THE BARCODE OF EVERYTHING™
Visit digimarc.com/app to download the free Digimarc Discover®
app and scan the front cover with your smartphone to experience
The Barcode of Everything™.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
☐☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
OR
For the transition period from
to
Commission File Number 001-34108
DIGIMARC CORPORATION
(Exact name of registrant as specified in its charter)
Oregon
(State or other jurisdiction of
incorporation or organization)
26-2828185
(I.R.S. Employer
Identificff ation No.)
9405 SW Gemini Drive, Beaverton, Oregon 97008
(Address of principal executive officff es) (Zip Code)
(503) 469-4800
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.001 Par Value Per Share
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to fileff
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
ation statements incorporated by reference in Part III of this Form
contained, to the best of registrants knowledge, in definitive proxy or informff
10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated fileff
r, or a smaller
reporting company. See the definit
Exchange Act.
ff
ions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Large accelerated filer
☐
Non-accelerated filer
☐ (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
☒
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of common stock, par value $0.001 per share, held by non-affiliates of the registrant, based on the closing
price of our common stock on the Nasdaq Global Market on the last business day of the registrants most recently completed fiscal second quarter
(June 30, 2016), was approximately $278 million. Shares of common stock beneficially held by each officer and director have been excluded
from this computation because these persons may be deemed to be affiff liates. This determination of affiliat
determination for any other purposes.
rr
yrr 17, 2017, 10,689,383 shares of the registrants common stock were outstanding.
e status is not necessarily a conclusive
As of Februar
rr
ff
Portions of the registrants proxy statement pursuant to Regulation 14A (the Proxy Statement) for its 2017 annual meeting of
DOCUMENTS INCORPORATED BY REFERENCE
shareholders are incorpor
to file the Proxy Statement not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
nce into Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K. The registrant intends
ated by refereff
rr
Table of Contents
PART I
Item 1.
Business.......................................................................................................................................
Item 1A.
Risk Factors.................................................................................................................................
Item 1B.
Unresolved Staff Comments .......................................................................................................
Item 2.
Item 3.
Item 4.
PART II
Properties.....................................................................................................................................
Legal Proceedings .......................................................................................................................
Mine Safety Disclosures..............................................................................................................
Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities ................................................................................................................
Item 6.
Item 7.
Selected Financial Data ...............................................................................................................
Managements Discussion and Analysis of Financial Condition and Results of Operations ......
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.....................................................
Item 8.
Item 9.
Financial Statements and Supple
uu
mentary Data ...........................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......
Item 9A.
Controls and Procedures..............................................................................................................
Item 9B.
Other Inforff mation........................................................................................................................
PART III
Item 10.
Directors, Executive Officers
ff
and Corporate Governance ..........................................................
Item 11.
Executive Compensation.............................................................................................................
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters....................................................................................................................................
Item 13.
Certain Relationships and Related Transactions, and Director Independence ............................
Item 14.
Principal Accountant Fees and Services......................................................................................
Item 15.
Exhibits and Financial Statement Schedules ...............................................................................
1
6
18
18
18
18
19
22
23
44
44
44
45
46
47
47
47
47
47
48
SIGNATURES ..................................................................................................................................................
EXHIBIT INDEX..............................................................................................................................................
49
E-1
PART I
Unless the context otherwirr
seii
requires, refee rences in this Annual Report on Form 10-K to Di gii marc, we,
our and us refee r to Digii marc Corporation.
All dollar amounts are in thousands except per share amountstt or unless otherwir
se noted.dd Percentages within
the following tables maya not foot due to rounding.
Digii marc, Digii marc Discii over and Guardian are regie stii ered trademarksrr
tt
and trade names owned by other
includes trademarksrr
of Digii marc Corporation. This Annual
parties, and all other
tt
such
and trade names mentioned in this Annual Report on Formrr 10-K are the property of their respective
Report on Form 10-K alsoll
trademarksrr
owners.rr
ITEM 1: BUSINESS
The following discussion of Digimarcs business contains forwarr
dd
rd-look
or the future financial perfor rmance of Digimi
these forward-ldd ooking statements. Please see the discii ussion regae
Annual Report on Form 10-K in Item 7, Managements Discussion and Analysis ofo Financial Condition and Results
of Operations, under the capta ion F orFF warr
arc. Our actual results couldl differff materially from those anticipate
rding forward-ldd ooking statementstt
rd-Ldd ooking Statements.tt
i
includeddd
in this
ing statements relating to futurtt e events
d in
The following discii ussion of our business shouldll be read in conjunction with our consolidatdd ed financial
statementstt and the related notes and other
Formrr 10-K.KK
tt
financial infon rmation appepp aring elsell where in this Annual Report on
Overview
Digimarc Corporation, an Oregon corporation founded in 2008, enables governments and enterprises around
the world to give digital identities to media and objects that compumm ters can sense and recognize, and to which they
can react. We have developed the Digimarc Discover®, Digimarc Barcode and Intuitive Computing Platform that are
designed to optimize the identification of all consumer brand imprmm essions, wherever and whenever they may appear,
facilitating modern mobile-centric shopping. The platform includes means to embedm
Digimarc Barcodes, invisible
and inaudible barcode-like information that is recognizable by smartphones, tablets, industrial scanners, and other
compumm ter interfaces
Barcodes have many applications, including facilitating remarkably faster scanning of products at retail checkout as
well as imprmm oved engagement with smartphone-equipped consumers. The Digimarc Barcode is robust yet
imperce
mm
identification of media without visible computer codes like traditional barcodes.
