PART I. FINANCIAL INFORMATION

 

Item 1.         Financial Statements.

 

DIGIMARC CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(UNAUDITED)

 

 

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

 

 

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except per share data)

(UNAUDITED)

 

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(1) Cost of revenue for Subscription and Service excludes amortization expense on acquired intangible assets.

 

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

 

  

 DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

(UNAUDITED)

 

 

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

 

  

DIGIMARC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(UNAUDITED)

 

 

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 ("the Company"), an Oregon corporation, is a pioneer and global leader in digital watermarking technologies. For nearly 30 years, Digimarc innovations and intellectual property in digital watermarking have been deployed in solutions built upon one or both of the following two things: the identification and the authentication of physical and digital items, often at massive scale, and often where other methods of identification or authentication don’t work well or don’t work at all.

 

The Digimarc Illuminate platform is a distinctive software as a service (“SaaS”) cloud-based platform for digital connectivity that provides the tools for the application of advanced digital watermarks and dynamic Quick Response (“QR”) codes, software (digital twins) that enables various systems and devices to interact with those data carriers, and a centralized platform for capturing insights about digital interactions and automating activities based on that information.

 

The Digimarc product suite is built on top of the Digimarc Illuminate platform to power a trusted and scalable ecosystem that can address specific business needs in areas like automation, authenticity, sustainability, and customer trust and connectivity. All of the Company’s products are complementary to each other, providing exponential benefits when combined. By enabling customers to create and connect digital twins to physical and digital items, Digimarc’s products provide many benefits including:

 

•

Digimarc Automate improves product inspection by embedding imperceptible digital watermarks into products, labels, and packaging, which are detectable by standard vision systems. This significantly reduces mixing errors and mislabeling, ensuring higher accuracy and efficiency in production, fulfillment, and distribution facilities without additional costs for special inks or hardware. By enabling real-time data analysis and minimizing human error, Digimarc Automate enhances quality assurance, reduces waste, and lowers the risk of product recalls, giving brands a competitive edge.

 

•

Digimarc Engage activates products and multimedia to create and leverage an interactive, fully owned communications channel directly with consumers. Digimarc delivers dynamic, GS1 Digital Link-compliant QR codes and hyperlinks that provide contextual redirection capabilities for multiple consumer experiences (including personalized and automated loyalty and rewards programs) based on a variety of factors such as time and location or previous behavior. Connecting engagements across the physical and digital worlds in a singular view results in powerful new capabilities and insights for brands.

 

•

Digimarc Recycle increases the quality and quantity of recycled materials by digitizing products and packaging with digital watermarking technology. Coupled with consumer engagement capabilities, brands can leverage a direct, digital communications channel. Plus, Digimarc Recycle creates a cloud-based record of never-before-seen post-consumption data to provide new insights that benefit stakeholders across the value chain, including brands, facility operators, and Producer Responsibility Organizations (“PROs”).

 

•

Digimarc Retail Experience delivers smarter, connected packaging that supports next-generation retail checkout systems, including checkout efficiency (faster scanning) and checkout effectiveness (reduced shrinkage, including gift card and price look-up fraud prevention), optimized operational processes, advanced consumer engagement experiences, compliance with upcoming industry standards, and the collection of powerful first-party data and consumer insights.

 

•

Digimarc Validate supports authentication in the physical and digital worlds to help ensure online interactions can be trusted and that real products and digital assets are genuine and in the right place. Digimarc’s technology protects digital images, audio, product packaging, gift cards, and other physical items by delivering exclusive, covert digital watermarks and/or dynamic QR codes and a cloud-based record of product authentication information. In addition, consumer engagement capabilities provide a direct, digital communications channel.

 

 

Interim Consolidated Financial Statements

 

Our significant accounting policies are detailed in “Note 1: Description of Business and Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended December 31, 2024, which was filed with the U.S. Securities and Exchange Commission (“SEC”) on February 27, 2025 (the “2024 Annual Report”).

 

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 Generally Accepted Accounting Principles in the United States (“GAAP”) have been condensed or omitted in accordance with the rules and regulations of the SEC.

 

These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the 2024 Annual Report. 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.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of Digimarc and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

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Accounting Pronouncements Issued But Not Yet Adopted

 

In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-09 “Income Taxes (Topic 740) - Improvements to Income Tax Disclosures”. The ASU requires greater disaggregation of income tax disclosures primarily on the income tax rate reconciliation and income taxes paid. This ASU will be effective for the Company for the fiscal year ending December 31, 2025, with early adoption permitted. The adoption of this ASU will lead to additional income tax disclosures in the Company's consolidated financial statements for 2025 and future periods.

 

In November 2024, the FASB issued ASU No. 2024-03 “Income Statement (Subtopic 220-40) - Reporting Comprehensive Income - Expense Disaggregation Disclosures”. The ASU requires disaggregated disclosure of income statement expenses, primarily the disaggregation of certain expense captions into specified categories in disclosures within the footnotes to the financial statements. This ASU will be effective for the Company starting in the fiscal year ending December 31, 2027 for annual periods and in the first quarter of the fiscal year ending December 31, 2028 for interim periods, with early adoption permitted. The Company is currently evaluating the effect of adopting this ASU on the Company’s disclosures, but it is not expected to have a material impact.

 

In September 2025, the FASB issued ASU No. 2025-06, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software”, which includes amendments intended to modernize the accounting for software costs by removing references to software development stages and clarifying the capitalization threshold. The amendments are effective for annual periods beginning after December 15, 2027, and interim reporting periods within those annual reporting periods, with early adoption permitted. The amendments may be applied prospectively, retrospectively, or through a modified transition approach. The Company is currently evaluating the effect of adopting this ASU on the Company’s consolidated financial statements and disclosures.

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’s marketable securities are classified as available-for-sale and are reported at fair value. Unrealized holding gains and losses are excluded from earnings and are reported net of tax in “accumulated other comprehensive loss” in the Consolidated Balance Sheets until realized. Realized gains and losses are included in “other income, net” in the Consolidated Statements of Operations and Comprehensive Loss and are derived using the specific identification method for determining the cost of marketable securities sold.

 

In accordance with Accounting Standards Codification (“ASC”) No. 820 “Fair Value Measurements and Disclosures”, the Company defines its fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, in the following:

 

•

Level 1 Pricing inputs are quoted prices available in active markets for identical investments as of the reporting date.

 

•

Level 2 Pricing inputs are quoted for similar investments, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. Level 2 includes investments valued at quoted prices adjusted for legal or contractual restrictions specific to these investments.

 

•

Level 3 Pricing inputs are unobservable for the investment; that is, the inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

 

The Company’s fair value hierarchy for its cash equivalents and marketable securities was as follows:

 

September 30, 2025		Level 1				Level 2				Level 3				Total
Money market securities		$	1,604			$	—			$	—			$	1,604
Commercial paper			—				4,390				—				4,390
Federal agency notes			—				3,212				—				3,212
U.S. treasuries			—				1,996				—				1,996
Total		$	1,604			$	9,598			$	—			$	11,202

 

December 31, 2024		Level 1				Level 2				Level 3				Total
Money market securities		$	112			$	—			$	—			$	112
Commercial paper			—				10,633				—				10,633
U.S. treasuries			—				9,192				—				9,192
Federal agency notes			—				5,317				—				5,317
Total		$	112			$	25,142			$	—			$	25,254

 

The fair value maturities of the Company’s cash equivalents and marketable securities as of September 30, 2025, were as follows:

 

		Maturities by Period
						Less than				1-5				5-10				More than
		Total				1 year				years				years				10 years
Cash equivalents and marketable securities		$	11,202			$	11,202			$	—			$	—			$	—

 

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 commercial paper, federal agency notes, U.S. treasuries, and money market securities totaling $7,741 and $8,889 at  September 30, 2025 and December 31, 2024, respectively. Cash equivalents are carried at either cost or fair value, depending on the type of security.

 

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3. Revenue Recognition

 

The Company derives its revenue primarily from software subscriptions and software development services. Applicable revenue recognition criteria are considered separately for each performance obligation as follows:

 

•

Subscription revenue consists primarily of revenue earned from subscription fees for access to the Company’s SaaS platform and products and, to a lesser extent, licensing fees for software products. The majority of subscription contracts are recurring, paid in advance and recognized over the term of the subscription, which is typically one to three years.

 

•

Service revenue consists primarily of revenue earned from the performance of software development services and, to a lesser extent, professional services. The majority of software development contracts are structured as time and materials agreements. Revenue for services is generally recognized as the services are performed. Billing for services rendered generally occurs within one month after the services are provided.

  

Customer arrangements may contain multiple deliverables such as software platform subscriptions, software product subscriptions, and professional services. Subscriptions and services offered are usually distinct performance obligations. When they are not capable of being distinct, they are combined with other subscriptions or services until a distinct performance obligation is identified. To determine the transaction price, management considers the terms of the contract and the Company’s customary business practices. Some contracts may contain variable consideration. In those cases, management estimates the amount of variable consideration based on the sum of probability-weighted amounts in a range of possible consideration amounts. As part of this assessment, management evaluates whether any of the variable consideration is constrained and if it is, it is not included in the transaction price. The consideration is allocated between distinct performance obligations based on their stand-alone selling prices. When the standalone selling prices are not directly observable, management makes estimates based on reasonably available information, including market conditions, specific factors affecting the Company, and information about the customer. The Company recognizes the revenue associated with each performance obligation as the obligation is fulfilled, which for subscriptions is typically recognized ratably over time, and for services is typically recognized when they are performed.

 

All revenue recognized in the Consolidated Statements of Operations and Comprehensive Loss is considered to be revenue from contracts with customers.

 

The following table provides information about disaggregated revenue by major target market in the Company’s single reporting segment:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
Commercial:
Subscription		$	4,267			$	4,952			$	13,605			$	16,494
Service			41				430				876				864
Total Commercial		$	4,308			$	5,382			$	14,481			$	17,358
Government:
Subscription		$	300			$	300			$	900			$	900
Service			3,019				3,761				9,624				11,502
Total Government			3,319				4,061				10,524				12,402
Total		$	7,627			$	9,443			$	25,005			$	29,760

 

 

The Company has contract assets from contracts with customers that are classified as “trade accounts receivable” in the Consolidated Balance Sheets. See Note 8 for more information about trade accounts receivable.

 

The Company has contract assets from capitalized contract acquisition costs that are classified as “other current assets” and “other assets” in the Consolidated Balance Sheets. These contract acquisition costs are recognized in proportion to the revenue recognized from the contract they are associated with.

 

The following table provides information about contract assets:

 

		September 30,				December 31,
		2025				2024
Contract acquisition costs, current		$	124			$	38
Contract acquisition costs, long-term			199				—
Total		$	323			$	38

 

The Company has contract liabilities from contracts with customers that are classified as “deferred revenue” in the Consolidated Balance Sheets. Deferred revenue consists of billings in advance for subscriptions and services for which the performance obligation has not been satisfied.

