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. The Company recognizes share-based payments as an operating expense, based on their fair values, over the requisite service period.

Stock-based compensation expense was reported as follows in the condensed consolidated statements of operations:

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

As of March 31, 2020, approximately $9.5 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 2.4 years.

The Company uses the Black-Scholes option pricing model to determine the weighted average grant date fair value of stock options granted. Stock option fair value assumptions and the weighted average fair value of stock options granted were as follows:

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

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

Non-qualified stock options are granted at fair market value on the date of grant. Non-qualified stock options expire in seven years, or upon termination of employment or service as a Board member. With respect to members of our Board, non-qualified stock options generally become exercisable on a monthly pro-rata basis within the one-year period following the date of grant. With respect to our employees, non-qualified stock options generally become exercisable with respect to 25% of the shares on each of the first four anniversaries following the grant date. The stock-based compensation expense table above includes stock option expenses recognized related to these awards, which totaled $0.6 million and $0.5 million for the three months ended March 31, 2020 and 2019, respectively, and $1.2 million and $1.0 million for the six months ended March 31, 2020 and 2019, respectively.

The total pre-tax intrinsic value of options exercised was $0.9 million and less than $0.1 million for the three months ended March 31, 2020 and 2019, respectively, and $1.1 million and $0.1 million for the six months ended March 31, 2020 and 2019, respectively. Intrinsic value represents the difference between the Company’s common stock fair market value on the date of exercise and the option’s exercise price.

The Company has entered into restricted stock agreements with certain key employees, covering the issuance of common stock (“Restricted Stock”). Under accounting guidance, these shares are considered to be non-vested shares. The Restricted Stock is released to the key employees if they are employed by the Company at the end of the vesting period. Restricted Stock vesting periods range from one to three years. During the six months ended March 31, 2020 and 2019, the Company awarded 60,112 and 43,713 Restricted Stock shares, respectively, to certain key employees and officers. Forfeiture of 12,980 and 800 Restricted Stock shares occurred during the six months ended March 31, 2020 and 2019, respectively. As of March 31, 2020 and September 30, 2019, 95,359 and 90,409 Restricted Stock shares were outstanding, respectively. Compensation expense has been recognized for the estimated fair value of the common shares, net of estimated forfeitures, and is being charged to operating expenses over the vesting term. The stock-based compensation expense table includes Restricted Stock expenses recognized related to these awards, which totaled $0.5 million and $0.4 million for the three months ended March 31, 2020 and 2019, respectively, and $1.0 million and $0.8 million for the six months ended March 31, 2020 and 2019, 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 2017 (2017 – 2019). The fiscal 2017 awards also included performance objectives related to achievement of the Company’s strategic initiatives. Awards granted in fiscal 2017 were finalized in the first quarter of fiscal 2020 and resulted in the issuance of 67,653 shares, with a value of $2.8 million, based on the performance objectives relative to actual results achieved during the performance period. The per share compensation cost for each award was fixed on the grant date. The stock-based compensation expense table includes Performance Shares expense recognized related to these awards, which totaled $(0.2) million and $(0.1) million for the three and six months ended March 31, 2019, respectively. Performance Shares expense recognized in the three and six months ended March 31, 2020 was insignificant as all Performances Shares were vested as of September 30, 2019.

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

During the six months ended March 31, 2020 and 2019, the Company awarded 16,858 and 11,871 restricted stock units (“RSUs”), respectively, to non-employee directors and certain key employees in foreign jurisdictions. RSU awards are not considered issued or outstanding common stock of the Company until they vest. As of March 31, 2020 and September 30, 2019, outstanding, unvested RSUs totaled 69,784 and 62,242, respectively. Compensation expense has been recognized for the estimated fair value of the common shares and is being charged to operating expenses over the vesting term. The estimated fair value of the RSUs was calculated based on the closing market price of Surmodics’ common stock on the grant date. The stock-based compensation expense table includes RSU expenses recognized related to these awards, which totaled $0.2 million and $0.1 million for the three months ended March 31, 2020 and 2019, respectively, and $0.3 million for each of the six months ended March 31, 2020 and 2019.

Directors may elect to receive their annual fees for services to the Board in deferred stock units (“DSUs”). Directors may elect this option quarterly. During the six months ended March 31, 2020 and 2019, 1,846 and 1,422 units, respectively, were issued with a total fair value of less than $0.1 million in each period. Outstanding, fully vested DSUs totaled 31,375 and 29,729 as of March 31, 2020 and September 30, 2019, respectively. Stock-based compensation expense related to DSU awards totaled less than $0.1 million for both the three months ended March 31, 2020 and 2019 and $0.1 million for each the six months ended March 31, 2020 and 2019.

Under the amended 1999 Employee Stock Purchase Plan (“Employee Stock Purchase Plan”), the Company is authorized to issue up to 600,000 shares of common stock. All full-time and part-time U.S. employees can choose to contribute up to 10% of their annual compensation, with a limit of $25,000, to purchase the Company’s common stock at purchase prices defined within the provisions of the Employee Stock Purchase Plan. As of March 31, 2020 and September 30, 2019, there was less than $0.1 million of employee contributions to the Employee Stock Purchase Plan included in accrued liabilities in the condensed consolidated balance sheets. Stock-based compensation expense recognized related to the Employee Stock Purchase Plan for the three and six months ended March 31, 2020 and 2019 totaled less than $0.1 million in each respective period. The stock-based compensation expense table includes the Employee Stock Purchase Plan expenses.