ptible by people in ordinary use, allowing for reliable, effiff cient, economical, globally scalable, automatic
into virtually all forms of media content, including consumer producd t packaging. Digimarc
ff
Our media identification and discovery innovations enable our business partners to create numerous
applications across a wide range of media content, including solutions that:
Impromm ve the speed of retail checkout;
Provide simple and intuitive mobile customer engagement experiences in stores;
Quickly and reliably identify and effecti
images, e-publu ications, documents and other printed materials, especially in light of non-linear
distribution over the Internet;
vely manage music, movies, television programming, digital
ff
Deter counterfeiting of money, media and goods, and piracy of e-publu ications, movies and music;
Support
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new digital media distribution models and methods to monetize media content;
Leverage the power of ubiquitous computing to instantly link consumers to a wealth of information
and/or interactive experiences related to the media and objeb cts they encounter each day;
Provide consumers with more choice and access to media content when, where and how they want it;
1
Enhance imagery and video by associating metadata or authenticating media content for government and
commercial uses; and
Better secure identity documents to enhance national security and combat identity theftff and fraud.
Our Intuitive Computing Platform has a proprietary foundation in signal processing innovation known as
digital watermarking, which allows impem rceptible digital information to be embem dded in all forms of digitally
designed, produced or distributed media content and many physical objeb cts, including photographs, movies, music,
television, personal identification documents, financial instrut ments, industrial parts and product packages. We referff
to the embem dded information as the Digimarc Barcode. This digital information can be detected and read by a wide
range of computers, smartphones, tablets and other digital devices.
Our inventions allow our business partners and customers to provide persistent digital identities for virtually
any media content that is digitally processed at some point during its lifecycle. Our technology can be applied to
printed materials, video, audio, and images to suppl
y a wide range of consumer engagement, media management
and security solutions across multiple consumer and government industry sectors. Over the years our enabling
software and business processes, and associated intellectual property portfolio have grown to encompass many
related technologies.
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We provide our solutions directly and through our business partners. Our inventions provide a powerfulff
element of document security, giving rise to a long-term relationship with a consortium of central banks (the
Central Banks), and many leading companies in the inforff mation technology industry. We and our business
ly propagated the use of our technology in music, movies, television broadcasts, digital
partners have successfulff
images, e-publu ications and printed materials. Digimarc Barcodes have been used in these applications to improvmm
e
media rights and asset management, reduce piracy and counterfeiting losses, improm ve marketing programs, permit
more effiff cient and effecti
commercial experiences.
ve distribution of valuable media content and enhance consumer entertainment and
ff
Digimarc Barcodes can be used to enhance all forms of media and are impemm rceptible to human senses, but
quickly detected by computers, networks or other digital devices like smartphones and tablets. Unlike traditional
barcodes and tags, our solution does not require publu ishers to give up valuable visual space in magazines and
newspapea
impercept
mm
delivers a range of rich media experiences to its readers on their smartphones or tabla ets across multiple media
formats, including print, audio, video and packaging. Unique to the Digimarc Discover platforff m is its seamless
multi-modal use of various content identification technologies as needed, including Digimarc Barcode when present.
rs; nor does it impamm ct the overall layout or aesthetics of the publu ication for readers. Digimarc Barcodes are
better. Our Digimarc Discover platform
ible in normal use and do all that visible barcodes do, but performff
Banknote counterfeit deterrence was the first commercially successful large scale use of our technologies.
Innovations based on our existing digital watermarking technology and experience have been leveraged to create
new products to deter counterfeiting and tampering of driver licenses and other government-issued secure
credentials. In parallel, our business partners, under patent or technology licenses from us, are delivering digital
watermarking solutions to track and monitor the distribution of music, images, television and movies to consumers.
In November of 2007, we announced a relationship with The Nielsen Company (US) LLC (Nielsen) to
license our patents in suppo
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rt of Nielsens industry leading television audience measurement solutions.