 

The following table provides information about contract liabilities:

 

		September 30,				December 31,
		2025				2024
Deferred revenue, current		$	3,842			$	4,020
Deferred revenue, long-term			16				2
Total		$	3,858			$	4,022

 

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The Company recognized $3,598 of revenue during the nine months ended September 30, 2025, that was included in the contract liability balance as of December 31, 2024.

 

The aggregate amount of the transaction prices from contractual obligations that are unsatisfied or partially unsatisfied was $28,880 and $25,215 as of September 30, 2025, and December 31, 2024, respectively. As of September 30, 2025, the Company expects $22,672 of the $28,880 to be recognized as revenue during the next twelve months.

4. Segment Information

 

Significant Segment Expenses

 

The Company derives its revenue from a single reporting segment: product digitization solutions. Revenue is generated in this segment primarily through software subscriptions and software development services. The Company manages its business activities on a consolidated basis. In addition, the Chief Executive Officer of the Company, as the chief operating decision-maker (“CODM”), reviews the Company’s operating results and makes decisions to allocate resources based on consolidated financial information. As such, the Company has one single reportable segment. The CODM uses consolidated net income (loss) as a performance measure and total consolidated assets as an asset measure, to assess performance of the Company, to allocate working capital, and to monitor budget versus actual results. 

 

The following table illustrates reported segment revenue, segment profit and loss, and significant segment expenses.

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
Revenue:
Subscription		$	4,567			$	5,252			$	14,505			$	17,394
Service			3,060				4,191				10,500				12,366
Total revenue			7,627				9,443				25,005				29,760
Cost of revenue:
Subscription (1)			642				735				2,101				2,205
Service (1)			1,330				1,638				4,120				5,138
Amortization expense on acquired intangible assets			1,209				1,173				3,546				3,445
Total cost of revenue			3,181				3,546				9,767				10,788
Operating expenses:
Cash compensation			4,875				10,322				22,281				30,425
Stock-based compensation			3,529				2,548				8,170				7,376
Professional services and consultants			1,969				2,057				6,811				5,880
Software and hardware			608				871				2,146				2,759
Depreciation and amortization			563				536				1,606				1,636
Other segment items (2)			1,266				932				3,093				3,104
Total operating expenses			12,810				17,266				44,107				51,180
Operating loss			(8,364	)			(11,369	)			(28,869	)			(32,208	)
Other income, net			217				617				796				1,868
Provision for income taxes			(5	)			(2	)			(29	)			(22	)
Net loss		$	(8,152	)		$	(10,754	)		$	(28,102	)		$	(30,362	)

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(1)	Cost of revenue for Subscription and Service excludes amortization expense on acquired intangible assets.

 

(2)	Other segment items include training and travel expenses, recruiting expenses, rent and facility expenses, bad debt expenses and other miscellaneous costs.

 

Geographic Information

 

The Company markets its products in the U.S. and in non-U.S. countries through its sales personnel and partners. Revenue by geographic area, based upon the “bill-to” location, was as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
Domestic		$	2,308			$	2,004			$	6,781			$	8,349
International (1)			5,319				7,439				18,224				21,411
Total		$	7,627			$	9,443			$	25,005			$	29,760

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(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.

 

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Major Customers

 

The following customers accounted for 10% or more of revenue:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
Customer A			43	%			43	%			42	%			41	%
Customer B			*				16	%			13	%			15	%
Customer C			11	%			*				10	%			15	%

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*	Less than 10%

 

Long-Lived Assets by Geographical Area

 

Long-lived assets by geographic area were as follows:

 

		September 30,				December 31,
		2025				2024
United States		$	1,223			$	1,026
Europe			4				14
Total		$	1,227			$	1,040

 

5. Stock-Based Compensation

 

Stock-based compensation includes expense charges for all stock-based awards to employees and directors. These awards include restricted stock awards, restricted stock units, and performance restricted stock units.

 

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

 

Determining Fair Value

 

Restricted Stock Awards

 

The fair value of restricted stock awards (“RSA”) that vest upon meeting a service condition is based on the fair market value of the Company’s common stock on the date of the grant (measurement date) and is recognized on a straight-line basis over the service period of the award, which is generally three to four years for employee grants and one to three years for director grants.

 

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Restricted Stock Units

 

The fair value of restricted stock unit (“RSU”) awards that vest upon meeting a service condition is based on the fair market value of the Company’s common stock on the date of the grant (measurement date) and is recognized on a straight-line basis over the service period of the award, which is generally three to four years for employee grants.

 

Performance Restricted Stock Units

 

The fair value of performance restricted stock unit (“PRSU”) awards that vest upon meeting a service condition and a performance condition, such as the Company exceeding a future annual recurring revenue target, is determined based on the fair market value of the Company’s common stock on the date of the grant (measurement date), adjusted for probability of achievement of the performance criteria as of each reporting date, and is recognized on a straight-line basis over the service period of the award, which is generally three years for employee grants. The probability of achievement is subject to judgment, and could change from period to period, impacting the amount of expense to be recognized. 

 

The fair value of PRSU awards that vest upon meeting a service condition and a market condition, such as the Company exceeding shareholder returns as compared to an index of peer companies, is determined on the date of grant (measurement date) using the Monte Carlo valuation model. The Company recognizes the fair value of the award on a straight-line basis over the service period of the award, which is generally three years for employee grants.

 

The following inputs are used in the Monte Carlo valuation model to estimate the fair value:

 

Stock Price. The stock price represents the fair market value of the Company’s common stock on the date of the grant.

 

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 term 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 term of the award.

 

Monte Carlo valuation inputs:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
Stock price		$	—			$	—			$	13.16			$	36.64
Expected volatility			—				—				70.9	%			66.3	%
Risk-free interest rate			—				—				3.8	%			4.3	%

  

Stock-Based Compensation

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
Stock-based compensation:
Cost of revenue		$	336			$	154			$	726			$	563
Sales and marketing			577				688				1,727				2,198
Research, development and engineering			1,244				648				2,872				1,911
General and administrative			1,708				1,212				3,571				3,267
Stock-based compensation expense			3,865				2,702				8,896				7,939
Capitalized to software and patent costs			61				5				115				25
Total stock-based compensation		$	3,926			$	2,707			$	9,011			$	7,964

 

 

The following table sets forth total unrecognized compensation costs related to non-vested stock-based awards granted under the Company’s stock incentive plan:

 

		September 30,				December 31,
		2025				2024
Total unrecognized compensation costs		$	15,491			$	16,226

 

Total unrecognized compensation costs will be adjusted based on updates to the estimated future achievement of performance conditions on PRSU awards as well as for any future forfeitures if and when they occur.

 

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The Company expects to recognize the total unrecognized compensation costs as of September 30, 2025, for all non-vested stock-based awards over weighted average periods through  September 30, 2029, as follows:

 

		RSAs				RSUs				PRSUs
Weighted average period (in years)			1.06				1.47				1.41

 

As of September 30, 2025, under the Company’s stock incentive plan, an additional 2,347 shares remained available for future grants. The Company issues new shares upon the grants of RSAs and vesting of RSU and PRSU awards.

 

Restricted Stock Awards Activity

 

The following table presents the unvested RSA activity:

 

						Weighted
						Average
		Number of				Grant Date
Three Months Ended September 30, 2025:		Shares				Fair Value
Unvested balance at June 30, 2025			74			$	18.15
Granted			22			$	12.27
Vested			(5	)		$	19.52
Forfeited			—			$	—
Unvested balance at September 30, 2025			91			$	16.59

 

						Weighted
						Average
		Number of				Grant Date
Nine Months Ended September 30, 2025:		Shares				Fair Value
Unvested balance at December 31, 2024			59			$	29.98
Granted			69			$	12.69
Vested			(37	)		$	30.61
Forfeited			—			$	—
Unvested balance at September 30, 2025			91			$	16.59

 

The fair value of RSAs vested is as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
Fair value of RSAs vested		$	73			$	308			$	668			$	2,069

 

Restricted Stock Units Activity

 

The following table presents the unvested RSU award activity:

 

						Weighted
						Average
		Number of				Grant Date
Three Months Ended September 30, 2025:		Shares				Fair Value
Unvested balance at June 30, 2025			679			$	16.25
Granted			98			$	8.98
Vested			(120	)		$	16.46
Forfeited			(41	)		$	19.69
Unvested balance at September 30, 2025			616			$	14.83

 

						Weighted
						Average
		Number of				Grant Date
Nine Months Ended September 30, 2025:		Shares				Fair Value
Unvested balance at December 31, 2024			406			$	28.27
Granted			673			$	13.09
Vested			(267	)		$	18.81
Forfeited			(196	)		$	26.30
Unvested balance at September 30, 2025			616			$	14.83

 

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The fair value of RSU awards vested is as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
Fair value of RSU awards vested		$	1,082			$	1,356			$	4,119			$	4,403

 

Performance Restricted Stock Units Activity

 

The following table presents the unvested PRSU award activity:

 

						Weighted
						Average
		Number of				Grant Date
Three Months Ended September 30, 2025:		Shares				Fair Value
Unvested balance at June 30, 2025			560			$	18.49
Change in units based on performance expectations			—			$	—
Granted			3			$	8.81
Vested			—			$	—
Forfeited			(39	)		$	18.18
Unvested balance at September 30, 2025			524			$	18.45

 

						Weighted
						Average
		Number of				Grant Date
Nine Months Ended September 30, 2025:		Shares				Fair Value
Unvested balance at December 31, 2024			215			$	32.08
Change in units based on performance expectations			(5	)		$	42.43
Granted			421			$	15.20
Vested			(49	)		$	42.43
Forfeited			(58	)		$	23.04
Unvested balance at September 30, 2025			524			$	18.45

 

The fair value of PRSU awards vested is as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
Fair value of PRSU awards vested		$	—			$	—			$	1,707			$	2,370

 

6. Shareholders’ Equity

 

Registered Direct Offering

 

On February 24, 2024, the Company entered into purchase agreements with certain investors providing for the issuance and sale by the Company of 929 shares of common stock in a registered direct stock offering. The common shares were offered at a price of $35.00 per share, and the gross cash proceeds to the Company were $32,500. We incurred $282 of legal costs related to the offering. The closing of the registered direct offering occurred on February 27, 2024.

 

Employee Stock Purchase Plan

 

On February 25, 2025, the Company’s Board of Directors adopted the 2025 Employee Stock Purchase Plan (“ESPP”). The Company reserved a total of 250 thousand shares and as of  September 30, 2025, there were 250 thousand shares authorized and available for future issuance under the ESPP. Subject to any plan limitations, the ESPP allows eligible employees to contribute, normally through payroll deductions, up to 15% of their salary for the purchase of the Company’s common stock at a discounted price per share. The Company’s current offering period began on June 16, 2025, with the first purchase period ending on December 15, 2025. The stock-based compensation expense and payroll withholding for the ESPP during the three and nine months ended September 30, 2025 were not material. 

