Digimarc CORP - Quarter Report: 2015 March (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-34108

DIGIMARC CORPORATION

(Exact name of registrant as specified in its charter)

Oregon

26-2828185

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

9405 SW Gemini Drive, Beaverton, Oregon 97008

(Address of principal executive offices) (Zip Code)

(503) 469-4800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ¨ No x

As of April 22, 2015, there were 8,544,154 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

Table of Contents


PART I FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):	3
	Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014	3
	Consolidated Statements of Operations for the three-months ended March 31, 2015 and 2014	4
	Consolidated Statements of Shareholders’ Equity for the three-months ended March 31, 2015 and 2014	5
	Consolidated Statements of Cash Flows for the three-months ended March 31, 2015 and 2014	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27
PART II OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 6.	Exhibits	29
SIGNATURES		30

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

DIGIMARC CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(UNAUDITED)


	March 31, 2015			December 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	5,064		$	6,122
Marketable securities		32,031			32,201
Trade accounts receivable, net		3,620			4,545
Other current assets		2,518			2,611

Total current assets		43,233			45,479
Marketable securities		—			749
Property and equipment, net		2,895			2,976
Intangibles, net		6,692			6,720
Goodwill		1,114			1,114
Other assets		337			378

Total assets	$	54,271		$	57,416

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities	$	1,473		$	1,379
Deferred revenue		2,984			3,660

Total current liabilities		4,457			5,039
Deferred rent and other long-term liabilities		158			203

Total liabilities		4,615			5,242
Commitments and contingencies (Note 12)
Shareholders’ equity:
Preferred stock (par value $0.001 per share, 2,500 authorized, 10 shares issued and outstanding at March 31, 2015 and December 31, 2014)		50			50
Common stock (par value $0.001 per share, 50,000 authorized, 8,540 and 8,427 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively)		9			8
Additional paid-in capital		61,853			60,222
Accumulated deficit		(12,256	)		(8,106	)

Total shareholders’ equity		49,656			52,174

Total liabilities and shareholders’ equity	$	54,271		$	57,416

The accompanying notes are an integral part of these consolidated financial statements.

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(UNAUDITED)


	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014
Revenue:
Service	$	3,501		$	2,988
Subscription		1,716			1,412
License		772			2,805

Total revenue		5,989			7,205
Cost of revenue:
Service		1,578			1,414
Subscription		754			649
License		84			83

Total cost of revenue		2,416			2,146
Gross profit		3,573			5,059
Operating expenses:
Sales and marketing		2,090			1,879
Research, development and engineering		3,084			3,546
General and administrative		2,206			2,421
Intellectual property		367			534

Total operating expenses		7,747			8,380

Operating loss		(4,174	)		(3,321	)
Other income, net		23			27

Loss before income taxes		(4,151	)		(3,294	)
Benefit for income taxes		1			1,308

Net loss	$	(4,150	)	$	(1,986	)

Earnings (loss) per common share:
Loss per common share—basic	$	(0.52	)	$	(0.29	)
Loss per common share—diluted	$	(0.52	)	$	(0.29	)
Weighted average common shares outstanding—basic		7,960			7,000
Weighted average common shares outstanding—diluted		7,960			7,000
Cash dividends declared per common share	$	—		$	0.11

The accompanying notes are an integral part of these consolidated financial statements.

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

(UNAUDITED)


	Preferred Stock				Common Stock					Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Total Shareholders’ Equity
	Shares		Amount		Shares			Amount		Additional Paid-in Capital			Retained Earnings (Accumulated Deficit)			Total Shareholders’ Equity
BALANCE AT DECEMBER 31, 2013		10	$	50		7,401		$	7	$	41,498		$	9,368		$	50,923
Exercise of stock options		—		—		122			1		711			—			712
Issuance of restricted common stock		—		—		57			—		—			—			—
Forfeiture of restricted common stock		—		—		(7	)		—		—			—			—
Purchase and retirement of common stock		—		—		(51	)		—		(850	)		—			(850	)
Stock-based compensation		—		—		—			—		1,304			—			1,304
Tax impact from stock-based awards		—		—		—			—		72			—			72
Net loss		—		—		—			—		—			(1,986	)		(1,986	)
Cash dividends declared		—		—		—			—		—			(824	)		(824	)

BALANCE AT MARCH 31, 2014		10	$	50		7,522		$	8	$	42,735		$	6,558		$	49,351

BALANCE AT DECEMBER 31, 2014		10	$	50		8,427		$	8	$	60,222		$	(8,106	)	$	52,174
Exercise of stock options		—		—		45			1		873			—			874
Issuance of restricted common stock		—		—		90			—		—			—			—
Forfeiture of restricted common stock		—		—		(5	)		—		—			—			—
Purchase and retirement of common stock		—		—		(17	)		—		(496	)		—			(496	)
Stock-based compensation		—		—		—			—		1,254			—			1,254
Net loss		—		—		—			—		—			(4,150	)		(4,150	)

BALANCE AT MARCH 31, 2015		10	$	50		8,540		$	9	$	61,853		$	(12,256	)	$	49,656

The accompanying notes are an integral part of these consolidated financial statements.

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)


	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014
Cash flows from operating activities:
Net loss	$	(4,150	)	$	(1,986	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and write-off of property and equipment		328			231
Amortization and write-off of intangibles		277			308
Changes in allowance for doubtful accounts		10			(7	)
Stock-based compensation		1,217			1,259
Deferred income taxes		—			(509	)
Excess tax benefit from stock-based awards		—			(72	)
Changes in operating assets and liabilities:
Trade accounts receivable		915			1,809
Other current assets		93			(699	)
Other assets		41			84
Accounts payable and other accrued liabilities		(99	)		(314	)
Deferred revenue		(668	)		(1,484	)

Net cash used in operating activities		(2,036	)		(1,380	)
Cash flows from investing activities:
Purchase of property and equipment		(125	)		(117	)
Capitalized patent costs		(194	)		(295	)
Maturity of marketable securities		21,976			11,192
Purchase of marketable securities		(21,057	)		(9,266	)

Net cash provided by investing activities		600			1,514
Cash flows from financing activities:
Exercise of stock options		874			712
Purchase of common stock		(496	)		(850	)
Cash dividends paid		—			(824	)
Excess tax benefit from stock-based awards		—			72

Net cash provided by (used in) financing activities		378			(890	)

Net decrease in cash and cash equivalents		(1,058	)		(756	)
Cash and cash equivalents at beginning of period		6,122			3,811

Cash and cash equivalents at end of period	$	5,064		$	3,055

Supplemental disclosure of cash flow information:
Cash paid (received) for income taxes, net	$	2		$	(12	)
Supplemental schedule of non-cash investing activities:
Stock-based compensation capitalized to patent costs and software	$	37		$	45

The accompanying notes are an integral part of these consolidated financial statements.

