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.

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

Determining Fair Value

Stock Options

The Company estimates the fair value of stock options granted using the Black-Scholes option pricing model. The fair value of stock options is determined on the date of the grant (measurement date), and is recognized over the vesting period of the option using the straight-line method.

There were no stock options granted during the three and nine months ended September 30, 2016 and 2015.

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 (measurement date), and is recognized over the vesting period of the award 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		Three		Nine		Nine
	Months		Months		Months		Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2016		2015		2016		2015
Stock-based compensation:
Cost of revenue	$	196	$	171	$	553	$	569
Sales and marketing	$	265	$	251	$	715	$	585
Research, development and engineering	$	346	$	396	$	1,050	$	1,011
General and administrative	$	568	$	485	$	1,613	$	1,487
Intellectual property	$	80	$	74	$	231	$	205
Stock-based compensation expense	$	1,455	$	1,377	$	4,162	$	3,857
Capitalized to software and patent costs	$	46	$	46	$	121	$	137
Total stock-based compensation expense	$	1,501	$	1,423	$	4,283	$	3,994

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		As of
	September 30,		December 31,
	2016		2015
Total unrecognized compensation costs	$	10,620	$	9,549

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, 2016 for stock options and restricted stock over weighted average periods through September 2020 as follows:

	Stock	Restricted
	Options	Stock
Weighted average period	0.0 years	1.4 years

As of September 30, 2016, under all of the Company’s stock-based compensation plans, equity awards to purchase an additional 1,319 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, 2016:	Options			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Outstanding at June 30, 2016		458		$	18.29	$	8.79
Options granted		—			—		—
Options exercised		(17	)		9.64		6.30
Options forfeited or expired		—			—		—
Outstanding at September 30, 2016		441		$	18.63	$	8.88	$	8,687

Nine months ended September 30, 2016:	Options			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Outstanding at December 31, 2015		490		$	17.73	$	8.69
Granted		—			—		—
Exercised		(49	)		9.64		6.94
Forfeited or expired		—			—		—
Outstanding at September 30, 2016		441		$	18.63	$	8.88	$	8,687
Exercisable at September 30, 2016		441		$	18.63			$	8,687

The aggregate intrinsic value is based on the closing price of $38.35 per share of Digimarc common stock on September 30, 2016, which would have been received by the optionees had all of the options with exercise prices less than $38.35 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, 2016:	Number of Shares			Weighted Average Grant Date Fair Value
Unvested balance, June 30, 2016		470		$	25.59
Granted		14		$	35.38
Vested		(54	)	$	25.50
Forfeited		(4	)	$	28.15
Unvested balance, September 30, 2016		426		$	25.89

Nine months ended September 30, 2016:	Number of Shares			Weighted Average Grant Date Fair Value
Unvested balance, December 31, 2015		408		$	24.30
Granted		191		$	29.11
Vested		(166	)	$	25.51
Forfeited		(7	)	$	30.14
Unvested balance, September 30, 2016		426		$	25.89

The following table indicates the fair value of all restricted stock awards that vested during the three and nine months ended September 30, 2016 and 2015:

	Three		Three		Nine		Nine
	Months		Months		Months		Months
	Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,
	2016		2015		2016		2015
Fair value of restricted stock awards vested	$	1,912	$	1,961	$	5,029	$	4,840