 

Incentive Plan Amendment

 

On May 7, 2025, the Company’s shareholders approved an amendment to the Digimarc Corporation 2018 Stock Incentive Plan (as amended, the “2018 Plan”) to, among other things, increase the number of shares authorized for issuance by 950 thousand shares. 

 

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7. Earnings Per Share

 

The Company calculates basic and diluted earnings per share in accordance with ASC No. 260, “Earnings Per Share,” using the treasury stock method. 

 

Basic earnings per share excludes dilution and is calculated by dividing earnings by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing earnings by the weighted-average number of common shares, as adjusted for the potentially dilutive effect of unvested RSUs and PRSUs. The dilutive effect of unvested RSUs and PRSUs is determined using the treasury stock method. RSAs are included in shares outstanding on the date of grant.

 

The following table reconciles earnings (loss) per share:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
Basic Earnings (Loss) per Share:
Net loss — basic		$	(8,152	)		$	(10,754	)		$	(28,102	)		$	(30,362	)
Weighted average shares outstanding — basic			21,709				21,435				21,614				21,187
Basic loss per share		$	(0.38	)		$	(0.50	)		$	(1.30	)		$	(1.43	)
Diluted Earnings (Loss) per Share:
Net loss — diluted		$	(8,152	)		$	(10,754	)		$	(28,102	)		$	(30,362	)
Weighted average shares outstanding — diluted			21,709				21,435				21,614				21,187
Diluted loss per share		$	(0.38	)		$	(0.50	)		$	(1.30	)		$	(1.43	)

 

The following table indicates the stock equivalents related to unvested RSUs and PRSUs that were anti-dilutive and excluded from diluted earnings (loss) per share calculations:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
Anti-dilutive shares due to net loss			—				95				—				85

 

8. Trade Accounts Receivable

 

Trade Accounts Receivable

 

Trade accounts receivables are recorded at the contractual or invoiced amount.

 

		September 30,				December 31,
		2025				2024
Trade accounts receivable, current		$	7,760			$	6,563
Trade accounts receivable, long-term			90				80
Allowance for doubtful accounts			(1,439	)			(151	)
Trade accounts receivable, net		$	6,411			$	6,492
Unpaid deferred revenue included in trade accounts receivable		$	1,503			$	2,590

  

Allowance for Doubtful Accounts

 

The Company’s accounts receivables are subject to concentrations of credit risk. The Company maintains an allowance for its doubtful accounts receivable to reflect any estimated credit losses. The allowance is established in accordance with the current expected credit loss model, which requires the estimation of expected credit losses over the contractual life of financial assets. The allowance is calculated using a forward-looking probability-weighted approach based on historical loss experience, current economic conditions, and reasonable and supportable forecasts. The Company records the allowance in “general and administrative” expense in the Consolidated Statements of Operations and Comprehensive Loss, up to the amount of revenue recognized to date for each account. Any incremental allowance is recorded as an offset to “deferred revenue” in the Consolidated Balance Sheets. Account receivables are written off and charged against the recorded allowance when the Company has exhausted collection efforts without success.

 

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.

 

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Major Customers

 

The following customers accounted for 10% or more of trade accounts receivable, net:

 

		September 30,				December 31,
		2025				2024
Company A			30	%			47	%
Company B			24	%			*
Company C			*				12	%

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*	Less than 10%

9. 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 ten years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life or the lease term.

 

		September 30,				December 31,
		2025				2024
Office furniture and fixtures		$	63			$	63
Software			6,022				5,476
Equipment			2,616				2,566
Leasehold improvements			227				203
Gross property and equipment			8,928				8,308
Less accumulated depreciation			(7,701	)			(7,268	)
Property and equipment, net		$	1,227			$	1,040

 

10. Goodwill

 

The Company performs its annual goodwill impairment test during the second quarter of each fiscal year or whenever events or changes in circumstances indicate that the carrying value may exceed the fair value. If the carrying value exceeds the estimated fair value, an impairment is recorded. The Company operates as a single reporting unit. The Company estimates the fair value of its single reporting unit using a market approach, which takes into account the Company’s market capitalization plus an estimated control premium. No impairment charges were recorded for the three and nine months ended  September 30, 2025 and 2024. 

 

Balance at December 31, 2024		$	8,532
Currency translation adjustments			528
Balance at September 30, 2025		$	9,060

 

11. 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. No impairment charges were recorded for the three and nine months ended September 30, 2025 and 2024.

 

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, but generally approximates seventeen years.

 

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

 

		Estimated Life				September 30,				December 31,
		(years)				2025				2024
Capitalized patent costs			~17			$	9,243			$	9,174
Intangible assets acquired:
Purchased intellectual property			10				250				250
Developed technology			5				24,106				22,504
Customer relationships			10				11,519				10,754
Gross intangible assets							45,118				42,682
Accumulated amortization							(26,353	)			(20,491	)
Intangibles, net						$	18,765			$	22,191

 

The amortization of capitalized patent costs, purchased intellectual property, and developed technology is recorded in “cost of revenue” and the amortization of customer relationships is recorded in “operating expenses” in the Consolidated Statements of Operations and Comprehensive Loss.

 

Amortization expense on intangible assets was as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
Amortization expense		$	1,627			$	1,589			$	4,789			$	4,678

 

For intangible assets recorded at September 30, 2025, the estimated future aggregate amortization expense for the years ending December 31, 2025 through December 31, 2029 is as follows:

 

		Amortization
As of September 30, 2025		Expense
Remaining in 2025		$	1,632
2026			6,470
2027			1,615
2028			1,606
2029			1,578

 

12. Leases

 

The Company accounts for leases in accordance with ASC No. 842, “Leases.”

 

The Company entered into a sublease agreement and lease extension agreement for office space in Beaverton, Oregon in February 2022 to move the Company’s corporate headquarters. The term of the sublease and lease extension runs through September 2030, with remaining rent payments as of September 30, 2025, totaling $6,817 plus operating expenses, payable in monthly installments. The first 26 months of rent payments and operating expenses were abated to cover the remaining lease term on the Company’s former corporate headquarters.

    

All of the Company’s leases are operating leases. The following table provides additional details of leases presented in the Consolidated Balance Sheets:

 

		September 30,				December 31,
		2025				2024
Lease right of use assets		$	3,350			$	3,659
Lease liabilities, current		$	869			$	781
Lease liabilities, long-term		$	4,549			$	5,213
Weighted-average remaining life (in years)			5.0				5.7
Weighted-average discount rate			9	%			9	%

 

The current lease liabilities are included in “accounts payable and other accrued liabilities” in the Consolidated Balance Sheets.

 

The carrying value of the lease right of use assets is evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. No impairment charges were recorded for the three and nine months ended September 30, 2025 and 2024. 

 

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Operating lease expense is included in “operating expenses” in the Consolidated Statements of Operations and Comprehensive Loss and in “cash flows from operating activities” in the Consolidated Statements of Cash Flows. The operating leases include variable lease payments, which are included in operating lease expense. Additional details of the Company’s operating leases are presented in the following table:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
Operating lease expense		$	356			$	363			$	1,098			$	1,110
Cash paid for operating leases		$	447			$	445			$	1,365			$	1,209

 

The table below reconciles the aggregate cash payment obligations for the next five years and total of the remaining years for the operating lease liability recorded in the Consolidated Balance Sheets as of September 30, 2025:

 

		Cash
		Payment
As of September 30, 2025		Obligations
Remaining in 2025		$	332
2026			1,356
2027			1,397
2028			1,296
2029			1,389
Thereafter			1,066
Total lease payments			6,836
Imputed interest			(1,418	)
Total minimum lease payments		$	5,418

    

13. Accounts Payable and Accrued liabilities

 

The components of accounts payable and accrued liabilities are summarized below:

 

		September 30,				December 31,
		2025				2024
Accounts payable		$	2,884			$	2,378
Accrued liabilities			1,842				1,959
Lease liabilities, current			869				781
Total accounts payable and other accrued liabilities		$	5,595			$	5,118

 

14. Reorganization

 

On February 26, 2025, the Company announced a reduction of its global workforce to streamline the Company’s team structure to better align with its long-term growth initiatives and profitability objectives. All associated costs with the reorganization are recorded as “operating expenses” in the Consolidated Statements of Operations and Comprehensive Loss. Corresponding liabilities are recorded as “accrued liabilities” in the Consolidated Balance Sheets. During the nine months ended September 30, 2025, the Company incurred cash severance costs totaling $3,230, reported as “cash compensation” in Note 4 Segment Information, including $1,622 related to research, development and engineering, $980 related to sales and marketing, and $628 related to general and administration. 

 

The following table provides the details of costs and liabilities associated with the reorganization announced on February 26, 2025:

 

Balance at December 31, 2024		$	—
Costs incurred			3,230
Cash paid			(3,220	)
Balance at September 30, 2025		$	10

      

15. Other Income

 

The following table provides activity in other income, net:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
Interest income		$	135			$	486			$	567			$	1,471
Refundable tax credit			61				152				148				402
Foreign currency gains (losses)			21				(21	)			81				(5	)
Total other income, net		$	217			$	617			$	796			$	1,868

 

 

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16. Income Taxes

 

The provision for income taxes reflects current taxes and deferred taxes. The effective tax rate for each of the nine months ended September 30, 2025 and 2024 was 0%.

 

The valuation allowance against net deferred tax assets as of September 30, 2025, was $112,750, an increase of $8,389 from $104,361 as of December 31, 2024. The Company continues to provide for a valuation allowance to offset its net deferred tax assets until such time it is more likely than not the tax assets or portions thereof will be realized.

 

Excess tax deficiencies of $948 and $102 were recognized in the provision for income taxes for the three months ended September 30, 2025 and 2024, respectively, which were offset by $948 and $102 of valuation allowance, respectively.

 

An excess tax deficiency of $1,827 and an excess tax benefit of $1,410 were recognized in the provision for income taxes for the nine months ended September 30, 2025 and 2024, respectively, which were offset by $1,827 and $1,410 of valuation allowance, respectively.

 

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”), which includes a broad range of tax reform provisions, was signed into law in the United States, which includes a new Internal Revenue Code ("IRC") Section 174A. Under Section 174A, commencing with tax years beginning after December 31, 2024, domestic research or experimental expenditures may be deducted in the current period rather than capitalized and amortized over multiple years, as previously required under IRC Section 174. As a result of this legislation, the Company intends to deduct its domestic Section 174A expenditures beginning in its 2025 taxable year. The Company does not expect the OBBBA to have a material impact on its effective tax rate, financial condition, or results of operations in 2025.