DIGIMARC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(UNAUDITED)

1. Description of Business and Significant Accounting Policies

Description of Business

Digimarc Corporation (“Digimarc” or the “Company”), an Oregon corporation, enables governments and enterprises around the world to give digital identities to media and objects that computers can sense and recognize and to which they can react. The Company has developed an intuitive computing platform that is intended to optimize the identification of consumer brand impressions, facilitating modern mobile-centric shopping. The platform includes means to infuse persistent digital information, “Digimarc IDs,” perceptible only to computers and digital devices, into all forms of media content, including consumer products packaging. Digimarc IDs for packaging, often referred to as “Digimarc Barcodes,” facilitate remarkably faster scanning of items at retail checkout as well as improved interaction with consumers. The unique digital identifier placed in media generally persists with it regardless of the distribution path and whether it is copied, manipulated or converted to a different format, and does not affect the quality of the content or the enjoyment or other traditional uses of it. The Company’s technology permits computers and digital devices to quickly and reliably identify relevant data from vast amounts of media content.

Interim Consolidated Financial Statements

The Company has adhered to the accounting policies set forth in its Annual Report on Form 10-K for the year ended December 31, 2014 in preparing the accompanying interim consolidated financial statements.

The accompanying interim consolidated financial statements have been prepared from the Company’s records without audit and, in management’s opinion, include all adjustments (consisting of only normal recurring adjustments) necessary to fairly reflect the financial condition and the results of operations for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (the “U.S. GAAP”) have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”).

These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on February 20, 2015. The results of operations for the interim periods presented in these consolidated financial statements are not necessarily indicative of the results for the full year.

Reclassifications

Certain prior period amounts in the accompanying consolidated financial statements and notes thereto have been reclassified to conform to current period presentation. These reclassifications had no material effect on the results of operations or financial position for any period presented.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU No 2014-09 provides specific guidance to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The amendments in this update are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The amendments in this update permit the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently assessing the potential future impact of this standard on the financial condition or results of operations of the Company.

On April 1, 2015, the FASB tentatively agreed to propose a one-year deferral of the effect date for ASU 2014-09, but would permit all entities to adopt the standard as of the original effective date for public business entities (i.e., annual periods beginning after December 15, 2016, and interim periods therein). The FASB expects to issue an Exposure Draft for this issue in the near term.

2. Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments, which include cash equivalents, accounts receivable, accounts payable and other accrued liabilities approximate their carrying values due to the short-term nature of these instruments. The Company records marketable securities at amortized cost, which approximates fair value.

The Company’s fair value hierarchy for its cash equivalents and marketable securities as of March 31, 2015 and December 31, 2014, respectively, was as follows:


March 31, 2015	Level 1		Level 2		Level 3		Total
Money market securities	$	3,367	$	—	$	—	$	3,367
Corporate notes		—		19,995		—		19,995
Pre-refunded municipal bonds (1)		—		9,067		—		9,067
Commercial paper		—		1,947		—		1,947
Certificates of deposits		—		1,442		—		1,442

Total	$	3,367	$	32,451	$	—	$	35,818


December 31, 2014	Level 1		Level 2		Level 3		Total
Money market securities	$	3,556	$	—	$	—	$	3,556
Corporate notes		—		19,245		—		19,245
Pre-refunded municipal bonds (1)		—		13,317		—		13,317
Certificates of deposits		—		2,176		—		2,176

Total	$	3,556	$	34,738	$	—	$	38,294

(1)	Pre-refunded municipal bonds are collateralized by U.S. treasuries.

The fair value maturities of the Company’s cash equivalents and marketable securities as of March 31, 2015 are as follows:


	Maturities by Period
	Total		Less than 1 year		1-5 years		5-10 years		More than 10 years
Cash equivalents and marketable securities	$	35,818	$	35,818	$	—	$	—	$	—

The Company considers all highly liquid marketable securities with original maturities of 90 days or less at the date of acquisition to be cash equivalents. Cash equivalents include money market funds and certificates of deposit totaling $3,787 and $5,344 at March 31, 2015 and December 31, 2014, respectively. Cash equivalents are carried at cost or amortized cost, which approximates fair value.

3. Revenue Recognition

The Company derives its revenue primarily from development services, subscriptions and licensing of its intellectual property:

•

Service revenue consists primarily of software development and consulting services. The majority of service revenue arrangements are structured as time and materials consulting agreements.

•

Subscription revenue includes Digimarc Discover, Barcode and Guardian products and services, is generally recurring, paid in advance and recognized over the term of the subscription.

•

License revenue originates primarily from licensing the Company’s intellectual property where the Company receives license fees and/or royalties as its income stream.

Revenue is recognized in accordance with ASC 605 “Revenue Recognition” and ASC 985 “Software” when the following four criteria are met:

(i)

persuasive evidence of an arrangement exists,

(ii)

delivery has occurred,

(iii)

the fee is fixed or determinable, and

(iv)

collection is reasonably assured.

Some customer arrangements encompass multiple deliverables, such as patent licenses, professional services, software licenses, and maintenance and support fees. For arrangements that include multiple deliverables, the Company identifies separate units of accounting at inception based on the consensus reached under ASC 605-25 “Multiple-Element Arrangements,” which provides that revenue arrangements with multiple deliverables should be divided into separate units of accounting if certain criteria are met. The Company applies ASC 985 to software deliverables when relevant. The consideration for the arrangement under ASC 605-25 is allocated to the separate units of accounting using the relative selling price method.

The relative selling price method allocates the consideration based on the Company’s specific assumptions rather than assumptions of a marketplace participant, and any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price.

Applicable revenue recognition criteria is considered separately for each separate unit of accounting as follows:

•

Service revenue is generally determined based on time and materials. Revenue for professional services is recognized as the services are performed. Billing for services rendered generally occurs within one month after the services are provided.

•

Subscription revenue, which includes Digimarc Discover, Barcode and Guardian products and services, is generally paid in advance and recognized over the term of the subscription, which is generally one to three years.

•

License revenue is recognized when amounts owed to the Company have been earned, are fixed or determinable (within the Company’s normal 30 to 60 day payment terms), and collection is reasonably assured. If the payment terms extend beyond the normal 30 to 60 days, the fee may not be considered to be fixed or determinable, and the revenue would then be recognized when installments are due.

•

The Company records revenue from certain license agreements upon cash receipt as a result of collectability not being reasonably assured.

