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Stock-Based Compensation
 6 Months Ended
Jun. 30, 2011
Stock-Based Compensation  
Stock-Based Compensation

5. Stock-Based Compensation

Stock-based compensation includes expense charges for all stock-based awards to employees and directors. These awards include option grants and restricted stock awards.

Determining Fair Value

Preferred Stock

The Board of Directors authorized 10,000 shares of Series A Redeemable Nonvoting Preferred stock (Series A Preferred) to be issued to the executive officers. The Series A Redeemable Nonvoting Preferred stock has no voting rights, except as required by law, and may be redeemed at the option of the Company's Board of Directors at any time on or after June 18, 2013.

The Series A Preferred is redeemable based on the stated fair value of $5.00 per share, and the related stock compensation expense is recognized over the non-redeemable period of 5 years, or 60 months, through June 2013 using the straight-line method. The Series A Preferred has no dividend rights and no rights to the undistributed earnings of the Company.

Stock Options

Valuation and Amortization Method. The Company estimates the fair value of stock-based awards granted on date of grant using the Black-Scholes option valuation model. The Company amortizes the fair value of all awards on a straight-line basis over the requisite service periods, which are generally the vesting periods.

Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. For 2011, the Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and pre-vesting and post-vesting forfeitures. For 2010, the Company determined the initial expected life based on a simplified method in accordance with SAB 110 "Shared-Based Payment," giving consideration to the contractual terms, vesting schedules and post-vesting forfeitures. Stock options granted generally vest over four years for employee grants and one to two years for director grants, and have contractual terms of ten years.

Expected Volatility. For 2011, the Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its common stock based on historical prices over the most recent period commensurate with the estimated expected life of the award. For 2010, the Company's estimate of volatility was based on a 50/50 blend of the Company's own historical volatility and an independent analysis of a peer group's historical volatility, calculated by individual entity basis, of its common stock based on historical stock prices over the most recent period commensurate with the estimated expected life of the award.

Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes option valuation model on an interest rate on a Treasury bond with a maturity commensurate with each expected life estimate.

Expected Dividend Yield. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model.

A summary of the weighted average assumptions and results for options granted are as follows:

 

             
     2011     2010

Expected life (in years)

      5.75      5.2 - 6.0

Expected volatility

      42 %    52% -55%

Risk-free interest rate

      2.3 %    2.5% -3.0%

Expected dividend yield

      0 %    0%

 

                                 
     Three
Months
Ended
June 30,
2011		      Three
Months
Ended
June 30,
2010		      Six
Months
Ended
June 30,
2011		      Six
Months
Ended
June 30,
2010		  

Fair value of stock options granted

    $ —         $ 266       $ 954       $ 1,159   

 

Expected Forfeitures. The Company uses a zero forfeiture for both the stock options granted to employees, which vest monthly, and the stock options granted to the Company's Directors. Initial option grants, for new Directors, vest 50% on the first anniversary of the date of grant and then monthly thereafter, and annual option grants, for continuing Directors, vest monthly. The Company records stock-based compensation expense only for those awards that are expected to vest, including awards made to Directors who are expected to continue with the Company through the year following the date of grant.

Restricted Stock

The Compensation Committee of the Board of Directors has awarded restricted stock shares under the Company's 2008 Stock Incentive Plan to certain employees and Directors. The shares subject to the restricted stock awards vest over a certain period, usually four years, following the date of the grant. Specific terms of the restricted stock awards are governed by Restricted Stock Agreements between the Company and the award recipients.

The fair value of restricted stock awards granted is based on the fair market value of the Company's common stock on the date of the grant (measurement date), and is recognized over the vesting period of the related restricted stock using the straight-line method.

Stock-based Compensation

 

                                 
     Three
Months
Ended
June 30,
2011		      Three
Months
Ended
June 30,
2010		      Six
Months
Ended
June 30,
2011		      Six
Months
Ended
June 30,
2010		  

Stock-based compensation:

                                    

Cost of revenue

    $ 178       $ 91       $ 288       $ 188   

Sales and marketing

      76         49         161         91   

Research, development and engineering

      108         76         266         146   

General and administrative

      586         527         1,171         1,034   

Intellectual property

      47         22         95         46   
                                     

Stock-based compensation expense

      995         765         1,981         1,505   

Capitalized to patent costs

      15         11         26         22   
                                     

Total stock-based compensation

    $ 1,010       $ 776       $ 2,007       $ 1,527   
                                     

Total unrecognized compensation costs related to non-vested stock-based awards granted under all equity compensation plans, including preferred stock, stock options and restricted stock:

 

                 
     As of
June 30,
    2011    		      As of
December 31,
2010		  

Unrecognized compensation costs

    $ 8,556       $ 6,212   

Total unrecognized compensation cost will be adjusted for any future changes in estimated forfeitures.

