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 valuation model. The fair value of stock options is determined on the date of the grant (measurement date), and is amortized on a straight-line method over the requisite service periods, which are generally the vesting periods.

There were no stock options granted during the three and six months ended June 30, 2017 and 2016.

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.

Stock-based Compensation

	Three		Three		Six		Six
	Months		Months		Months		Months
	Ended		Ended		Ended		Ended
	June 30,		June 30,		June 30,		June 30,
	2017		2016		2017		2016
Stock-based compensation:
Cost of revenue	$	175	$	184	$	351	$	357
Sales and marketing		342		238		710		450
Research, development and engineering		354		379		662		704
General and administrative		637		544		1,210		1,045
Intellectual property		82		79		160		151
Stock-based compensation expense		1,590		1,424		3,093		2,707
Capitalized to software and patent costs		53		43		98		75
Total stock-based compensation	$	1,643	$	1,467	$	3,191	$	2,782

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
	June 30,		December 31,
	2017		2016
Total unrecognized compensation costs	$	12,577	$	9,728

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

The Company expects to recognize the unrecognized compensation costs as of June 30, 2017 for stock options and restricted stock over weighted average periods through June 2021 as follows:

	Stock	Restricted
	Options	Stock
Weighted average period	0.0 years	1.52 years

As of June 30, 2017, under all of the Company’s stock-based compensation plans, equity awards to purchase an additional 1,144 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:

				Weighted		Weighted
				Average		Average		Aggregate
				Exercise		Grant Date		Intrinsic
Three months ended June 30, 2017:	Options			Price		Fair Value		Value
Outstanding at March 31, 2017		402		$	19.49	$	9.13
Granted		—			—		—
Exercised		(40	)		9.64		6.30
Forfeited or expired		—			—		—
Outstanding at June 30, 2017		362		$	20.60	$	9.45	$	7,071

				Weighted		Weighted
				Average		Average		Aggregate
				Exercise		Grant Date		Intrinsic
Six months ended June 30, 2017:	Options			Price		Fair Value		Value
Outstanding at December 31, 2016		421		$	19.06	$	9.01
Granted		—			—		—
Exercised		(59	)		9.64		6.30
Forfeited or expired		—			—		—
Outstanding at June 30, 2017		362		$	20.60	$	9.45	$	7,071
Exercisable at June 30, 2017		362		$	20.60			$	7,071

The aggregate intrinsic value is based on the closing price of $40.15 per share of Digimarc common stock on June 30, 2017, which would have been received by the optionees had all of the options with exercise prices less than $40.15 per share been exercised on that date.

Restricted Stock Activity

The following table reconciles the unvested balance of restricted stock:

				Weighted
				Average
	Number of			Grant Date
Three months ended June 30, 2017:	Shares			Fair Value
Unvested balance, March 31, 2017		511		$	25.91
Granted		58		$	30.39
Vested		(72	)	$	17.40
Forfeited		(5	)	$	26.35
Unvested balance, June 30, 2017		492		$	27.67

				Weighted
				Average
	Number of			Grant Date
Six months ended June 30, 2017:	Shares			Fair Value
Unvested balance, December 31, 2016		385		$	26.28
Granted		236		$	26.43
Vested		(122	)	$	21.08
Forfeited		(7	)	$	24.32
Unvested balance, June 30, 2017		492		$	27.67

The following table indicates the fair value of all restricted stock awards that vested during the three and six months ended June 30, 2017 and 2016:

	Three		Three		Six		Six
	Months		Months		Months		Months
	Ended		Ended		Ended		Ended
	June 30,		June 30,		June 30,		June 30,
	2017		2016		2017		2016
Fair value of restricted stock awards vested	$	2,214	$	1,839	$	3,491	$	3,117