•

The Company’s standard payment terms for license arrangements are 30 to 60 days. Extended payment terms on patent license arrangements are not considered to be fixed or determinable if payments are due beyond the Company’s standard payment terms, primarily because of the risk of substantial modification present in the Company’s patent licensing business. As such, revenue on license arrangements with extended payment terms are recognized as fees become fixed or determinable.

Deferred revenue consists of billings in advance for service, subscription and license contracts for which revenue has not been earned.

4. Segment Information

Geographic Information

The Company derives its revenue from a single reporting segment: media management solutions. Revenue is generated in this segment through development services, subscriptions and licensing of intellectual property. The Company markets its products in the U.S. and in non-U.S. countries through its sales and licensing personnel.

Revenue by geographic area, based upon the “bill-to” location, was as follows:


	Three Months Ended March 31, 2015		Three Months Ended March 31, 2014
Domestic	$	1,687	$	3,117
International (1)		4,302		4,088

Total	$	5,989	$	7,205

(1)	Revenue from the Central Banks, consisting of a consortium of central banks around the world, is classified as international revenue. Reporting revenue by country for this customer is not practicable.

Major Customers

Customers who accounted for 10% or more of the Company’s revenue are as follows:


	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014
Central Banks		59	%		43	%
The Nielsen Company (“Nielsen”)		—			16	%
Verance Corporation (“Verance”)		—			10	%

In the first quarter of 2014, Nielsen made its final quarterly license fee payment under its patent license agreement.

In the third quarter of 2014, the Company extended the patent license agreement with Verance through 2023, in effect waiving any future royalties and license fees, in exchange for a $1.0 million license fee payment.

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-month periods ended March 31, 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 (measurement date), 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 March 31, 2015		Three Months Ended March 31, 2014
Stock-based compensation:
Cost of revenue	$	185	$	142
Sales and marketing		159		142
Research, development and engineering		287		356
General and administrative		518		550
Intellectual property		68		69

Stock-based compensation expense		1,217		1,259
Capitalized to patent costs and software		37		45

Total stock-based compensation	$	1,254	$	1,304

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 March 31, 2015		As of December 31, 2014
Total unrecognized compensation costs	$	12,411	$	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 March 31, 2015 for stock options and restricted stock over weighted average periods through March 2019 as follows:


	Stock Options		Restricted Stock
Weighted average period		0.0 years		1.6 years

Stock Option Activity

As of March 31, 2015, under all of the Company’s stock-based compensation plans, equity awards to purchase an additional 1,411 shares were authorized for future grants under the plans. The Company issues new shares upon option exercises. The following table reconciles the outstanding balance of stock options:


Three-months ended March 31, 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		(45	)		19.45		8.66
Options canceled or expired		—			—		—

Outstanding at March 31, 2015		556		$	16.76	$	8.40	$	4,055

Exercisable at March 31, 2015		556		$	16.76			$	4,055

The aggregate intrinsic value is based on the closing price of $21.95 per share of Digimarc common stock on March 31, 2015, which would have been received by the optionees had all of the options with exercise prices less than $21.95 per share been exercised on that date.

Restricted Stock Activity

The following table reconciles the unvested balance of restricted stock:


Three-months ended March 31, 2015:	Number of Shares			Weighted Average Grant Date Fair Value
Unvested balance, December 31, 2014		502		$	23.09
Granted		90		$	28.66
Vested		(42	)	$	23.14
Canceled		(5	)	$	27.01

Unvested balance, March 31, 2015		545		$	23.97

The fair value of all restricted stock awards that vested during the three-months ended March 31, 2015 and 2014 was $1,213 and $1,367, respectively.

6. Earnings (Loss) Per Common Share

The Company calculates basic and diluted earnings per common share in accordance with ASC 260 “Earnings Per Share,” using the two-class method because the Company’s unvested restricted stock is a participating security since these awards contain non-forfeitable rights to receive dividends. Under the two-class method, earnings are allocated to each class of common stock and participating security as if all of the net earnings for the period had been distributed.

Basic earnings per common share excludes dilution and is calculated by dividing earnings to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing earnings to common shares by the weighted-average number of common shares, as adjusted for the potentially dilutive effect of stock options. The following table reconciles earnings (loss) per common share for the three-months ended March 31, 2015 and 2014:


	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014
Basic Earnings (Loss) per Common Share:
*Numerator:*
Net loss	$	(4,150	)	$	(1,986	)
Distributed earnings to common shares		—			773
Distributed earnings to participating securities		—			51

Total distributed earnings		—			824
Undistributed loss allocable to common shares		(4,150	)		(2,810	)
Undistributed earnings allocable to participating securities		—			—
Total undistributed loss		(4,150	)		(2,810	)

Loss to common shares—basic	$	(4,150	)	$	(2,037	)
*Denominator*
Weighted average common shares outstanding—basic		7,960			7,000
Basic earnings (loss) per common share	$	(0.52	)	$	(0.29	)


	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014
Diluted Earnings (Loss) per Common Share:
*Numerator:*
Loss to common shares—basic	$	(4,150	)	$	(2,037	)
Undistributed earnings allocated to participating securities		—			—
Undistributed earnings reallocated to participating securities		—			—

Loss to common shares—diluted	$	(4,150	)	$	(2,037	)
*Denominator*:
Weighted average common shares outstanding—basic		7,960			7,000
Dilutive effect of stock options		—			—

Weighted average common shares outstanding—dilutive		7,960			7,000
Diluted earnings (loss) per common share	$	(0.52	)	$	(0.29	)

There were 212 and 220 common stock equivalents related to stock options that were anti-dilutive and excluded from diluted earnings per common share for the three-months ended March 31, 2015 and 2014, respectively, as the Company incurred a net loss for the period.

7. Trade Accounts Receivable

Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount.


	March 31, 2015			December 31, 2014
Trade accounts receivable	$	3,652		$	4,567
Allowance for doubtful accounts		(32	)		(22	)

Trade accounts receivable, net	$	3,620		$	4,545

Unpaid deferred revenue included in trade accounts receivable	$	542		$	1,974

Allowance for doubtful accounts

The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing trade accounts receivable. The Company determines the allowance based on historical write-off experience and current information. The Company reviews its allowance for doubtful accounts each reporting period. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Unpaid deferred revenue

The unpaid deferred revenue that is included in trade accounts receivable is billed in accordance with the provisions of the contracts with the Company’s customers. Unpaid deferred revenue from the Company’s cash-basis customers is not included in trade accounts receivable nor deferred revenue.

