10. Stock-based Compensation

The Company has stock-based compensation plans under which it grants stock options, restricted stock awards, performance share awards and restricted 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 (in thousands):


	Three months ended				Nine months ended
	June 30,				June 30,
	2013		2012		2013		2012
Product costs	$	7	$	5	$	17	$	31
Research and development		54		71		141		453
Selling, general and administrative		684		580		1,825		1,705

Total	$	745	$	656	$	1,983	$	2,189

As of June 30, 2013, approximately $4.0 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of approximately 2.7 years. The unrecognized compensation costs above include $1.3 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 at or above target levels.

Stock Option Awards

The Company uses the Black-Scholes option pricing model to determine the weighted average grant date fair value of stock options granted. No stock options were granted during the three months ended June 30, 2013. The weighted average per share fair value of stock options granted during the three months ended June 30, 2012 was $5.94. The weighted average per share fair values of stock options granted during the nine months ended June 30, 2013 and 2012 were $8.69 and $5.24, respectively. The assumptions used as inputs in the model were as follows:


	Three months ended					Nine months ended
	June 30,					June 30,
	2013		2012			2013			2012
Risk-free interest rates		N/A		0.7	%		0.6	%		0.8	%
Expected life (years)		N/A		4.8			4.8			4.8
Expected volatility		N/A		48.6	%		49.2	%		49.6	%
Dividend yield		N/A		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 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 zero for the expected life of the options. The Company also estimates forfeitures of options granted, which are based on historical experience.

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. Non-qualified stock options granted generally become exercisable with respect to 25% of the shares on each of the first four anniversaries following the grant date.

The total pre-tax intrinsic value of options exercised during the three and nine months ended June 30, 2013 was $26,000 and $51,000, respectively. There were no stock options exercised during the three months ended June 30, 2012. The total pre-tax intrinsic value of options exercised during the nine months ended June 30, 2012 was $49,000. 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 period end.

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. Compensation has been recognized for the estimated fair value of the common shares and is being charged to income over the vesting term. The stock-based compensation table above includes Restricted Stock expenses recognized related to these awards, which totaled less than $0.1 million during the three and nine months ended June 30, 2013 and less than $0.1 million and $0.2 million during the three and nine months ended June 30, 2012, respectively.

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. Performance objectives selected by the Organization and Compensation Committee of the Board of Directors (the “Committee”) were cumulative earnings per share and cumulative revenue for the three-year performance periods for fiscal 2011 beginning on October 1, 2010 and ending on September 30, 2013 (68,533 shares at target), for fiscal 2012 beginning on October 1, 2011 and ending on September 30, 2014 (62,497 shares at target), and for fiscal 2013 beginning on October 1, 2012 and ending on September 30, 2015 (42,753 shares at target). 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). 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 compensation cost related to the number of shares to be granted under each performance period is fixed on the grant date, which is the date the performance period begins. Compensation is recognized in each period based on management’s best estimate of the achievement level of the specified performance objectives for Performance Shares. For the three and nine months ended June 30, 2013, the Company recognized expenses of $0.3 million and $0.9 million, respectively, related to probable achievement of performance objectives for Performance Shares. The Company recognized expenses of $0.4 million and $0.7 million related to probable achievement of performance objectives for Performance Shares for the three and nine months ended June 30, 2012, respectively. The stock-based compensation table above includes the Performance Shares expenses.

1999 Employee Stock Purchase Plan

Under the 1999 Employee Stock Purchase Plan (“Stock Purchase Plan”), the Company is authorized to issue up to 400,000 shares of common stock. All full-time and part-time 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 June 30, 2013 and 2012, there were $0.1 million and less than $0.1 million, respectively, of employee contributions in each period included in accrued liabilities in the condensed consolidated balance sheets. Stock compensation expense recognized related to the Stock Purchase Plan for the three months ended June 30, 2013 and 2012 totaled less than $0.1 million in each period. Stock compensation expense recognized related to the Stock Purchase Plan for the nine months ended June 30, 2013 and 2012 totaled $0.1 million for each period. The stock-based compensation table above includes the Stock Purchase Plan expenses.

Restricted Stock Units

On December 12, 2012, the Company awarded 11,776 restricted stock units (“RSU”) under the 2009 Equity Incentive Plan to directors. The RSU awards vest annually at a rate of 33%. 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. Compensation has been recognized for the estimated fair value of the common shares and is being charged to income over the vesting term. Directors can also elect to receive their annual fees for services to the Board in RSUs. Certain directors elected this option beginning on January 1, 2013 which has resulted in 3,994 units issued with a total value of $92,000. These RSUs are fully vested. The stock-based compensation table above includes RSU expenses recognized related to these awards, which totaled less than $0.1 million and $0.1 million for the three and nine months ended June 30, 2013, respectively.