6. Stock-Based Compensation Plans

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 expense, based on their fair values, over the requisite service period. The Company also estimates forfeitures of awards granted, which are based on historical experience and reduce the recognized expense. The Company’s stock-based compensation expenses for the years ended September 30 were allocated to the following expense categories (in thousands):

	2017		2016		2015
Product costs	$	90	$	22	$	24
Research and development		510		324		226
Selling, general and administrative		2,872		3,498		2,131
Total stock-based compensation expense	$	3,472	$	3,844	$	2,381

As of September 30, 2017, approximately $4.7 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 2.1 years. Such costs include $1.5 million based on payout levels associated with performance share awards that are currently anticipated to be fully expensed because the performance conditions are expected to be met above the minimum levels for each award period.

Under the amended 2009 Equity Incentive Plan (“2009 Plan”), the Company is authorized to issue up to 2,000,000, plus the number of shares that have not yet been awarded under the 2003 Equity Incentive Plan, or were awarded and subsequently returned to the pool of available shares under the 2003 Equity Incentive Plan pursuant to its terms. As of September 30, 2017, there were 888,546 shares available for future equity awards, including stock options, restricted stock awards, performance share awards, and restricted stock and deferred stock units, under the 2009 Plan.

Stock Option Awards

The Company uses the Black-Scholes option pricing model to determine the weighted average grant date fair value of stock options. Weighted average per share fair values of stock options granted during fiscal 2017, 2016 and 2015 were $7.63, $6.95 and $7.26, respectively. The assumptions used as inputs in the model for the years ended September 30 were as follows:

	2017			2016			2015
Risk-free interest rates		1.74	%		1.89	%		1.43	%
Expected life	4.6 years			4.6 years			4.5 years
Expected volatility		34	%		37	%		43	%
Dividend yield		0	%		0	%		0	%

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

Non-qualified stock options are granted at fair market value on the grant date. Non-qualified stock options expire in seven to ten years or upon termination of employment or service as a Board member. With respect to members of the Board, non-qualified stock options generally become exercisable on a pro-rata basis over the one-year period following the date of grant. With respect to 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 $1.3 million, $1.2 million and $1.2 million during fiscal 2017, 2016 and 2015, respectively.

As of September 30, 2017, the aggregate intrinsic value of the option shares outstanding and option shares exercisable was $10.0 million and $6.1 million, respectively. As of September 30, 2017, the average remaining contractual life of options outstanding and options exercisable was 4.0 years and 2.8 years, respectively. The total pre-tax intrinsic value of options exercised during fiscal 2017 and 2016 was $0.1 million and $5.1 million, respectively. The intrinsic value represents the difference between the exercise price and the fair market value of the Company’s common stock on the last day of the respective fiscal year end.

The following table summarizes all stock options activity and stock options outstanding and exercisable under the stock option plans during fiscal 2017, 2016 and 2015:

	Number of Shares			Weighted Average Exercise Price
Outstanding at September 30, 2014		1,210,619		$	20.35
Granted		164,401			21.24
Exercised		(166,422	)		14.54
Forfeited and expired		(90,590	)		35.35
Outstanding at September 30, 2015		1,118,008			20.10
Granted		241,582			20.63
Exercised		(437,850	)		15.68
Forfeited and expired		(94,415	)		31.52
Outstanding at September 30, 2016		827,325			21.30
Granted		229,039			24.08
Exercised		(6,819	)		13.89
Forfeited and expired		(47,640	)		30.65
Outstanding at September 30, 2017		1,001,905			21.54
Exercisable at September 30, 2017		547,051		$	20.80

Restricted Stock Awards

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 awards generally vest at a 33% rate on each of the first three anniversaries following the grant date. Compensation expense is recognized on a straight-line basis over the vesting term based on the fair value of the common shares on the date of grant. The stock-based compensation table above includes Restricted Stock expenses recognized related to these awards, which totaled $0.5 million, $0.3 million and $0.3 million during fiscal 2017, 2016 and 2015, respectively.