Major customers

Customers who accounted for 10% or more of trade accounts receivable, net are as follows:


	March 31, 2015			December 31, 2014
Central Banks		61	%		61	%
Civolution		*			13	%

*	Less than 10%

8. Property and Equipment

Property and equipment are stated at cost. Repairs and maintenance are charged to expense when incurred.

Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, generally two to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life or the lease term.


	March 31, 2015			December 31, 2014
Office furniture fixtures	$	848		$	845
Software		1,392			1,312
Equipment		3,089			3,072
Leasehold improvements		1,229			1,198

Gross property and equipment		6,558			6,427
Less accumulated depreciation and amortization		(3,663	)		(3,451	)

Property and equipment, net	$	2,895		$	2,976

9. Intangibles

Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Amortization of capitalized patent costs associated with the application and award of patents in the U.S. and various other countries are capitalized and amortized on a straight-line basis over the term of the patents as determined at the award date, which varies depending on the pendency period of the application, generally approximating seventeen years.

Amortization of intangible assets acquired is calculated using the straight-line method over the estimated useful lives of the assets.


	March 31, 2015			December 31, 2014
Capitalized patent costs	$	6,334		$	6,183
Intangible assets acquired:
Purchased patents and intellectual property		250			250
Existing technology		1,560			1,560
Customer relationships		290			290
Backlog		760			760
Tradenames		290			290
Non-solicitation agreements		120			120

Gross intangible assets		9,604			9,453
Accumulated amortization		(2,912	)		(2,733	)

Intangibles, net	$	6,692		$	6,720

10. Joint Ventures and Related Party Transactions

In March 2012, Digimarc and Nielsen decided to reduce the investments in their two joint ventures, TVaura LLC (in which Digimarc holds a 51% ownership interest) and TVaura Mobile LLC (in which Digimarc holds a 49% ownership interest), to minimal levels while assessing alternative approaches to achieving each of their goals in the emerging market opportunity of synchronized second screen television. Payment of all expenses incurred after the suspension of operations of each joint venture is unconditionally the responsibility of the majority owner, which expenses for TVaura LLC, if any, will be paid by Digimarc. As of March 31, 2015, both Digimarc and Nielsen continued to assess the market opportunities of each of the joint ventures.

Summarized financial information for the joint ventures has not been provided as the disclosures are immaterial to the Company’s filing given the operations of the joint ventures have been suspended. The joint ventures had no revenue or expenses for the three months ended March 31, 2015 and 2014. The Company’s investment in each joint venture was $0 as of March 31, 2015 and December 31, 2014.

11. Income Taxes

The benefit for income taxes for the three-months ended March 31, 2015 and 2014 reflects current taxes, deferred taxes, and withholding taxes in certain foreign jurisdictions. The effective tax rate for the three-months ended March 31, 2015 and 2014 was 0% and 40%, respectively. The valuation allowance against net deferred tax assets as of March 31, 2015 was $8,858, an increase of $1,570 from $7,288 as of December 31, 2014.

12. Commitments and Contingencies

Certain of the Company’s product license and services agreements include an indemnification provision for claims from third parties relating to the Company’s intellectual property. Such indemnification provisions are accounted for in accordance with ASC 450 “Contingencies.” To date, there have been no claims made under such indemnification provisions.

The Company is subject from time to time to other legal proceedings and claims arising in the ordinary course of business.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to future events or the future financial performance of Digimarc, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. Please see the discussion regarding forward-looking statements included in this Quarterly Report on Form 10-Q under the caption “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995.”

The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. Readers are also urged to carefully review and consider the disclosures made in Part II, Item 1A (Risk Factors) of this Quarterly Report on Form 10-Q and in the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2014 filed on February 20, 2015 (our “2014 Annual Report”), and other reports and filings made with the Securities and Exchange Commission (“SEC”).

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to “Digimarc,” “we,” “our” and “us” refer to Digimarc Corporation.

All dollar amounts are in thousands except per share amounts or unless otherwise noted. Percentages within the following tables may not foot due to rounding.

Digimarc Discover, Digimarc Barcode and Digimarc Guardian are registered trademarks of Digimarc Corporation. This Quarterly Report on Form 10-Q also includes trademarks and trade names owned by other parties, and all other such trademarks and trade names mentioned in this Quarterly Report on Form 10-Q are the property of their respective owners.

Overview

Digimarc Corporation enables governments and enterprises around the world to give digital identities to media and objects that computers can sense and recognize and to which they can react. We have developed an intuitive computing platform that is intended to optimize the identification of consumer brand impressions, facilitating modern mobile-centric shopping. The platform includes means to infuse persistent digital information, “Digimarc IDs,” perceptible only to computers and digital devices, into all forms of media content, including consumer products packaging. Digimarc IDs for packaging, often referred to as “Digimarc Barcodes,” facilitate remarkably faster scanning of items at retail checkout as well as improved interaction with consumers. The unique digital identifier placed in media generally persists with it regardless of the distribution path and whether it is copied, manipulated or converted to a different format, and does not affect the quality of the content or the enjoyment or other traditional uses of it. Our technology permits computers and digital devices to quickly and reliably identify relevant data from vast amounts of media content.

Our technologies, and those of our licensees, span numerous applications across a wide range of media content, enabling our customers and those of our partners to:

•

Improve the speed of retail checkout;

•

Provide simple and intuitive mobile customer engagement experiences in stores;

•

Quickly and reliably identify and effectively manage music, movies, television programming, digital images, e-books, documents and other printed materials, especially in light of non-linear distribution over the Internet;

•

Deter counterfeiting of money, media and goods, and piracy of e-books, movies and music;

•

Support new digital media distribution models and methods to monetize media content;

•

Leverage the power of ubiquitous computing to instantly link consumers to a wealth of information and/or interactive experiences related to the media and objects they encounter each day;

•

Provide consumers with more choice and access to media content when, where and how they want it;

•

Enhance imagery and video by associating metadata or authenticating media content for government and commercial uses; and

•

Better secure identity documents to enhance national security and combat identity theft and fraud.

At the core of our intellectual property is a signal processing innovation known as “digital watermarking,” which allows imperceptible digital information to be embedded in all forms of digitally designed, produced or distributed media content and some physical objects, including photographs, movies, music, television, personal identification documents, financial instruments, industrial parts and product packages. The digital information can be detected and read by a wide range of computers, mobile phones and other digital devices.

Our technology allows our customers to provide persistent digital identities for any media content that is digitally processed at some point during its lifecycle. The technology can be applied to printed materials, video, audio, and images. The inclusion of these digital signals enables a wide range of improvements in security and media management, and new business models for distribution and consumption of media content. Over the years our technology and intellectual property portfolios have grown to encompass many related technologies.