 

17. Commitments and Contingencies

 

Certain of the Company’s product 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 No. 450 “Contingencies.” To date, there have been no claims made under such indemnification provisions.

 

On May 8, 2025, a class action lawsuit captioned Ullom v. Digimarc Corp., et al., No: 3:25-cv-00779-JR (the “Ullom Action”) was filed against the Company in the United States District Court for the District of Oregon. The complaint purports to assert claims against the Company and its Chief Executive Officer and Chief Financial Officer pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, on behalf of a putative class of investors who purchased or otherwise acquired the Company’s shares between May 2, 2024 and February 26, 2025 (the “class period”). The Ullom Action seeks to recover damages allegedly caused by purported misstatements and omissions regarding the renewal status of a commercial contract, claiming that these alleged misstatements and omissions artificially inflated the price paid for our common stock during the class period.

 

Subsequently, four derivative lawsuits were filed nominally on the Company’s behalf, including three in the United States District Court for the District of Oregon on August 29, 2025 (as amended September 2, 2025) (Franchi v. McCormack et al., No. 3:25-cv-01543-AN), October 7, 2025 (Chadwick v. McCormack et al., No. 3:25-cv-01838-JR), October 14, 2025 (Jensen v. McCormack et al., No. 3:25-cv-01891-SB), and one in the Circuit Court of the State of Oregon for the County of Multnomah on October 23, 2025 (Johnson v. McCormack et al., No. 25-cv-56998), which are based on the same alleged facts and circumstances as the above-referenced securities class action and are against the Company’s Chief Executive Officer, Chief Financial Officer and directors. The derivative actions collectively assert claims pursuant to Sections 10(b), 14(a), and 20(a) of the Exchange Act, as well as for breaches of fiduciary duties, aiding and abetting breaches of fiduciary duties, unjust enrichment, and waste of corporate assets.  Each of the four derivative lawsuits seeks to recover damages on the Company’s behalf and alleges that a legally required pre-suit demand on the Board of Directors would be futile and should be excused.

 

On November 4, 2025, the Chadwick, Jensen and Franchi actions were consolidated and stayed pending resolution of the Company’s anticipated motion to dismiss in the Ullom Action.

 

These cases are at an early stage.  The Company believes it has defenses to the claims and is responding accordingly.

 

 

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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 that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. 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 2024 Annual Report, and other reports and filings we have made with the SEC.

 

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

 

All dollar amounts within the tables below are in thousands. The percentages within the tables may not sum to 100% due to rounding.

 

Digimarc, Digimarc Barcode, The Barcode of Everything, Barcode of Everything, and the circle-d logo are registered trademarks of Digimarc Corporation. EVRYTHNG and EVRYTHNG PRODUCT CLOUD are registered trademarks of EVRYTHNG Limited (“EVRYTHNG”), a wholly owned subsidiary of Digimarc. 

 

Overview

 

Digimarc, an Oregon corporation, is a pioneer and global leader in digital watermarking technologies. For nearly 30 years, Digimarc innovations and intellectual property in digital watermarking have been deployed in solutions built upon one or both of the following two things: the identification and the authentication of physical and digital items, often at massive scale, and often where other methods of identification or authentication don’t work well or don’t work at all.

 

The Digimarc Illuminate platform is a distinctive software as a service (“SaaS”) cloud-based platform for digital connectivity that provides the tools for the application of advanced digital watermarks and dynamic Quick Response (“QR”) codes, software (digital twins) that enables various systems and devices to interact with those data carriers, and a centralized platform for capturing insights about digital interactions and automating activities based on that information.

 

The Digimarc product suite is built on top of the Digimarc Illuminate platform to power a trusted and scalable ecosystem that can address specific business needs in areas like automation, authenticity, sustainability, and customer trust and connectivity. All of the Company’s products are complementary to each other, providing exponential benefits when combined. By enabling customers to create and connect digital twins to physical and digital items, Digimarc’s products provide many benefits including:

 

•

Digimarc Automate improves product inspection by embedding imperceptible digital watermarks into products, labels, and packaging, which are detectable by standard vision systems. This significantly reduces mixing errors and mislabeling, ensuring higher accuracy and efficiency in production, fulfillment, and distribution facilities without additional costs for special inks or hardware. By enabling real-time data analysis and minimizing human error, Digimarc Automate enhances quality assurance, reduces waste, and lowers the risk of product recalls, giving brands a competitive edge.

 

•

Digimarc Engage activates products and multimedia to create and leverage an interactive, fully owned communications channel directly with consumers. Digimarc delivers dynamic, GS1 Digital Link-compliant QR codes and hyperlinks that provide contextual redirection capabilities for multiple consumer experiences (including personalized and automated loyalty and rewards programs) based on a variety of factors such as time and location or previous behavior. Connecting engagements across the physical and digital worlds in a singular view results in powerful new capabilities and insights for brands.

 

•

Digimarc Recycle increases the quality and quantity of recycled materials by digitizing products and packaging with digital watermarking technology. Coupled with consumer engagement capabilities, brands can leverage a direct, digital communications channel. Plus, Digimarc Recycle creates a cloud-based record of never-before-seen post-consumption data to provide new insights that benefit stakeholders across the value chain, including brands, facility operators, and Producer Responsibility Organizations (“PROs”).

 

•

Digimarc Retail Experience delivers smarter, connected packaging that supports next-generation retail checkout systems, including checkout efficiency (faster scanning) and checkout effectiveness (reduced shrinkage, including gift card and price look-up fraud prevention), optimized operational processes, advanced consumer engagement experiences, compliance with upcoming industry standards, and the collection of powerful first-party data and consumer insights.

 

•

Digimarc Validate supports authentication in the physical and digital worlds to help ensure online interactions can be trusted and that real products and digital assets are genuine and in the right place. Digimarc’s technology protects digital images, audio, product packaging, gift cards, and other physical items by delivering exclusive, covert digital watermarks and/or dynamic QR codes and a cloud-based record of product authentication information. In addition, consumer engagement capabilities provide a direct, digital communications channel.

 

Digimarc has maintained a relationship with a consortium of central banks for nearly 30 years, providing trusted technology to help deter digital counterfeiting of currency. The relationship was the first commercially successful large-scale use of our technologies and protects billions of banknotes in circulation globally.

 

 

Our intellectual property contains many innovations in digital watermarking, content and object recognition, product authentication, and related fields. To protect our inventions, 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 approximately 750 U.S. and foreign patents granted and applications pending as of September 30, 2025. The patents in our portfolio each have a life of approximately 20 years from the patent’s effective filing date.

 

Critical Accounting Policies and Estimates

 

Detailed information about our critical accounting policies and estimates is set forth in Part III, Item 15 of our 2024 Annual Report (“Exhibits and Financial Statement Schedules”), in “Note 1: Description of Business and Summary of Significant Accounting Policies,” which is incorporated by reference into this Quarterly Report on Form 10-Q.

    

Results of Operations

 

The following table presents Consolidated Statements of Operations data for the periods indicated as a percentage of total revenue. Unless stated otherwise, all references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations relate to the three and nine months ended September 30, 2025, and all changes discussed with respect to such period reflect changes compared to the three and nine months ended September 30, 2024.

 

	Three Months Ended September 30,						Nine Months Ended September 30,
	2025			2024			2025			2024
Percentages are percent of total revenue
Revenue:
Subscription		60	%		56	%		58	%		58	%
Service		40	%		44	%		42	%		42	%
Total revenue		100	%		100	%		100	%		100	%
Cost of revenue:
Subscription (1)		8	%		8	%		8	%		7	%
Service (1)		17	%		17	%		16	%		17	%
Amortization expense on acquired intangible assets		16	%		12	%		14	%		12	%
Total cost of revenue		42	%		38	%		39	%		36	%
Gross profit		58	%		62	%		61	%		64	%
Operating expenses:
Sales and marketing		37	%		60	%		45	%		56	%
Research, development and engineering		57	%		69	%		66	%		67	%
General and administrative		70	%		51	%		62	%		46	%
Amortization expense on acquired intangible assets		4	%		3	%		3	%		3	%
Total operating expenses		168	%		183	%		176	%		172	%
Operating loss		(110	)%		(120	)%		(115	)%		(108	)%
Other income, net		3	%		7	%		3	%		6	%
Loss before income taxes		(107	)%		(114	)%		(112	)%		(102	)%
Provision for income taxes		(—	)%		(—	)%		(—	)%		(—	)%
Net loss		(107	)%		(114	)%		(112	)%		(102	)%

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(1)	Cost of revenue for Subscription and Service excludes amortization expense on acquired intangible assets.

 

Summary

 

Our commercial subscription revenue in fiscal 2025 has been negatively impacted by the expiration of a commercial contract that ended in April 2025 with an international customer. The contract contributed $0.8 million and $2.5 million of subscription revenue during the three and nine months ended September 30, 2024, compared to $0.0 million and $1.1 million of subscription revenue during the three and nine months ended September 30, 2025. Our commercial subscription revenue in fiscal 2025 has also been negatively impacted by the expiration of a commercial contract that ended in June 2024 with a domestic customer. The contract contributed $0.0 million and $2.1 million of subscription revenue during the three and nine months ended September 30, 2024, compared to $0.0 million of subscription revenue for both the three and nine months ended September 30, 2025. Our commercial subscription revenue in the fourth quarter of fiscal 2025 will also be impacted by the conclusion of a contract renegotiation with a domestic customer that will negatively impact future revenue by $3.1 million on an annualized basis.

 

Our government service revenue in fiscal 2025 has been negatively impacted by a smaller approved budget by the Central Banks for program work in 2025. We expect government service revenue in fiscal 2025 to be $1.7 million to $1.8 million lower than in fiscal 2024.

 

Total revenue for the three months ended September 30, 2025, decreased $1.8 million, to $7.6 million, compared to $9.4 million for the corresponding three months ended September 30, 2024. Subscription revenue decreased $0.7 million, primarily reflecting a decrease of $0.8 million from the expiration of the commercial contract in April 2025 referenced above. Service revenue decreased $1.1 million, primarily reflecting $0.7 million of lower government service revenue from the Central Banks and $0.4 million of lower commercial service revenue from HolyGrail 2.0 recycling projects. 

 

Total revenue for the nine months ended September 30, 2025, decreased $4.8 million, to $25.0 million, compared to $29.8 million for the corresponding nine months ended September 30, 2024. Subscription revenue decreased $2.9 million, primarily reflecting a decrease of $3.5 million from the expiration of the commercial contracts in June 2024 and April 2025 referenced above, partially offset by higher commercial subscription revenue from new and existing commercial contracts. Service revenue decreased $1.9 million, reflecting lower government service revenue from the Central Banks. 

