5. Stock-Based Compensation

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

Stock-based compensation expense related to internal labor is capitalized to patent costs and software based on direct labor hours charged to capitalized patent costs and software.

Determining Fair Value

Stock Options

Valuation and Amortization Method. The Company estimates the fair value of stock options granted 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. 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. Stock options granted generally vest over three to four years for employee grants and one to two years for director grants, and have contractual terms of ten years.

Expected Volatility. 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 expected life of the award.

Risk-Free Interest Rate. The Company determines the risk-free interest rate using current U.S. treasury yields for bonds with a maturity commensurate with the expected life of the award.

Expected Dividend Yield. The expected dividend yield is derived by the Company’s expected annual dividend rate over the expected term divided by the fair value of the Company’s common stock at the grant date.

There were no stock options granted during the three- and nine-month periods ended September 30, 2015 and 2014.

The Company records stock-based compensation expense for stock option awards only for those awards that are expected to vest.

Restricted Stock

The fair value of restricted stock awarded is based on the fair market value of the Company’s common stock on the date of the grant, and is recognized over the vesting period using the straight-line method.

The Company records stock-based compensation expense for restricted stock awards only for those awards that are expected to vest.

Stock-based Compensation


	Three Months Ended September 30, 2015		Three Months Ended September 30, 2014		Nine Months Ended September 30, 2015		Nine Months Ended September 30, 2014
Stock-based compensation:
Cost of revenue	$	171	$	131	$	569	$	402
Sales and marketing		251		187		585		504
Research, development and engineering		396		363		1,011		1,083
General and administrative		485		688		1,487		1,844
Intellectual property		74		85		205		252

Stock-based compensation expense		1,377		1,454		3,857		4,085
Capitalized to patent costs and software		46		46		137		133

Total stock-based compensation expense	$	1,423	$	1,500	$	3,994	$	4,218

The following table sets forth total unrecognized compensation cost related to non-vested stock-based awards granted under all equity compensation plans, including stock options and restricted stock:


	As of September 30, 2015		As of December 31, 2014
Total unrecognized compensation costs	$	10,380	$	11,206

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

The Company expects to recognize the unrecognized compensation costs as of September 30, 2015 for stock options and restricted stock over weighted average periods through September 2019 as follows:


	Stock Options		Restricted Stock
Weighted average period		0.0 years		1.4 years

As of September 30, 2015, under all of the Company’s stock-based compensation plans, equity awards to purchase an additional 1,434 shares were authorized for future grants under the plans. The Company issues new shares upon option exercises.

Stock Option Activity

The following table reconciles the outstanding balance of stock options:


Three-months ended September 30, 2015:	Options			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Outstanding at June 30, 2015		530		$	17.12	$	8.51
Options granted		—			—		—
Options exercised		(20	)		9.64		6.30
Options forfeited or expired		—			—		—

Outstanding at September 30, 2015		510		$	17.41	$	8.59	$	6,699


Nine-months ended September 30, 2015:	Options			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Outstanding at December 31, 2014		601		$	16.97	$	8.42
Options granted		—			—		—
Options exercised		(91	)		14.47		7.46
Options forfeited or expired		—			—		—

Outstanding at September 30, 2015		510		$	17.41	$	8.59	$	6,699

Exercisable at September 30, 2015		510		$	17.41			$	6,699

The aggregate intrinsic value is based on the closing price of $30.55 per share of Digimarc common stock on September 30, 2015, which would have been received by the optionees had all of the options with exercise prices less than $30.55 per share been exercised on that date.

Restricted Stock Activity

The following table reconciles the unvested balance of restricted stock:


Three-months ended September 30, 2015:	Number of Shares			Weighted Average Grant Date Fair Value
Unvested balance, June 30, 2015		489		$	23.98
Granted		13		$	37.60
Vested		(52	)	$	24.53
Forfeited		(1	)	$	24.43

Unvested balance, September 30, 2015		449		$	24.30


Nine-months ended September 30, 2015:	Number of Shares			Weighted Average Grant Date Fair Value
Unvested balance, December 31, 2014		502		$	23.09
Granted		132		$	29.37
Vested		(156	)	$	24.80
Forfeited		(29	)	$	23.68

Unvested balance, September 30, 2015		449		$	24.30

The following table indicates the fair value of all restricted stock awards that vested during the three- and nine-months ended September 30, 2015 and 2014:


	Three Months Ended September 30, 2015		Three Months Ended September 30, 2014		Nine Months Ended September 30, 2015		Nine Months Ended September 30, 2014
Fair value of restricted stock awards vested	$	1,961	$	1,206	$	4,840	$	4,417