We provide solutions directly and through our licensees. Our proprietary technology has proven to be a powerful element of document security, giving rise to our long-term relationship with a consortium of central banks (“Central Banks”), and many leading companies in the information technology industry. We and our licensees have successfully propagated the use of our technology in music, movies, television broadcasts, images and printed materials. Digimarc IDs have been used in these applications to improve media rights and asset management, reduce piracy and counterfeiting losses, improve marketing programs, permit more efficient and effective distribution of valuable media content and enhance consumer entertainment and commercial experiences.

Digimarc IDs are easily embedded into all forms of media and are imperceptible to human senses, but quickly detected by computers, networks or other digital devices like smartphones. Unlike traditional barcodes and tags, our solution does not require publishers to give up valuable space in magazines and newspapers; nor does it impact the overall layout or aesthetics of the publication. Our Digimarc Discover™ platform delivers a range of rich media experiences to its readers on their smartphones across multiple media including print, audio, video and packaging. Unique to the Digimarc Discover platform is its ability to use various content identification technologies as needed, including our patented technology.

We introduced Digimarc Barcodes as a feature of Digimarc Discover in 2014 for use in consumer product packaging. Digimarc Barcodes contain the same information found in traditional universal product codes (“UPC”). The UPC information is invisibly repeated multiple times over the entire package surface. We partnered with Datalogic, a global leader in Automatic Data Capture and Industrial Automation markets and producer of barcode readers, in bringing the Digimarc Barcode to the market. The first retail scanner enabled was Datalogic’s Magellan^TM 9800i multi-plane imaging scanner. Digimarc Barcodes can also connect mobile-enabled consumers directly from packaging to engaging mobile experiences such as additional product information, special offers, recommendations, reviews, social networks and more.

Our patent portfolio contains a number of innovations in digital watermarking, pattern recognition (sometimes referred to as “fingerprinting”), digital rights management and related fields. To protect our significant efforts in creating our technology, we have implemented an extensive intellectual property protection program that relies on a combination of patent, copyright, trademark and trade secret laws, and nondisclosure agreements and other contracts. As a result, we believe we have one of the world’s most extensive patent portfolios in digital watermarking and related fields, with more than 1,200 U.S. and foreign patents and pending patent applications as of March 31, 2015. We continue to develop and broaden our portfolio of patented technology in the fields of media identification and management technology and related applications and systems. We devote significant resources to developing and protecting our inventions and continuously seek to identify and evaluate potential licensees for our patents. The patents in our portfolio have a life of approximately 20 years from the effective filing date, and up to 17 years after the patent has been granted.

As part of our intellectual property marketing and patent monetization efforts, our key objectives in building relationships with potential customers and partners are to:

•

make progress toward the realization of our vision to enrich everyday living via pervasive, intuitive computing;

•

expand the scope of our license program;

•

effectively monetize our patent assets;

•

encourage large scale adoption of our technologies by industry leaders;

•

improve our financial performance;

•

increase the scale and rate of growth of our products and services business; and

•

lay a foundation for continuing innovation.

For a discussion of activities and costs related to our research and development, read the section titled “Results of Operations –Summary – Research, development and engineering.”

Critical Accounting Policies and Estimates

Detailed information on our critical accounting policies and estimates are set forth in our 2014 Annual Report in Part II, Item 7 thereof (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”), under the caption “Critical Accounting Policies and Estimates,” which is incorporated by reference into this Quarterly Report on Form 10-Q.

Results of Operations

The following table presents statements of operations data for the periods indicated as a percentage of total revenue. Unless otherwise indicated, all references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to the three-month period relate to the three-month period ended March 31, 2015 and all changes discussed with respect to such period reflect changes compared to the three-month period ended March 31, 2014.


	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014
Revenue:
Service		58	%		41	%
Subscription		29			20
License		13			39

Total revenue		100			100
Cost of revenue:
Service		26			20
Subscription		13			9
License		1			1

Total cost of revenue		40			30
Gross profit		60			70
Operating expenses:
Sales and marketing		35			26
Research, development and engineering		51			49
General and administrative		37			34
Intellectual property		6			7

Total operating expenses		129			116
Operating loss		(70	)		(46	)

Other income, net		—			—

Loss before income taxes		(69	)		(46	)
Benefit for income taxes		—			18

Net loss		(69	)%		(28	)%

Summary

Total revenue for the three-months ended March 31, 2015 decreased 17% to $6.0 million compared to the same period in 2014 due to lower license revenue reflecting the end of the quarterly license fee payments from The Nieslen Company (“Nielsen”) in the first quarter of 2014 and the end of the quarterly royalty payments from Verance Corporation (“Verance”) in the fourth quarter of 2014. The decline in license revenue was partially offset by higher service and subscription revenue.

Total operating expenses for the three-months ended March 31, 2015 decreased 8% to $7.7 million compared to the same period in 2014 reflecting lower investment in research and development, partially offset by higher investment in sales and marketing as we continue the transition from research and product development to market development and delivery of Digimarc Discover and Barcode. Legal and third-party consulting costs were also down for the three-months ended March 31, 2015.

Revenue


	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014			Dollar Increase (Decrease)			Percent Increase (Decrease)
Revenue:
Service	$	3,501		$	2,988		$	513			17	%
Subscription		1,716			1,412			304			22	%
License		772			2,805			(2,033	)		(72	)%

Total	$	5,989		$	7,205		$	(1,216	)		(17	)%

Revenue (as % of total revenue):
Service		58	%		41	%
Subscription		29	%		20	%
License		13	%		39	%

Total		100	%		100	%

Service. Service revenue consists primarily of software development and consulting services. The majority of service revenue arrangements are structured as time and materials consulting agreements. Most of our service revenue is derived from contracts with the Central Banks and government agency contractors. The agreements range from several months to several years in length, and our longer term contracts are subject to work plans that are reviewed and agreed upon at least annually. These contracts generally provide for billing hours worked at predetermined rates and, to a lesser extent, reimbursement for third party costs and services. Increases or decreases in the services provided under these contracts are generally subject to both volume and price changes. The volume of work is generally negotiated at least annually and can be modified as the customer’s needs change. We also have provisions in our longer term contracts that allow for specific hourly rate price increases on an annual basis to account for cost of living variables. Contracts with government agency contractors are generally shorter term in nature, less linear in billings and less predictable than our longer term contracts because the contracts with government agency contractors are subject to government budgets and funding.

The increase in service revenue for the three-month period was primarily due to timing of program work and higher billable rates under our agreement with the Central Banks and increased program work with a government agency contractor.

