

The Company has entered into performance share agreements with certain key employees covering the issuance of common stock (“Performance Shares”). Performance Shares vest upon the achievement of all or a portion of certain performance objectives (which may include financial or project objectives), which must be achieved during the performance period. The Organization and Compensation Committee of the Board of Directors (the “Committee”) approves the performance objectives used for our executive compensation programs, which objectives were cumulative revenue and cumulative earnings before interest, income taxes, depreciation and amortization (“EBITDA”) for the three-year performance periods for awards granted in fiscal 2016 (2016 – 2018) and fiscal 2017 (2017 – 2019). The fiscal 2017 awards also include performance objectives related to achievement of the Company’s strategic initiatives. Assuming that the minimum performance level is attained, the number of shares that may actually vest will vary based on performance from 20% (minimum) to 200% (maximum) of the target number of shares. Shares will be issued to participants as soon as practicable following the end of each performance period, subject to Committee approval and verification of results. Awards granted in fiscal 2016 were finalized in the six months ended March 31, 2019 and resulted in the issuance of 76,396 shares (maximum was 132,676 shares) based on the performance objectives relative to actual results achieved during the performance period. The per share compensation cost for each award is fixed on the grant date. Compensation expense is recognized in each period based on management’s estimate of the achievement level of actual and forecasted results, as appropriate, compared with the specified performance objectives and the related impact on the number of Performance Shares expected to vest. The stock-based compensation expense table includes Performance Shares expense (benefit) recognized related to these awards, which totaled $(0.2) million and $0.2 million for the three months ended March 31, 2019 and 2018, respectively, and $(0.1) million and $0.4 million for the six months ended March 31, 2019 and 2018, respectively.

The fair values of the Performance Shares, at target, were $1.2 million for awards granted in fiscal 2017. There were no Performance Share awards granted in fiscal 2018 and none, to date, in fiscal 2019.

The aggregate number of shares that could be awarded to our executives if the minimum, target and maximum performance goals are met, based on the fair value at the date of grant is as follows as of March 31, 2019:

Performance Period

Minimum Shares

Target Shares

Maximum Shares

Fiscal 2017 – 2019

9,352

46,758

93,516

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

During the six months ended March 31, 2019 and 2018, the Company awarded 11,871 and 21,265 restricted stock units (“RSUs”), respectively, to non-employee directors and certain key employees in foreign jurisdictions. As of March 31, 2019 and September 30, 2018, 62,420 and 60,440 RSUs were outstanding, respectively. RSU awards are not considered issued or outstanding common stock of the Company until they vest. Compensation expense has been recognized for the estimated fair value of the common shares and is being charged to operating expenses over the vesting term. The estimated fair value of the RSUs was calculated based on the closing market price of Surmodics’ common stock on the grant date. The stock-based compensation table includes RSU expenses recognized related to these awards, which totaled $0.1 million for both the three-month periods ended March 31, 2019 and 2018 and $0.3 million and $0.2 for the six months ended March 31, 2019 and 2018, respectively.

Directors may elect to receive their annual fees for services to the Board in deferred stock units (“DSUs”). Certain directors elected this option beginning on January 1, 2013 with subsequent deferral elections updated quarterly. During the six months ended March 31, 2019 and 2018, 1,422 and 1,432 units, respectively, were issued with a total fair value of less than $0.1 million in each period. As of March 31, 2019 and September 30, 2018, outstanding, fully vested DSUs totaled 28,413 and 26,991, respectively. Stock-based compensation expense related to DSU awards totaled less than $0.1 million for both the three-month periods ended March 31, 2019 and 2018 and $0.1 million for both the six-month periods ended March 31, 2019 and 2018.