The following table summarizes all restricted stock awards activity during fiscal 2017, 2016 and 2015:

	Number of Shares			Weighted Average Grant Price
Balance at September 30, 2014		18,624		$	22.45
Granted		18,073			21.84
Vested		(7,606	)		22.28
Forfeited		(1,316	)		22.16
Balance at September 30, 2015		27,775			22.12
Granted		20,108			20.14
Vested		(12,311	)		22.19
Forfeited		(2,439	)		21.17
Balance at September 30, 2016		33,133			20.96
Granted		51,559			25.12
Vested		(14,497	)		21.10
Forfeited		(2,278	)		25.12
Balance at September 30, 2017		67,917		$	23.98

Performance Share Awards

The Company has entered into performance share agreements with certain key employees, covering the issuance of common stock (“Performance Shares”). The Performance Shares vest upon the achievement of all or a portion of certain performance objectives, which must be achieved during the performance period. The Performance Shares are not issued and outstanding until the performance objectives are met. The Organization and Compensation Committee of the Board of Directors (the “Committee”) approves the performance objectives used for executive compensation programs, which objectives were cumulative earnings per share and cumulative revenue for the three-year performance periods for fiscal 2013 awards (2013 – 2015), and 2014 awards (2014 – 2016), and are cumulative earnings before interest, income taxes, depreciation and amortization (“EBITDA”) for fiscal 2015 awards (2015 – 2017), fiscal 2016 awards (2016-2018) and fiscal 2017 awards (2016-2018). 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 the performance periods, subject to Committee approval and verification of results. The per-unit compensation cost related to the shares to be granted under each performance period is fixed on the grant date, which is the date the performance period begins. Compensation expense is recognized in each period based on management’s best estimate of the achievement level of the specified performance objectives for Performance Shares for each open performance period. In fiscal 2017, the Company recognized expense of $1.2 million related to probable achievement of performance objectives for three-year Performance Shares granted in fiscal 2017, 2016 and 2015. In fiscal 2016, the Company recognized expense of $1.9 million related to probable achievement of performance objectives for three-year Performance Shares granted in fiscal 2016, 2015 and 2014. In fiscal 2015, the Company recognized expense of $0.5 million related to probable achievement of performance objectives for three-year Performance Shares granted in fiscal 2015, 2014 and 2013. The stock-based compensation table above includes the Performance Shares expenses.

The fair values of the Performance Shares, at target, were $1.2 million, $1.3 million and $0.9 million for grants awarded in fiscal 2017, 2016 and 2015, respectively.

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

Performance Period	Minimum Shares		Target Shares		Maximum Shares
Fiscal 2015 – 2017		8,440		42,199		84,398
Fiscal 2016 – 2018		13,268		66,338		132,676
Fiscal 2017 – 2019		10,437		52,185		104,370

The Fiscal 2015 – 2017 awards are expected to be finalized in December 2017 at an estimated 51,483 shares based on performance objective results. Based on the Company’s performance through September 30, 2017, it is estimated that approximately 57,979 shares may be earned for the Fiscal 2016 – 2018 performance period and that approximately 63,561 shares may be earned for the Fiscal 2017 – 2019 performance period.

1999 Employee Stock Purchase Plan

Under the amended 1999 Employee Stock Purchase Plan (“Stock Purchase Plan”), the Company is authorized to issue up to 600,000 shares of common stock. All full-time and part-time U.S. employees can choose to have up to 10% of their annual compensation withheld, with a limit of $25,000, to purchase the Company’s common stock at purchase prices defined within the provisions of the Stock Purchase Plan. As of September 30, 2017 and 2016, there were less than $0.1 million of employee contributions in accrued liabilities in the consolidated balance sheets. Stock compensation expense recognized related to the Stock Purchase Plan for the fiscal years ended September 30, 2017, 2016 and 2015 totaled $0.1 million or less for each year. The stock-based compensation table above includes the Employee Stock Purchase Plan expenses.

Restricted Stock and Deferred Stock Units

The Company awarded 16,004 and 18,877 restricted stock units (“RSU”) in fiscal 2017 and 2016, respectively, under the 2009 Plan to non-employee directors and certain key employees in foreign jurisdictions with forfeitures of 495 and 1,609 in fiscal 2017 and 2016, respectively. RSU awards are not considered issued or outstanding common stock of the Company until they vest. The estimated fair value of the RSU awards was calculated based on the closing market price of Surmodics’ common stock on the date of grant. As of September 30, 2017 and 2016, outstanding RSU’s totaled 44,391 and 32,101, respectively. Compensation expense is recognized over the vesting term based on the fair value of the common shares on the date of grant. The stock-based compensation table above includes RSU expenses recognized related to these awards, which totaled $0.3 million, $0.2 million and $0.4 million for fiscal 2017, 2016 and 2015, respectively.

Directors may elect to receive their annual fees for services to the Board in deferred stock units (“DSUs”). As of September 30, 2017 and 2016, outstanding DSUs totaled 24,441 and 21,077, respectively, with an estimated fair value of $0.8 million. These DSUs are fully vested when granted. Stock-based compensation expense related to DSU awards, totaled $0.1 million, $0.2 million and $0.1 million in fiscal 2017, 2016 and 2015, respectively.