Subscription. Subscription revenue includes Digimarc Discover, Barcode and Guardian products and services, is generally recurring in nature, paid in advance and recognized over the term of the subscription.

The increase in subscription revenue for the three-month period was primarily from software license fees, recognized over the associated 12-month support period.

License. License revenue originates primarily from licensing our intellectual property where we receive license fees and/or royalties as our income stream.

The decrease in license revenue for the three-month period was primarily due to the end of the quarterly license fee payments from Nielsen in the first quarter of 2014 and the end of the quarterly royalty payments from Verance in the fourth quarter of 2014.

Revenue by Geography


	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014			Dollar Increase (Decrease)			Percent Increase (Decrease)
Revenue by geography:
Domestic	$	1,687		$	3,117		$	(1,430	)		(46	)%
International		4,302			4,088			214			5	%

Total	$	5,989		$	7,205		$	(1,216	)		(17	)%

Revenue (as % of total revenue):
Domestic		28	%		43	%
International		72	%		57	%

Total		100	%		100	%

The decrease in domestic revenue for the three-month period was primarily the result of the end of the quarterly license fee payments from Nielsen and quarterly royalty payments from Verance, partially offset by higher subscription revenue.

The increase in international revenue for the three-month period was primarily due to higher service revenue from the Central Banks.

We anticipate revenue in 2015 will be down slightly when compared with 2014, reflecting the end of license fee payments from Nielsen and royalty payments from Verance, partially offset by growth in revenues from our Digimarc Discover and Barcode products and higher service revenue.

Cost of Revenue

Service. Cost of service revenue primarily includes costs that are allocated from research, development and engineering, sales and marketing and intellectual property that relate directly to performing services under our customer contracts and direct costs of program delivery for both personnel and operating expenses. Costs include:

•

compensation, benefits, incentive compensation in the form of stock-based compensation and related costs of our software developers, quality assurance personnel, product managers, business development managers and other personnel where we bill our customers for time and materials costs;

•

payments to outside contractors that are billed to customers;

•

charges for equipment directly used by customers;

•

depreciation and other charges for machinery, equipment and software directly used by customers;

•

travel costs directly attributable to service and development contracts; and

•

charges for infrastructure and centralized costs of facilities and information technology.

Subscription. Cost of subscription revenue primarily includes:

•

compensation, benefits, incentive compensation in the form of stock-based compensation and related costs of operations personnel;

•

cost of outside contractors to support our Digimarc Guardian anti-piracy service;

•

amortization of existing technology acquired in the Attributor acquisition;

•

Internet service provider connectivity charges and image search data fees to support the services offered to our subscription customers; and

•

charges for infrastructure and centralized costs of facilities and information technology.

License. Cost of license revenue primarily includes:

•

amortization of capitalized patent costs and patent maintenance fees;

•

license costs from third parties; and

•

charges for infrastructure and centralized costs of facilities and information technology.

Gross Profit


	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014			Dollar Increase (Decrease)			Percent Increase (Decrease)
Gross Profit:
Service	$	1,923		$	1,574		$	349			22	%
Subscription		962			763			199			26	%
License		688			2,722			(2,034	)		(75	)%

Total	$	3,573		$	5,059		$	(1,486	)		(29	)%

Gross Profit (as % of related revenue components):
Service		55	%		53	%
Subscription		56	%		54	%
License		89	%		97	%
Total		60	%		70	%

The decrease in total gross profit and total gross profit as a percentage of total revenue for the three-month period was due primarily to the end of the quarterly license fee payments from Nielsen in the first quarter of 2014 and the end of the quarterly royalty payments from Verance in the fourth quarter of 2014.

The increase in service gross profit as a percentage of service revenue was due primarily to higher billable rates under our contract with the Central Banks.

The increase in subscription gross profit as a percentage of subscription revenue was due primarily to increased revenue from software license fees.

The decrease in license gross profit and license gross profit as a percentage of license revenue was due primarily to the end of the quarterly license fee payments from Nielsen and quarterly royalty payments from Verance.

We anticipate gross profit and gross profit as a percentage of revenue to be lower in 2015 than 2014, reflecting lower projected license revenue partially offset by higher projected service and subscription revenue.

Operating Expenses

We allocate certain costs of research, development and engineering, sales and marketing, and intellectual property to cost of revenue when they relate directly to our customer contracts. We record all remaining, or “residual,” costs as sales and marketing, research, development and engineering, general and administrative, and intellectual property expenses.

We anticipate operating expenses will be lower in 2015 than 2014 primarily due to lower research, development and engineering, general and administrative and intellectual property expenses, partially offset by higher sales and marketing expenses.

Sales and marketing


	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014			Dollar Increase		Percent Increase
Sales and marketing	$	2,090		$	1,879		$	211		11	%
Sales and marketing (as % of total revenue)		35	%		26	%

Sales and marketing expenses consist primarily of:

•

compensation, benefits, incentive compensation in the form of stock-based compensation and related costs of sales and marketing employees and product managers;

•

travel and market research costs, and costs associated with marketing programs, such as trade shows, public relations and new product launches;

•

professional services and outside contractors for product and marketing initiatives; and

•

charges for infrastructure and centralized costs of facilities and information technology.

The increase in sales and marketing expenses for the three-month period was due primarily to increased headcount, reflecting the expansion of our sales organization in support of Digimarc Discover and Barcode.

We anticipate sales and marketing expenses in 2015 will be higher than 2014 due to the expansion of our sales organization in support of Digimarc Discover and Barcode.

Research, development and engineering


	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014			Dollar Decrease			Percent Decrease
Research, development and engineering	$	3,084		$	3,546		$	(462	)		(13	)%
Research, development and engineering (as % of total revenue)		51	%		49	%

Research, development and engineering expenses consist primarily of:

•

compensation, benefits, incentive compensation in the form of stock-based compensation expense, recruiting and related costs of software and hardware developers and quality assurance personnel;

•

payments to outside contractors;

•

the purchase of materials and services for product development; and

•

charges for infrastructure and centralized costs of facilities and information technology.

The decrease in research, development and engineering expenses for the three-month period was due primarily to reduced headcount and reduced use of outside contractors.

We anticipate research, development and engineering expenses in 2015 will be lower than 2014 as we continue the transition from research and product development to market development and delivery of Digimarc Discover and Barcode.

General and administrative


	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014			Dollar Decrease			Percent Decrease
General and administrative	$	2,206		$	2,421		$	(215	)		(9	)%
General and administrative (as % of total revenue)		37	%		34	%

We incur general and administrative costs in the functional areas of finance, legal, human resources, executive and board of directors. Costs for facilities and information technology are also managed as part of the general and administrative processes and are allocated to this area as well as each of the areas in costs of revenue, sales and marketing, research, development and engineering and intellectual property.