The Company expects to recognize this compensation cost for stock options and restricted stock over weighted average periods through June 2015 as follows:

 

                 
     Stock
Options		      Restricted
Stock		  

Weighted average period

     
 		 1.04
years		   
  		     
 		 1.79
years		   
  

Stock Option Activity

As of June 30, 2011, under all of the Company's stock-based compensation plans, options to purchase an additional 958,916 shares were authorized for future grants under the plans. The Company issues new shares upon option exercises.

Options granted, exercised, canceled and expired under the Company's stock option plans are summarized as follows:

 

                                 

Three-months ended June 30, 2011:

    Options     Weighted
Average
Exercise
Price		      Weighted
Average
Grant Date
Fair Value		      Aggregate
Intrinsic
Value		  

Outstanding at March 31, 2011

      1,068,491      $ 11.84       $ 6.98            

Options granted

      —          —           —              

Options exercised

      (74,168 )    $ 9.88       $ 6.38            

Options canceled or expired

      —          —           —              
                                    

Outstanding at June 30, 2011

      994,323      $ 11.99       $ 7.03       $ 22,532   
                                    

Exercisable at June 30, 2011

      498,100      $ 10.82                $ 12,019   
                                    

Unvested at June 30, 2011

      496,223      $ 13.16                $ 10,513   
                                    

 

                                 

Six-months ended June 30, 2011:

    Options     Weighted
Average
Exercise
Price		      Weighted
Average
Grant Date
Fair Value		      Aggregate
Intrinsic
Value		  

Outstanding at December 31, 2010

      993,491      $ 10.47       $ 6.55            

Options granted

      75,000      $ 30.01       $ 12.72            

Options exercised

      (74,168 )    $ 9.88       $ 6.38            

Options canceled or expired

      —          —           —              
                                    

Outstanding at June 30, 2011

      994,323      $ 11.99       $ 7.03       $ 22,532   
                                    

Exercisable at June 30, 2011

      498,100      $ 10.82                $ 12,019   
                                    

Unvested at June 30, 2011

      496,223      $ 13.16                $ 10,513   
                                    

The aggregate intrinsic value is based on the closing price of $35.03 per share of Digimarc common stock on June 30, 2011, which would have been received by the optionees had all of the options with exercise prices less than $35.03 per share been exercised on that date.

The following table summarizes information about stock options outstanding at June 30, 2011:

 

                                                 
     Options Outstanding      Options Exercisable  

Range of Exercise Prices

    Number
Outstanding		      Remaining
Contractual
Life (Years)		      Weighted
Average
Price		      Number
Exercisable		      Remaining
Contractual
Life (Years)		      Weighted
Average
Price		  

$9.64

      756,407         7.33       $ 9.64         398,411         7.33       $ 9.64   

$9.91

      30,000         7.84       $ 9.91         30,000         7.84       $ 9.91   

$14.99

      102,916         8.51       $ 14.99         31,876         8.51       $ 14.99   

$18.01

      30,000         8.83       $ 18.01         30,000         8.83       $ 18.01   

$30.01

      75,000         9.51       $ 30.01         75,000         9.51       $ 30.01   
                                                       

$9.64 - $30.01

      994,323         7.68       $ 11.99         498,100         7.56       $ 10.82   
                                                       

Restricted Stock Activity

The following table reconciles the unvested balance of restricted stock:

 

                 

Three-months ended June 30, 2011:

    Number of
Shares		     Weighted
Average
Grant Date
Fair Value		  

Unvested balance, March 31, 2011

      271,605      $ 20.09   

Granted

      13,000      $ 27.71   

Vested

      (350 )    $ 9.80   

Canceled

      (395 )    $ 23.57   
                  

Unvested balance, June 30, 2011

      283,860      $ 20.42   
                  

 

                 

Six-months ended June 30, 2011:

    Number of
Shares		     Weighted
Average
Grant Date
Fair Value		  

Unvested balance, December 31, 2010

      197,760      $ 14.25   

Granted

      114,180      $ 29.75   

Vested

      (27,685 )    $ 14.73   

Canceled

      (395 )    $ 23.57   
                  

Unvested balance, June 30, 2011

      283,860      $ 20.42