 

We expect our expenses in fiscal 2025 to be significantly lower than fiscal 2024 due to the reorganization we announced on February 26, 2025, which reduced our cash expenses by approximately $16.5 million on an annualized basis. We also identified a total of approximately $5.5 million of other annualized cash cost savings that have now been implemented but not yet fully realized in the interim operating results for the period ended September 30, 2025.

 

 

Total operating expenses for the three months ended September 30, 2025, decreased $4.5 million, to $12.8 million, compared to $17.3 million for the corresponding three months ended September 30, 2024. The decrease in operating expenses primarily reflects $5.4 million of lower cash compensation costs largely due to lower headcount and $0.3 million of lower software and hardware costs, partially offset by $1.0 million of higher stock compensation costs, $0.3 million of higher other costs, and a $0.3 million lower allocation out of operating expenses primarily due to lower billable service hours.

 

Total operating expenses for the nine months ended September 30, 2025, decreased $7.1 million, to $44.1 million, compared to $51.2 million for the corresponding nine months ended September 30, 2024. The decrease in operating expenses primarily reflects $8.1 million of lower cash compensation costs and $0.6 million of lower software and hardware costs, partially offset by higher professional service costs of $0.9 million and higher stock compensation expense of $0.8 million. The $8.1 million of lower cash compensation costs primarily reflects $12.1 million of lower compensation costs largely due to lower headcount, partially offset by $3.2 million of higher cash severance costs incurred as a result of the reorganization and a $0.8 million lower allocation out of operating expenses primarily due to lower billable service hours.

  

Revenue

 

		Three Months Ended September 30,								Dollar				Percent				Nine Months Ended September 30,								Dollar				Percent
		2025				2024				Increase/(Decrease)				Increase/(Decrease)				2025				2024				Increase/(Decrease)				Increase/(Decrease)
Revenue:
Subscription		$	4,567			$	5,252			$	(685	)			(13	)%		$	14,505			$	17,394			$	(2,889	)			(17	)%
Service			3,060				4,191				(1,131	)			(27	)%			10,500				12,366				(1,866	)			(15	)%
Total		$	7,627			$	9,443			$	(1,816	)			(19	)%		$	25,005			$	29,760			$	(4,755	)			(16	)%
Revenue (as % of total revenue):
Subscription			60	%			56	%											58	%			58	%
Service			40	%			44	%											42	%			42	%
Total			100	%			100	%											100	%			100	%

 

Subscription

 

Subscription revenue consists primarily of revenue earned from subscription fees for access to our SaaS platform and products and, to a lesser extent, licensing fees for our software products. The majority of subscription contracts are recurring, paid in advance and recognized over the term of the subscription, which is typically one to three years.

 

The $0.7 million decrease in subscription revenue for the three months ended September 30, 2025, compared to the corresponding three months ended September 30, 2024, primarily reflects a decrease of $0.8 million from the expiration of a commercial contract in April 2025. 

 

The $2.9 million decrease in subscription revenue for the nine months ended September 30, 2025, compared to the corresponding nine months ended September 30, 2024, primarily reflects a decrease of $3.5 million from the expiration of commercial contracts in June 2024 and April 2025, partially offset by higher commercial subscription revenue from new and existing commercial contracts. 

 

Service

 

Service revenue consists primarily of revenue earned from the performance of software development services and, to a lesser extent, professional services. The majority of software development contracts are structured as time and materials agreements. Revenue for services is generally recognized as the services are performed. Billing for services rendered generally occurs within one month after the services are provided. Service contracts can range from days to several years in length. Our contract with the Central Banks, which accounts for the majority of our service revenue, has a contract term through December 31, 2029. The contract is subject to work plans that are reviewed and agreed upon quarterly. The contract provides for predetermined billing rates, which are adjusted annually to account for cost of living variables, and provides for the reimbursement of third party costs incurred to support the work plans.

 

The $1.1 million decrease in service revenue for the three months ended September 30, 2025, compared to the corresponding three months ended September 30, 2024, primarily reflects $0.7 million of lower government service revenue from the Central Banks and $0.4 million of lower commercial service revenue from HolyGrail 2.0 recycling projects.

 

The $1.9 million decrease in service revenue for the nine months ended September 30, 2025, compared to the corresponding nine months ended September 30, 2024, primarily reflects $1.9 million of lower government service revenue from the Central Banks. 

 

Revenue by geography

 

		Three Months Ended September 30,								Dollar				Percent				Nine Months Ended September 30,								Dollar				Percent
		2025				2024				Increase/(Decrease)				Increase/(Decrease)				2025				2024				Increase/(Decrease)				Increase/(Decrease)
Revenue by geography:
Domestic		$	2,308			$	2,004			$	304				15	%		$	6,781			$	8,349			$	(1,568	)			(19	)%
International			5,319				7,439				(2,120	)			(28	)%			18,224				21,411				(3,187	)			(15	)%
Total		$	7,627			$	9,443			$	(1,816	)			(19	)%		$	25,005			$	29,760			$	(4,755	)			(16	)%
Revenue (as % of total revenue):
Domestic			30	%			21	%											27	%			28	%
International			70	%			79	%											73	%			72	%
Total			100	%			100	%											100	%			100	%

 

 

Domestic

 

The $0.3 million increase in domestic revenue for the three months ended September 30, 2025, compared to the corresponding three months ended September 30, 2024, primarily reflects higher commercial subscription revenue from new and existing commercial contracts with domestic customers.

 

The $1.6 million decrease in domestic revenue for the nine months ended September 30, 2025, compared to the corresponding nine months ended September 30, 2024, primarily reflects a decrease of $2.1 million from the expiration of a commercial subscription contract in June 2024 with a domestic customer, partially offset by higher subscription revenue from new and existing commercial contracts with domestic customers.

 

International

 

The $2.1 million decrease in international revenue for the three months ended September 30, 2025, compared to the corresponding three months ended September 30, 2024, primarily reflects a decrease of $0.8 million from the expiration of a commercial subscription contract in April 2025 with an international customer, $0.7 million of lower government service revenue from the Central Banks and $0.4 million of lower commercial service revenue from HolyGrail 2.0 recycling projects.

 

The $3.2 million decrease in international revenue for the nine months ended September 30, 2025, compared to the corresponding nine months ended September 30, 2024, primarily reflects $1.9 million of lower government service revenue from the Central Banks and a decrease of $1.4 million from the expiration of a commercial subscription contract in April 2025 with an international customer.

 

Revenue by market

 

		Three Months Ended September 30,								Dollar				Percent				Nine Months Ended September 30,								Dollar				Percent
		2025				2024				Increase/(Decrease)				Increase/(Decrease)				2025				2024				Increase/(Decrease)				Increase/(Decrease)
Commercial:
Subscription		$	4,267			$	4,952			$	(685	)			(14	)%		$	13,605			$	16,494			$	(2,889	)			(18	)%
Service			41				430				(389	)			(90	)%			876				864				12				1	%
Total Commercial		$	4,308			$	5,382			$	(1,074	)			(20	)%		$	14,481			$	17,358			$	(2,877	)			(17	)%
Government:
Subscription		$	300			$	300			$	—				—	%		$	900			$	900			$	—				—	%
Service			3,019				3,761				(742	)			(20	)%			9,624				11,502				(1,878	)			(16	)%
Total Government		$	3,319			$	4,061			$	(742	)			(18	)%		$	10,524			$	12,402			$	(1,878	)			(15	)%
Total		$	7,627			$	9,443			$	(1,816	)			(19	)%		$	25,005			$	29,760			$	(4,755	)			(16	)%
Revenue (as % of total revenue):
Commercial			56	%			57	%											58	%			58	%
Government			44	%			43	%											42	%			42	%
Total			100	%			100	%											100	%			100	%

 

Commercial

 

The $1.1 million decrease in commercial revenue for the three months ended September 30, 2025, compared to the corresponding three months ended September 30, 2024, primarily reflects a decrease of $0.8 million from the expiration of a commercial subscription contract in April 2025 and $0.4 million of lower commercial service revenue from HolyGrail 2.0 recycling projects.

 

The $2.9 million decrease in commercial revenue for the nine months ended September 30, 2025, compared to the corresponding nine months ended September 30, 2024, primarily reflects a decrease of $3.5 million from the expiration of commercial subscription contracts in June 2024 and April 2025, partially offset by higher commercial subscription revenue from new and existing commercial contracts.

 

Government

 

The $0.7 million decrease in government revenue for the three months ended September 30, 2025, compared to the corresponding three months ended September 30, 2024, reflects $0.7 million of lower government service revenue from the Central Banks.

 

The $1.9 million decrease in government revenue for the nine months ended September 30, 2025, compared to the corresponding nine months ended September 30, 2024, reflects $1.9 million of lower government service revenue from the Central Banks.

 

Annual Recurring Revenue (“ARR”)

 

		As of				As of				Dollar				Percent
		September 30,				September 30,				Increase				Increase
		2025				2024				(Decrease)				(Decrease)
ARR		$	15,813			$	18,674			$	(2,861	)			(15	)%

 

ARR decreased $2.9 million from September 30, 2024 to September 30, 2025, reflecting the expiration of a commercial contract in April 2025 that accounted for $3.5 million of ARR, partially offset by increases to ARR from new and existing commercial contracts. ARR will be negatively impacted by $3.1 million in the fourth quarter of fiscal 2025, reflecting the conclusion of a contract renegotiation with a domestic customer.

 

 

We provide an ARR performance metric to help investors better understand and assess the performance of our business because our mix of revenue generated from recurring sources has increased in recent years. ARR is calculated as the aggregation of annualized subscription fees from all of our commercial contracts as of the measurement date. ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue and is not intended to be combined with, or to replace, either of those items. ARR is not a forecast and the contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers.

 

Cost of revenue

 

Subscription. Cost of subscription revenue primarily includes:

 

•

internet cloud hosting costs and image search data fees to support our subscription products; and

 

•

amortization of capitalized patent costs and patent maintenance fees.

   

Service. Cost of service revenue primarily includes:

 

•

compensation, benefits, incentive compensation in the form of cash and stock-based compensation and related costs of our software developers, quality assurance personnel, professional services team 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 and software directly used by customers;

 

•

depreciation for equipment and software directly used by customers; and

 

•

travel costs that are billed to customers.

 

Amortization expense on acquired intangible assets includes:

 

•

amortization expense recognized on the developed technology intangible asset acquired in the EVRYTHNG acquisition.