General and administrative expenses consist primarily of:

•

compensation, benefits and incentive compensation in the form of stock-based compensation expense and related costs of general and administrative personnel;

•

third party and professional fees associated with legal, accounting and human resources;

•

costs associated with being a public company; and

•

charges for infrastructure and centralized costs of facilities and information technology.

The decrease in general and administrative expenses for the three-month period was due primarily to lower legal costs as the licensing audit of Intellectual Ventures ended in the first quarter of 2014.

We anticipate general and administrative expenses will be lower in 2015 than 2014, primarily reflecting lower legal costs. We will continue to examine means to reduce general and administrative expenses in the longer term.

Intellectual property


	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014			Dollar Decrease			Percent Decrease
Intellectual property	$	367		$	534		$	(167	)		(31	)%
Intellectual property (as % of total revenue)		6	%		7	%

We incur intellectual property expenses that arise primarily from costs associated with documenting, applying for, and maintaining domestic and international patents and trademarks.

Gross expenditures for intellectual property costs, before reflecting the effect of capitalized patent costs, primarily consist of:

•

compensation, benefits and incentive compensation in the form of stock-based compensation expense and related costs of attorneys and legal assistants;

•

third party costs, including filing and governmental regulatory fees and fees for outside legal counsel and translation costs, each incurred in the patent process;

•

consulting costs related to marketing our intellectual property portfolio;

•

charges to write-off previously capitalized patent costs for patent assets we abandon; and

•

charges for infrastructure and centralized costs of facilities and information technology.

Intellectual property expenses can vary from period to period based on:

•

the level of capitalized patent activity, and

•

prosecution costs and direct labor hours (compensation, benefits and incentive compensation) related to the patents that were exclusively licensed to IV that are allocated to cost of revenue.

The decrease in intellectual property expense for the three-month period resulted primarily from a third party intellectual property marketing study performed in the first quarter of 2014.

We anticipate intellectual property expenses will be lower in 2015 than 2014, primarily as a result of the third party intellectual property marketing study performed in 2014 that is not planned to reoccur in 2015.

Stock-based compensation


	Three Months Ended March 31, 2015		Three Months Ended March 31, 2014		Dollar Increase (Decrease)			Percent Increase (Decrease)
Cost of revenue	$	185	$	142	$	43			30	%
Sales and marketing		159		142		17			12	%
Research, development and engineering		287		356		(69	)		(19	)%
General and administrative		518		550		(32	)		(6	)%
Intellectual property		68		69		(1	)		(1	)%

Total	$	1,217	$	1,259	$	(42	)		(3	)%

Stock-based compensation expense was essentially flat for the three-month period. We anticipate incurring an additional $12,411 in stock-based compensation expense through March 2019 for awards outstanding as of March 31, 2015.

Other income, net


	Three Months Ended March 31, 2015		Three Months Ended March 31, 2014		Dollar Decrease			Percent Decrease
Other income, net	$	23	$	27	$	(4	)		(15	)%
Other income, net (as % of total revenue)		*		*

*	Less than 1%

Other income, net was essentially flat for the three-month period.

Benefit for Income Taxes

The benefit for income taxes for the three-months ended March 31, 2015 and 2014 reflects current taxes, deferred taxes, and withholding taxes in certain foreign jurisdictions. The effective tax rate for the three-months ended March 31, 2015 and 2014 was 0% and 40%, respectively. The effective tax rate was 0% for the three-months ended March 31, 2015 because we have a full valuation allowance recorded against our deferred tax assets. The valuation allowance against deferred tax assets as of March 31, 2015 was $8,858, an increase of $1,570 from $7,288 as of December 31, 2014.

We continually assess the applicability of valuation allowance against our deferred tax assets. Based upon the positive and negative evidence available as of March 31, 2015, and largely due to the cumulative loss incurred by us over the last three years, which is considered a significant piece of negative evidence when assessing the realizability of deferred tax assets, a full valuation allowance is recorded against our deferred tax assets.

Liquidity and Capital Resources


	March 31, 2015		December 31, 2014
Working capital	$	38,776	$	40,440
Current ratio (1)		9.7:1		9.0:1
Cash, cash equivalents and short-term marketable securities	$	37,095	$	38,323
Long-term marketable securities	$	—	$	749
Total cash, cash equivalents and all marketable securities	$	37,095	$	39,072

(1)	The current ratio is calculated by dividing total current assets by total current liabilities.

The $2.0 million decrease in cash, cash equivalents and marketable securities resulted primarily from:

•

cash used in operations;

•

purchases of common stock related to the vesting of restricted stock; and

•

purchases of property and equipment and capitalized patent costs; partially offset by

•

cash flows provided by the net maturity of marketable securities; and

•

proceeds from stock option exercises.

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, and trade accounts receivable. We place our cash and cash equivalents with major banks and financial institutions and at times deposits may exceed insured limits. Marketable securities primarily include corporate notes, pre-refunded municipal bonds and commercial paper. Our investment policy requires the portfolio to be invested to ensure that the greater of $3 million or 7% of the invested funds will be available within 30 days’ notice.

Other than cash used for operating needs, which may include short-term marketable securities, our investment policy limits our credit exposure to any one financial institution or type of financial instrument by limiting the maximum of 5% of our cash and cash equivalents and marketable securities or $1 million, whichever is greater, to be invested in any one issuer except for the U.S. government, U.S. federal agencies and U.S. backed securities, which have no limits, at the time of purchase. Our investment policy

also limits our credit exposure by limiting to a maximum of 40% of our cash and cash equivalents and marketable securities, or $15 million, whichever is greater, to be invested in any one industry category (e.g., financial or energy industries) at the time of purchase. As a result, we believe our credit risk associated with cash and investments to be minimal. A decline in the market value of any security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. To determine whether an impairment is other-than-temporary, we consider whether we have the ability and intent to hold the investment until a market price recovery and evidence indicating that the cost of the investment is recoverable outweighs evidence to the contrary. There have been no other-than-temporary impairments identified or recorded by us.

Operating Cash Flow.

The components of operating cash flows were:


	Three Months Ended March 31, 2015			Three Months Ended March 31, 2014			Dollar Increase (Decrease)			Percent Increase (Decrease)
Net loss	$	(4,150	)	$	(1,986	)	$	(2,164	)		(109	)%
Non-cash items		1,832			1,210			622			51	%
Changes in operating assets and liabilities		282			(604	)		886			147	%

Net cash used in operating activities	$	(2,036	)	$	(1,380	)	$	(656	)		(48	)%

Cash flows from operating activities for the three-month period decreased by $0.7 million, primarily as the result of a higher net loss, partially offset by increased changes in operating assets and liabilities and non-cash items. The increase from changes in operating assets and liabilities for the three-month period was primarily due to changes in other current assets. The increase from non-cash items primarily reflects no income tax benefits recorded during the three-months ended March 31, 2015 due to the full valuation allowance recorded on deferred tax assets.

Cash flows provided by investing activities for the three-month period decreased by $0.9 million from $1.5 million to $0.6 million, primarily as a result of lower net maturities of marketable securities.

Cash flows from financing activities for the three-month period increased by $1.3 million from $0.9 million used to $0.4 million provided, primarily as a result of no cash dividends paid and lower purchases of common stock.

Future Cash Expectations

We believe that our current cash, cash equivalents, and short-term marketable securities balances will satisfy our projected working capital and capital expenditure requirements for at least the next 12 months. We have a $100 million shelf registration statement in place, of which $30 million has been allocated, and $13.3 million remains available, for future sale under the Equity Distribution Agreement entered into with Wells Fargo Securities, LLC in August 2014. We did not sell any common stock under the Equity Distribution Agreement during the three-month period ended March 31, 2015. We may sell shares under the Equity Distribution Agreement and/or use other financing means to raise working capital in the future, if necessary, to support continued investment in our strategic initiatives. We may also raise capital in the future to fund acquisitions and/or investments in complementary businesses, technologies or product lines. If it becomes necessary to obtain additional financing, we may not be able to do so, or if these funds are available, they may not be available on satisfactory terms.

Off-Balance Sheet Arrangements

Other than the contractual obligations disclosed in our 2014 Annual Report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Words such as “may,” “should,” “could,” “expect,” “anticipate,” “intend,” “believe,” “project,” “estimate,” “continue,” variations of such terms or similar expressions are intended to identify such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-

looking statements, or other statements made by us, are made based on our expectations and beliefs concerning future events impacting us, and are subject to uncertainties and factors (including those specified below), which are difficult to predict and, in many instances, are beyond our control. As a result, our actual results could differ materially from those expressed in or implied by any such forward-looking statements, and investors are cautioned not to place undue reliance on such statements. Forward-looking statements include but are not limited to statements relating to:

•

concentration of revenue with few customers comprising a large majority of the revenue;

•

revenue trends and expectations;

•

our future level of investment in our business, including investment in research, development and engineering of products and technology, development and protection of our intellectual property, sales growth initiatives and development of new market opportunities;

•

our ability to improve margins;

•

anticipated expenses, costs, margins, provision for income taxes and investment activities in the foreseeable future;

•

anticipated revenue to be generated from current contracts and as a result of new programs;

•

variability of contracted arrangements;

•

our profitability in future periods;

•

business opportunities that could require that we seek additional financing;

•

the size and growth of our markets;

•

the existence of international growth opportunities and our future investment in such opportunities;

•

the sources of our future revenue;

•

our expected short-term and long-term liquidity positions;

•

our capital expenditure and working capital requirements and our ability to fund our capital expenditure and working capital needs through cash flow from operations;

•

capital market conditions, interest rate volatility and other limitations on the availability of capital, which could have an impact on our cost of capital and our ability to access the capital markets;

•

our use of cash, cash equivalents and marketable securities in upcoming quarters;

•

anticipated levels of backlog in future periods;

•

the success of our arrangements with Intellectual Ventures;

•

the success of our acquisition of Attributor Corporation;

•

the success of Digimarc Discover and Barcode;

•

protection, development and monetization of our intellectual property portfolio; and

•

other risks detailed in our filings with the Securities and Exchange Commission, including the risk factors set forth in Part I, Item 1A of our 2014 Annual Report.

We believe that the risk factors specified above and the risk factors identified in Part I, Item 1A of our 2014 Annual Report, among others, could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us or on our behalf. Investors should understand that it is not possible to predict or identify all risk factors and that there may be other factors that may cause our actual results to differ materially from the forward-looking statements. All forward-looking statements made by us or by persons acting on our behalf apply only as of the date of this Quarterly Report on Form 10-Q. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of the filing of this Quarterly Report on Form 10-Q.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

The market risk disclosures as set forth in Part II, Item 7A of our 2014 Annual Report have not changed materially.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation (pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”)), under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to management, including the principal executive and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Controls

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the three-months ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION.

Item 1.

Legal Proceedings.

We are subject from time to time to legal proceedings and claims arising in the ordinary course of business.

Item 1A.

Risk Factors

Our business, financial condition, results of operations and cash flows may be affected by a number of factors. Detailed information about risk factors that may affect Digimarc’s actual results are set forth in Part I, Item 1A of our 2014 Annual Report. The risks and uncertainties described in our 2014 Annual Report are those risks of which we are aware and that we consider to be material to our business. If any of the risks and uncertainties develops into actual events, our business, financial condition, results of operations, or cash flows could be materially adversely affected. In that case, the trading price of our common stock could decline. As of March 31, 2015, there have been no material changes to the risk factors set forth in our 2014 Annual Report.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

We withhold (repurchase) shares of common stock in connection with the vesting of restricted shares from time to time.

The following table sets forth information regarding purchases of our equity securities during the three-month period ended March 31, 2015:


Period	(a) Total number of shares purchased⁽¹⁾		(b) Average price paid per share⁽¹⁾		(c) Total number of shares purchased as part of publicly announced plans or programs		(d) Approximate dollar value of shares that may yet be purchased under the plans or programs
Month 1
January 1, 2015 to January 31, 2015		250	$	27.15		—	$	—
Month 2
February 1, 2015 to February 28, 2015		16,892	$	28.66		—	$	—
Month 3
March 1, 2015 to March 31, 2015		229	$	22.19		—	$	—

Total		17,371	$	28.55		—

(1)	Fully vested shares of common stock withheld (purchased) by us in satisfaction of required withholding tax liability upon the vesting of restricted stock.

Item 6.

Exhibits.


Exhibit Number		Exhibit Description

10.1		Equity Compensation Program for Nonemployee Directors under the Digimarc Corporation 2008 Incentive Plan (as amended on February 21, 2011, February 20, 2014 and March 27, 2015)

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1		Section 1350 Certification of Chief Executive Officer

32.2		Section 1350 Certification of Chief Financial Officer

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: April 28, 2015	DIGIMARC CORPORATION

	By:	/s/ CHARLES BECK
		CHARLES BECK
		Chief Financial Officer
		(Duly Authorized Officer and Principal Financial and Accounting Officer)