 

Gross profit

 

		Three Months Ended September 30,								Dollar				Percent				Nine Months Ended September 30,								Dollar				Percent
		2025				2024				Increase/(Decrease)				Increase/(Decrease)				2025				2024				Increase/(Decrease)				Increase/(Decrease)
Gross Profit:
Subscription (1)		$	3,925			$	4,517			$	(592	)			(13	)%		$	12,404			$	15,189			$	(2,785	)			(18	)%
Service (1)			1,730				2,553				(823	)			(32	)%			6,380				7,228				(848	)			(12	)%
Amortization expense on acquired intangible assets			(1,209	)			(1,173	)			(36	)			(3	)%			(3,546	)			(3,445	)			(101	)			(3	)%
Total		$	4,446			$	5,897			$	(1,451	)			(25	)%		$	15,238			$	18,972			$	(3,734	)			(20	)%
Gross Profit Margin:
Subscription (1)			86	%			86	%											86	%			87	%
Service (1)			57	%			61	%											61	%			58	%
Total			58	%			62	%											61	%			64	%

---

(1)	Gross Profit and Gross Profit Margin for Subscription and Service excludes amortization expense on acquired intangible assets.

 

The $1.5 million decrease in total gross profit for the three months ended September 30, 2025, compared to the corresponding three months ended September 30, 2024, primarily reflects $1.8 million of lower revenue, partially offset by $0.3 million of lower cost of service revenue.

 

The $3.7 million decrease in total gross profit for the nine months ended September 30, 2025, compared to the corresponding nine months ended September 30, 2024, primarily reflects $4.8 million of lower revenue, partially offset by $1.0 million of lower cost of service revenue.

 

Subscription gross profit margin, excluding amortization expense on acquired intangible assets, for the three months ended September 30, 2025, compared to the corresponding three months ended September 30, 2024, was the same.

 

The decrease in subscription gross profit margin, excluding amortization expense on acquired intangible assets, for the nine months ended September 30, 2025, compared to the corresponding nine months ended September 30, 2024, primarily reflects lower subscription revenue, partially offset by lower cost of subscription revenue.

 

The decrease in service gross profit margin, excluding amortization expense on acquired intangible assets, for the three months ended September 30, 2025, compared to the corresponding three months ended September 30, 2024, primarily reflects a less favorable mix of service revenue.

 

The increase in service gross profit margin, excluding amortization expense on acquired intangible assets, for the nine months ended September 30, 2025, compared to the corresponding nine months ended September 30, 2024, primarily reflects a more favorable mix of service revenue.

 

 

Operating expenses

 

Sales and marketing

 

		Three Months Ended September 30,								Dollar				Percent				Nine Months Ended September 30,								Dollar				Percent
		2025				2024				Increase/(Decrease)				Increase/(Decrease)				2025				2024				Increase/(Decrease)				Increase/(Decrease)
Sales and marketing		$	2,852			$	5,637			$	(2,785	)			(49	)%		$	11,161			$	16,789			$	(5,628	)			(34	)%
Sales and marketing (as % of total revenue)			37	%			60	%											45	%			56	%

 

Sales and marketing expenses consist primarily of:

 

•

compensation, benefits, incentive compensation in the form of cash and stock-based compensation and related costs of our sales, marketing, product, professional services and customer support personnel;

 

•

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 contractor costs for sales and marketing and product initiatives; and

 

•

the allocation of facilities and information technology costs.

 

The $2.8 million decrease in sales and marketing expenses for the three months ended September 30, 2025, compared to the corresponding three months ended September 30, 2024, primarily reflects:

 

•

lower cash compensation costs of $2.5 million largely due to lower headcount; and

 

•

lower stock compensation costs of $0.1 million.

 

The $5.6 million decrease in sales and marketing expenses for the nine months ended September 30, 2025, compared to the corresponding nine months ended September 30, 2024, primarily reflects:

 

•

lower cash compensation costs of $5.4 million largely due to lower headcount;

 

•

lower stock compensation costs of $0.5 million;

 

•

lower other costs of $0.3 million;

 

•

lower allocation in for facilities and information technology costs of $0.3 million primarily due to lower allocable costs; and

 

•

lower professional services costs of $0.2 million; partially offset by

 

•

higher cash severance costs of $0.9 million incurred as a result of the reorganization.

 

Research, development and engineering

 

		Three Months Ended September 30,								Dollar				Percent				Nine Months Ended September 30,								Dollar				Percent
		2025				2024				Increase/(Decrease)				Increase/(Decrease)				2025				2024				Increase/(Decrease)				Increase/(Decrease)
Research, development and engineering		$	4,315			$	6,488			$	(2,173	)			(33	)%		$	16,485			$	19,873			$	(3,388	)			(17	)%
Research, development and engineering (as % of total revenue)			57	%			69	%											66	%			67	%

 

Research, development and engineering expenses consist primarily of:

 

•

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

 

•

payments to outside contractors for software development services;

 

•

the purchase of materials and services for platform and product development; and

 

•

the allocation of facilities and information technology costs.

 

 

The $2.2 million decrease in research, development and engineering expenses for the three months ended September 30, 2025, compared to the corresponding three months ended September 30, 2024, primarily reflects:

 

•

lower cash compensation costs of $2.6 million largely due to lower headcount; and

 

•

lower professional services costs of $0.2 million; partially offset by

 

•

higher stock compensation costs of $0.6 million; and

 

•

lower allocation out of operating expenses of $0.2 million primarily due to lower billable service hours.

 

The $3.4 million decrease in research, development and engineering expenses for the nine months ended September 30, 2025, compared to the corresponding nine months ended September 30, 2024, primarily reflects:

 

•

lower cash compensation costs of $5.3 million largely due to lower headcount;

 

•

lower professional service costs of $0.6 million; and

 

•

lower allocation in for facilities and information technology costs of $0.3 million primarily due to lower allocable costs; partially offset by

 

•

higher cash severance costs of $1.6 million incurred as a result of the reorganization;

 

•

higher stock compensation costs of $1.0 million; and

 

•

lower allocation out of operating expenses of $0.5 million primarily due to lower billable service hours.

 

General and administrative

 

		Three Months Ended September 30,								Dollar				Percent				Nine Months Ended September 30,								Dollar				Percent
		2025				2024				Increase/(Decrease)				Increase/(Decrease)				2025				2024				Increase/(Decrease)				Increase/(Decrease)
General and administrative		$	5,355			$	4,861			$	494				10	%		$	15,614			$	13,695			$	1,919				14	%
General and administrative (as % of total revenue)			70	%			51	%											62	%			46	%

 

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

 

General and administrative expenses consist primarily of:

 

•

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

 

•

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

 

•

costs associated with being a public company;

 

•

third party costs, including filing and governmental regulatory fees and outside legal fees and translation costs, related to the filing and maintenance of our intellectual property; and

 

•

the allocation of facilities and information technology costs.

 

 

•

higher stock compensation costs of $0.5 million;

 

•

higher other costs of $0.3 million; and

 

•

lower allocation out for facilities and information technology costs of $0.3 million primarily due to lower allocable costs; partially offset by

 

•

lower cash compensation costs of $0.7 million largely due to lower headcount.

 

 

The $1.9 million increase in general and administrative expenses for the nine months ended September 30, 2025, compared to the corresponding nine months ended September 30, 2024, primarily reflects:

 

•

higher professional services costs of $1.7 million;

 

•

higher cash severance costs of $0.7 million incurred as a result of the reorganization;

 

•

lower allocation out for facilities and information technology costs of $0.6 million primarily due to lower allocable costs;

 

•

higher other costs of $0.4 million; and

 

•

higher stock compensation costs of $0.3 million; partially offset by

 

•

lower cash compensation costs of $1.4 million largely due to lower headcount; and

 

•

lower software and hardware costs of $0.4 million.

 

Amortization expense on acquired intangible assets

 

		Three Months Ended September 30,								Dollar				Percent				Nine Months Ended September 30,								Dollar				Percent
		2025				2024				Increase/(Decrease)				Increase/(Decrease)				2025				2024				Increase/(Decrease)				Increase/(Decrease)
Amortization expense on acquired intangible assets		$	288			$	280			$	8				3	%		$	847			$	823			$	24				3	%
Amortization expense on acquired intangible assets (as % of total revenue)		4		%			3	%										3		%			3	%

 

Amortization expense on acquired intangible assets relates to amortization expense recognized on the customer relationships intangible asset acquired in the EVRYTHNG acquisition.

 

The insignificant changes in amortization expense on acquired intangible assets reflect the impact of changes in foreign currency exchange rates. 

 

Stock-based compensation

 

		Three Months Ended September 30,								Dollar				Percent				Nine Months Ended September 30,								Dollar				Percent
		2025				2024				Increase/(Decrease)				Increase/(Decrease)				2025				2024				Increase/(Decrease)				Increase/(Decrease)
Cost of revenue		$	336			$	154			$	182				118	%		$	726			$	563			$	163				29	%
Sales and marketing			577				688				(111	)			(16	)%			1,727				2,198				(471	)			(21	)%
Research, development and engineering			1,244				648				596				92	%			2,872				1,911				961				50	%
General and administrative			1,708				1,212				496				41	%			3,571				3,267				304				9	%
Total		$	3,865			$	2,702			$	1,163				43	%		$	8,896			$	7,939			$	957				12	%

 

The $1.2 million increase in stock-based compensation expense for the three months ended September 30, 2025, compared to the corresponding three months ended September 30, 2024, primarily reflects a larger number of employee stock grants and a higher estimate of future achievement of performance conditions on performance restricted stock unit awards.

 

The $1.0 million increase in stock-based compensation expense for the nine months ended September 30, 2025, compared to the corresponding nine months ended September 30, 2024, primarily reflects a larger number of employee stock grants and a higher estimate of future achievement of performance conditions on performance restricted stock unit awards.

 

We anticipate incurring an additional $15.5 million in stock-based compensation expense through September 30, 2029, for stock awards outstanding as of September 30, 2025. 

 

Other income, net

 

		Three Months Ended September 30,								Dollar				Percent				Nine Months Ended September 30,								Dollar				Percent
		2025				2024				Increase/(Decrease)				Increase/(Decrease)				2025				2024				Increase/(Decrease)				Increase/(Decrease)
Other income, net		$	217			$	617				(400	)			(65	)%		$	796			$	1,868				(1,072	)			(57	)%
Other income, net (as % of total revenue)			3	%			7	%											3	%			6	%

 

The $0.4 million decrease in other income, net for the three months ended September 30, 2025, compared to the corresponding three months ended September 30, 2024, primarily reflects lower interest income due to lower marketable securities balances and interest rates.

 

 

The $1.1 million decrease in other income, net for the nine months ended September 30, 2025, compared to the corresponding nine months ended September 30, 2024, primarily reflects lower interest income due to lower marketable securities balances and interest rates and a lower refundable tax credit.

 

Income Taxes 

 

The provision for income taxes reflects current taxes and deferred taxes. The effective tax rate for each of the nine months ended September 30, 2025 and 2024 was 0%. Our effective tax rate is significantly lower than our statutory tax rate because we have a valuation allowance recorded against our deferred tax assets. 

 

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”), which includes a broad range of tax reform provisions, was signed into law in the United States, which includes a new Internal Revenue Code ("IRC") Section 174A. Under Section 174A, commencing with tax years beginning after December 31, 2024, domestic research or experimental expenditures may be deducted in the current period rather than capitalized and amortized over multiple years, as previously required under IRC Section 174. As a result of this legislation, we intend to deduct our domestic Section 174A expenditures beginning in our 2025 taxable year. We do not expect the OBBBA to have a material impact on our effective tax rate, financial condition, or results of operations in 2025.

 

The valuation allowance against deferred tax assets as of September 30, 2025, was $112.8 million, an increase of $8.4 million from $104.4 million as of December 31, 2024.

 

We continually assess the applicability of a valuation allowance against our deferred tax assets. Based upon the positive and negative evidence available as of September 30, 2025, and largely due to the cumulative loss incurred by us over the last several years, which is considered a significant piece of negative evidence when assessing the realizability of deferred tax assets, a valuation allowance is recorded against our deferred tax assets. We will not record tax benefits on any future losses until it is determined that those tax benefits will be realized. Future reversals of the valuation allowance would result in a tax benefit in the period recognized.

 

Non-GAAP Financial Measures

 

The following discussion and analysis include both financial measures in accordance with U.S. GAAP (“GAAP”) as well as non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flows that excludes amounts that are not normally excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternatives to, GAAP financial measures. Non-GAAP financial measures may not be indicative of the historical operating results of the Company nor are they intended to be predictive of potential future results. Investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP. Our management uses and relies on Non-GAAP gross profit, Non-GAAP gross profit margin, Non-GAAP operating expenses, Non-GAAP net loss, and Non-GAAP loss per share (diluted), which are all non-GAAP financial measures. We believe that both management and shareholders benefit from referring to the following non-GAAP financial measures in planning, forecasting and analyzing future periods.

 

Our management uses these non-GAAP financial measures in evaluating its financial and operational decision making and as a means to evaluate period-to-period comparisons. Our management recognizes that the non-GAAP financial measures have inherent limitations because of the described excluded items.

 

We define Non-GAAP gross profit, Non-GAAP gross profit margin, Non-GAAP operating expenses, Non-GAAP net loss, and Non-GAAP loss per share (diluted) excluding the adjustments in the table below. These non-GAAP financial measures are an important measure of our operating performance because they allow management, investors and analysts to evaluate and assess our core operating results from period-to-period after removing non-cash and non-recurring activities that can affect comparability.

 

We have included a reconciliation of our financial measures calculated in accordance with GAAP to the most comparable non-GAAP financial measures. We believe that providing the non-GAAP financial measures, together with the reconciliation to GAAP, helps investors make comparisons between us and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definitions being used and to the reconciliation between such measures and the corresponding GAAP measures provided by each company under applicable SEC rules.

 

 

The following table presents a reconciliation of Non-GAAP gross profit, Non-GAAP gross profit margin, Non-GAAP operating expenses, Non-GAAP net loss, and Non-GAAP loss per share (diluted) for the three and nine months ended September 30, 2025 and 2024:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2025				2024				2025				2024
GAAP gross profit		$	4,446			$	5,897			$	15,238			$	18,972
Amortization of acquired intangible assets			1,209				1,173				3,546				3,445
Amortization and write-off of other intangible assets (1)			222				213				660				634
Stock-based compensation			336				154				726				563
Non-GAAP gross profit		$	6,213			$	7,437			$	20,170			$	23,614
Non-GAAP gross profit margin			81	%			79	%			81	%			79	%
GAAP operating expenses		$	12,810			$	17,266			$	44,107			$	51,180
Depreciation and write-off of property and equipment			(146	)			(179	)			(430	)			(570	)
Amortization of acquired intangible assets			(288	)			(280	)			(847	)			(823	)
Amortization and write-off of other intangible assets			(128	)			(77	)			(329	)			(164	)
Amortization of lease right of use assets under operating leases			(108	)			(90	)			(309	)			(263	)
Stock-based compensation			(3,529	)			(2,548	)			(8,170	)			(7,376	)
Non-GAAP operating expenses		$	8,611			$	14,092			$	34,022			$	41,984
GAAP net loss		$	(8,152	)		$	(10,754	)		$	(28,102	)		$	(30,362	)
Total adjustments to gross profit			1,767				1,540				4,932				4,642
Total adjustments to operating expenses			4,199				3,174				10,085				9,196
Non-GAAP net loss		$	(2,186	)		$	(6,040	)		$	(13,085	)		$	(16,524	)
GAAP loss per share (diluted)		$	(0.38	)		$	(0.50	)		$	(1.30	)		$	(1.43	)
Non-GAAP net loss		$	(2,186	)		$	(6,040	)		$	(13,085	)		$	(16,524	)
Non-GAAP loss per share (diluted)		$	(0.10	)		$	(0.28	)		$	(0.61	)		$	(0.78	)

 

---

(1)

In the second quarter of fiscal 2025, management updated its definition of Non-GAAP gross profit to adjust for the amortization of patent maintenance costs. The related amortization expense for the three and nine months ended September 30, 2025 and 2024 is now reflected in “amortization and write-off of other intangible assets” above to calculate Non-GAAP gross profit, Non-GAAP gross profit margin, Non-GAAP net loss and Non-GAAP loss per share (diluted).

 

Non-GAAP gross profit for the three months ended September 30, 2025, decreased by $1.2 million compared to the three months ended September 30, 2024. The decrease primarily reflects lower revenue, partially offset by lower cost of service revenue. 

 

Non-GAAP gross profit for the nine months ended September 30, 2025, decreased by $3.4 million compared to the nine months ended September 30, 2024. The decrease primarily reflects lower revenue, partially offset by lower cost of service revenue. 

 

Non-GAAP gross profit margin for the three months ended September 30, 2025, increased to 81% compared to 79% for the three months ended September 30, 2024. The increase primarily reflects a more favorable mix of service revenue when excluding non-cash costs and lower cost of subscription revenue, partially offset by lower subscription revenue.

 

Non-GAAP gross profit margin for the nine months ended September 30, 2025, increased to 81% compared to 79% for the nine months ended September 30, 2024. The increase primarily reflects a more favorable mix of service revenue when excluding non-cash costs and lower cost of subscription revenue, partially offset by lower subscription revenue.

 

Non-GAAP operating expenses for the three months ended September 30, 2025, decreased $5.5 million compared to the three months ended September 30, 2024. The decrease primarily reflects $5.4 million of lower cash compensation costs largely due to lower headcount and $0.3 million of lower software and hardware costs, partially offset by higher other costs of $0.3 million and a $0.3 million lower allocation out of operating expenses primarily due to lower billable service hours. 

 

 

Non-GAAP operating expenses for the nine months ended September 30, 2025, decreased $8.0 million compared to the nine months ended September 30, 2024. The decrease primarily reflects $8.1 million of lower cash compensation costs and $0.6 million of lower software and hardware costs, partially offset by higher professional service costs of $0.9 million. The $8.1 million of lower cash compensation costs primarily reflects $12.1 million of lower compensation costs largely due to lower headcount, partially offset by $3.2 million of higher cash severance costs incurred as a result of the reorganization and a $0.8 million lower allocation out of operating expenses primarily due to lower billable service hours. 

 

Liquidity and Capital Resources

 

		September 30,				December 31,
		2025				2024
Working capital		$	12,319			$	30,193
Current ratio (1)			2.3:1				4.3:1
Cash, cash equivalents and short-term marketable securities		$	12,562			$	28,730

---

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

 

The $16.2 million decrease in cash, cash equivalents and marketable securities at September 30, 2025, from December 31, 2024, resulted primarily from:

 

•

cash used in operations;

 

•

purchases of common stock related to tax withholding in connection with the vesting of restricted stock, restricted stock units, and performance restricted stock units; and

 

•

purchases of property and equipment and capitalized patent costs.

 

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 include commercial paper, federal agency notes, and U.S. treasuries. Our investment policy requires our portfolio to be invested to ensure that the greater of $3.0 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 $1.0 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 $15.0 million, whichever is lesser, to be invested in any one industry category (e.g., financial, energy, etc.) 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 that is deemed to be other-than-temporary is charged to earnings. 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 for the three and nine months ended September 30, 2025 and 2024.

 

Cash flows from operating activities

 

The components of cash flows used in operating activities were:

 

		Nine Months Ended September 30,								Dollar				Percent
		2025				2024				Increase/(Decrease)				Increase/(Decrease)
Net loss		$	(28,102	)		$	(30,362	)		$	(2,260	)			(7	)%
Non-cash items included in net loss			15,698				13,787				(1,911	)			(14	)%
Changes in operating assets and liabilities			(366	)			(5,762	)			(5,396	)			(94	)%
Net cash used in operating activities		$	(12,770	)		$	(22,337	)		$	(9,567	)			(43	)%

 

Cash used in operating activities for the nine months ended September 30, 2025, decreased by $9.6 million, compared to the corresponding nine months ended September 30, 2024, reflecting a $5.4 million improvement due to the favorable timing of changes in operating assets and liabilities, a $2.3 million lower net loss and $1.9 million of higher non-cash items included in net loss. The favorable timing primarily reflects the timing of customer receipts and vendor payments, lower incentive compensation paid in 2025 for fiscal 2024 than paid in 2024 for fiscal 2023, and the timing and amount of refundable tax credits. The increase in non-cash items included in net loss primarily reflects $1.0 million of higher stock compensation expense and $0.6 million of higher adjustments to our allowance for doubtful accounts.

 

We incurred cash severance costs of $3.2 million as a result of the reorganization we announced on February 26, 2025, of which $3.2 million was paid during the nine months ended September 30, 2025.

 

     Cash flows from investing activities

 

Cash flows from investing activities for the nine months ended September 30, 2025, increased by $14.9 million, compared to the corresponding nine months ended September 30, 2024, primarily reflecting $16.9 million of lower purchases of marketable securities, partially offset by $1.6 million of lower proceeds from maturities of marketable securities and $0.3 million of higher purchases of property and equipment.

 

     Cash flows from financing activities

 

Cash flows from financing activities for the nine months ended September 30, 2025, decreased by $31.8 million, compared to the corresponding nine months ended September 30, 2024, primarily reflecting the $32.2 million of net cash proceeds raised from our registered direct stock offering in February 2024, partially offset by $0.4 million of lower purchases of common stock. 

 

  

Future Cash Expectations

 

We believe that our current cash, cash equivalents, and marketable securities balances will satisfy our projected working capital and capital expenditure requirements for at least the next 12 months.

 

Our commercial subscription revenue in fiscal 2025 has been negatively impacted by the expiration of a commercial contract that ended in April 2025 with an international customer. The contract contributed $0.8 million and $2.5 million of subscription revenue during the three and nine months ended September 30, 2024, compared to $0.0 million and $1.1 million of subscription revenue during the three and nine months ended September 30, 2025. Our commercial subscription revenue in fiscal 2025 has also been negatively impacted by the expiration of a commercial contract that ended in June 2024 with a domestic customer. The contract contributed $0.0 million and $2.1 million of subscription revenue during the three and nine months ended September 30, 2024, compared to $0.0 million of subscription revenue for both the three and nine months ended September 30, 2025. Our commercial subscription revenue in the fourth quarter of fiscal 2025 will also be impacted by the conclusion of a contract renegotiation with a domestic customer that will negatively impact future revenue by $3.1 million on an annualized basis.

 

Our government service revenue in fiscal 2025 has been negatively impacted by a smaller approved budget by the Central Banks for program work in 2025. We expect government service revenue in fiscal 2025 to be $1.7 million to $1.8 million lower than in fiscal 2024.

 

Our expenses in fiscal 2025 will be significantly lower than fiscal 2024 due to the reorganization we announced on February 26, 2025, which reduced our cash expenses by approximately $16.5 million on an annualized basis. We have also identified approximately $5.5 million of other annualized cash cost savings that have now been implemented but not yet fully realized in the interim operating results for the period ended September 30, 2025.

 

Registered Direct Offering

 

On February 24, 2024, we entered into purchase agreements with certain investors providing for the issuance and sale by us of 929 thousand shares of our common stock in a registered direct stock offering. The common shares were offered at a price of $35.00 per share, and the gross cash proceeds to us were $32.5 million. We incurred $0.3 million of legal costs related to the offering. The closing of the registered direct offering occurred on February 27, 2024.

 

Employee Stock Purchase Plan

 

On February 25, 2025, the Company’s Board of Directors adopted the 2025 Employee Stock Purchase Plan (“ESPP”), which was approved by the Company's shareholders at its annual meeting of shareholders on May 7, 2025. The Company reserved a total of 250 thousand shares and as of September 30, 2025, there were 250 thousand shares authorized and available for future issuance under the ESPP. Subject to any plan limitations, the ESPP allows eligible employees to contribute, normally through payroll deductions, up to 15% of their salary for the purchase of the Company’s common stock at a discounted price per share. The Company’s current offering period began on June 16, 2025, with the first purchase period ending on December 15, 2025. The stock-based compensation expense and payroll withholding for the ESPP during the three and nine months ended September 30, 2025 were not material. 

 

Incentive Plan Amendment

 

On May 7, 2025, the Company’s shareholders approved an amendment to the Digimarc Corporation 2018 Stock Incentive Plan (as amended, the “2018 Plan”) to, among other things, increase the number of shares authorized for issuance by 950 thousand shares. 

 

Shelf Registration

 

On June 23, 2023, we filed a new shelf registration statement on Form S-3 that included $34.6 million of unsold securities from our prior shelf registration statement filed on June 5, 2020. The new shelf registration statement became effective on July 19, 2023, and expires on July 19, 2026. Under the new shelf registration statement, we may sell securities in one or more offerings up to $100.0 million. As of September 30, 2025, $67.5 million remained available under the new shelf registration statement.

 

We may sell shares under the shelf registration and/or use similar or other financing means to raise working capital in the future, if necessary, to support continued investment in our growth 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. These factors may inhibit our near-term ability to obtain financing.

 

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, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933. Words such as “may,” “might,” “plan,” “should,” “could,” “expect,” “anticipate,” “intend,” “believe,” “project,” “forecast,” “estimate,” “continue,” and 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. We believe that the following factors, among others (including those described in Item 1A. “Risk Factors” of our 2024 Annual Report), 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. Forward-looking statements include but are not limited to statements relating to:

 

•

trends and sources of future revenue;

 

•

anticipated revenue to be generated from current contracts;

 

•

anticipated expenses, costs, margins, provision for income taxes and investment activities;

 

•

our expectations regarding expense reductions resulting from our recent reorganization and implementation of other annualized cash cost savings;

 

•

our assumptions and expectations related to stock awards, including future stock-based compensation expense;

 

 

•

our belief that we have one of the world’s most extensive patent portfolios in digital watermarking and related fields;

 

•

our beliefs regarding our critical accounting policies;

 

•

business opportunities that could require that we seek additional financing and our ability to do so;

 

•

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 or financing;

 

•

our expectations regarding our ability to meet future financial obligations as they become due within the coming fiscal year;

 

•

our use of cash, cash equivalents and marketable securities in upcoming quarters and the possibility that our deposits of cash and cash equivalents with major banks and financial institutions may exceed insured limits;

 

•

protection, development and monetization of our intellectual property portfolio;

 

•

our expectations regarding the impact of the OBBBA on our tax rate; and

 

•

our beliefs related to legal proceedings and claims arising in the ordinary course of business.

 

We believe that the risk factors specified above and the risk factors contained in 2024 Part I, Item 1A. “Risk Factors” of our 2024 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

 

Not applicable.

 

Item 4.         Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We conducted an evaluation (pursuant to Rule 13a-15(b) of 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 our 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 by us in reports that we file or submit 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 our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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

 

Changes in Controls

 

There were no changes 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 September 30, 2025, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

   

 

PART II. OTHER INFORMATION.

 

Item 1.         Legal Proceedings.

 

On May 8, 2025, a class action lawsuit captioned Ullom v. Digimarc Corp., et al., No: 3:25-cv-00779-JR (the “Ullom Action”) was filed against the Company in the United States District Court for the District of Oregon. The complaint purports to assert claims against the Company and its Chief Executive Officer and Chief Financial Officer pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, on behalf of a putative class of investors who purchased or otherwise acquired the Company’s shares between May 2, 2024 and February 26, 2025 (the “class period”). The Ullom Action seeks to recover damages allegedly caused by purported misstatements and omissions regarding the renewal status of a commercial contract, claiming that these alleged misstatements and omissions artificially inflated the price paid for our common stock during the class period.

 

Subsequently, four derivative lawsuits were filed nominally on the Company’s behalf, including three in the United States District Court for the District of Oregon on August 29, 2025 (as amended September 2, 2025) (Franchi v. McCormack et al., No. 3:25-cv-01543-AN), October 7, 2025 (Chadwick v. McCormack et al., No. 3:25-cv-01838-JR), October 14, 2025 (Jensen v. McCormack et al., No. 3:25-cv-01891-SB), and one in the Circuit Court of the State of Oregon for the County of Multnomah on October 23, 2025 (Johnson v. McCormack et al., No. 25-cv-56998), which are based on the same alleged facts and circumstances as the above-referenced securities class action and are against the Company’s Chief Executive Officer, Chief Financial Officer and directors. The derivative actions collectively assert claims pursuant to Sections 10(b), 14(a), and 20(a) of the Exchange Act, as well as for breaches of fiduciary duties, aiding and abetting breaches of fiduciary duties, unjust enrichment, and waste of corporate assets.  Each of the four derivative lawsuits seeks to recover damages on the Company’s behalf and alleges that a legally required pre-suit demand on the Board of Directors would be futile and should be excused.

 

On November 4, 2025, the Chadwick, Jensen and Franchi actions were consolidated and stayed pending resolution of the Company’s anticipated motion to dismiss in the Ullom Action.

 

These cases are at an early stage.  The Company believes it has defenses to the claims and is responding accordingly. See Note 17 – Commitments and Contingencies to the consolidated financial statements of this Form 10-Q for information on our legal proceedings. 

 

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: “Risk Factors” of our 2024 Annual Report. The risks and uncertainties described in our 2024 Annual Report are those risks of which we are aware and that we consider to be material to our business. If any of those risks and uncertainties develop 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. In addition to the other information set forth in this Quarterly Report on Form 10-Q and in Part I, Item 1A: “Risk Factors” of our 2024 Annual Report, you should carefully consider the additional risk factor below.

 

Actions of activist shareholders and securities litigation can be costly and time-consuming, divert management’s attention and resources, and continue to have an adverse effect on our business.

 

While we value open dialogue and input from our shareholders, activist shareholders have in the past and could in the future take actions that could be costly and time-consuming for us, disrupt our operations, and divert the attention of our board of directors, management, and employees. Such actions include public proposals and requests for potential nominations of candidates for election to our board of directors, requests to pursue a strategic combination or other transaction, or other special requests. As a result, we have retained, and may in the future retain, additional services of various professionals to advise us in these matters, including legal, financial and communications advisers, the costs of which have negatively impacted our quarterly financial results, and may negatively impact our financial results in the future. In addition, perceived uncertainties as to our future direction, strategy, or leadership created as a consequence of activist shareholder initiatives can result in the loss of potential business opportunities, harm our ability to attract new or retain existing investors, customers, directors, employees or other partners, and cause our stock price to experience periods of volatility or otherwise be adversely affected. We are the subject of securities litigation, and volatility in our stock price may in the future cause us to become the target of additional securities litigation, which could result in substantial costs and divert management’s attention and the attention and resources of our board of directors from our business.

 

 

Item 2.         Unregistered Sales of Equity Securities and Use of Proceeds.

 

(c) Purchases of Equity Securities by the Issuer and Affiliated Purchases

 

We repurchase shares of common stock in satisfaction of required withholding of income tax liability in connection with the vesting of restricted stock, restricted stock units and performance restricted stock units.

 

The following table sets forth information regarding purchases of our equity securities during the three months ended September 30, 2025:

 

														(d)
										(c)				Approximate
										Total number				dollar value
										of shares				of shares that
		(a)				(b)				purchased as				may yet be
		Total number				Average price				part of publicly				purchased
		of shares				paid per				announced plans				under the plans
Period		purchased (1)				share (1)				or programs				or programs
Month 1
July 1, 2025 to July 31, 2025			—			$	—				—			$	—
Month 2
August 1, 2025 to August 31, 2025			47,548			$	8.81				—			$	—
Month 3
September 1, 2025 to September 30, 2025			—			$	—				—			$	—
Total			47,548			$	8.81				—			$	—

---

(1)	Shares of common stock withheld (purchased) by us in satisfaction of required withholding of income tax liability upon vesting of restricted stock, restricted stock units and performance restricted stock units.

 

Item 5.               Other Information

 

None of our officers or directors adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as defined in Item 408 of Regulation S-K, during the three months ended  September 30, 2025.

 

   

Item 6.         Exhibits.

 

Exhibit Number		Exhibit Description
10.1		Digimarc Corporation 2018 Incentive Plan, as amended
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		Inline XBRL Instance Document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

  

  

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: November 13, 2025		DIGIMARC CORPORATION
		By:	/s/ CHARLES BECK
			CHARLES BECK
			Chief Financial Officer
			(Duly Authorized Officer and Principal Financial and Accounting Officer)