In October 2010, we entered into a patent licensing arrangement with IV Digital Multimedia Inventions, LLC,
a Delaware limited liability company affilff iated with Intellectual Ventures (IV), pursuant to which we granted an
exclusive license to sublu icense, subju ect to pre-existing encumbrm ances and a grant-back license, an aggregate of
approximately 900 of the 1,200 patents and applications held by us at the time the agreement was entered into, as
noted below in the section titled Technology and Intellectual Property. The number of patents licensed to IV is
now approximately 550. Through ongoing development, our portfolff
patents and applications.
io not licensed to IV has grown to over 550
In December 2012, we entered into a renewal and extension through 2024 of the Counterfeiff
System Development and License Agreement with the Central Banks, with a 5-year extension option.
t Deterrence
2
In January 2014, we introduced Digimarc Barcodes for use in consumer product packaging. These Digimarc
Barcodes can contain the same information found in traditional universal product codes (UPC). The UPC
information is invisibly repeated multiple times over the entire package surface.
global leader in automatic data capture and industrial automation markets and producer of barcode readers, in
introducing the Digimarc Barcode to the consumer producdd t packaging market. The first retail scanner enabled was
Datalogics MagellanTM 9800i multi-plane imaging scanner. Since then, additional scanner vendors and other
channel partners have announced support for the Digimarc Barcode platforff m. Digimarc Barcodes can also connect
mobile-enabled consumers directly from packaging to engaging mobile experiences such as additional product
, recommendations, reviews, social networks and more.
information, special offersff
ff We partnered with Datalogic, a
Financial Inforff mation About Geographic Areas
Financial information about geographa
ic areas is included in Note 3 of our Notes to Consolidated Financial
Statements.
Customers and Business Partners
Our revenue is generated through commercial and government applications of our technology. We derive our
revenue primarily from development services, subscriptions for products and services, and licensing of our
technology and patents. During 2016, we generated the majoa rity of our revenuen
long-term contract with the Central Banks, subsu criptions to our anti-piracy and copyriyy ght protection services, and
royalties from licensees.
from development services under a
In 2016, revenuen
from government contracts accounted for 63% of our total revenue. Central Banks accounted
for substantially all revenue generated under our government contracts. Our government contracts typiyy cally span one
or more base years and multiple option periods. Government customers generally have the right to not exercise
option periods. As part of our work with government customers, we must comply with and are affeff cted by laws and
regulations relating to the award, administration and perforff mance of government contracts. Government contract
laws and regulations affeff ct how we do business with our government customers and, in some instances, impomm se
added costs on our business.
Information about customers that accounted for 10% or more of revenue in the last three years is included in
Note 3 of our Notes to Consolidated Financial Statements.
Products and Services
ting of currency using personal computers and digital reprographics for the last 18 years. We
We provide media identification and management solutions to commercial entities and government customers
and license our technology and patented inventions to other solution providers. Our largest government customer is
the Central Banks, with whom we have been developing, deploying, suppor
digital counterfeiff
license primarily to commercial entities who use our technology and patented inventions in the media and
entertainment industry. Commercial customers use a range of solutions from our business partners and us to
identify, track, manage and protect content as it is distributed and consumeddd
either digitally or physicallyyy and to
enable new consumer applications to access networks and inforff mation from personal computers and mobile devices.
Many movie studios, record label
sionals and other customers rely on our technology
as a cost-effeff ctive means to:
ting and enhancing a system to deter
s, broadcasters, creative profesff
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a
deter piracy and illegal use of movies, music, e-publu ications and images;
protect entertainment content from copyrigh
yy
t infringement;
track and monitor entertainment content for rights usage and licensing compliance;
monitor advertisements to verify ad placement and measure return on investment;
enhance information access, search and provide marketing capabilities related to media content; and
enable authorized use of content by consumers.
3
Digimarc Barcodes are easily embem dded into all forms of media and are impemm rceptible to human senses, but
the overall layout or aesthetics of their media content. Our Digimarc Discover platform delivers a range of
quickly detected by computers, networks or other digital devices like smartphones. Unlike traditional barcodes and
tags, our solution does not require content owners to give up valuable space on their media content; nor does it
impactmm
rich media experiences to smartphones across multiple media including print, audio, video and packaging. Unique to
the Digimarc Discover platform is its ability to use various content identification technologies as needed, including
our patented technology.
Digimarc Barcodes contain the same information found in traditional UPC codes used on consumer goods
ff We partnered
packing. The UPC information is invisibly repeated multiple times over the entire package surface.
with Datalogic, a global leader in automatic data capture and industrial automation markets and producer of barcode
readers, in bringing the Digimarc Barcode to the market. The first retail scanner enabled was Datalogics
MagellanTM 9800i multi-plane imaging scanner. Since then additional scanner vendors and other channel partners
for the Digimarc Barcode platform. Digimarc Barcodes can also connect mobile-enabled
have announced support
consumers directly from packaging to engaging mobile experiences such as additional product information, special
offeff
rs, recommendations, reviews, social networks and more.
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The market for patent licensing has become more challenging in recent years. As a result, we have shiftedff
our
focus from direct monetization via enforcement and licensing to:
facilitating progress toward the realization of our vision to enrich everyday living via pervasive, intuitive
compumm ting;
encouraging large scale adoption of our technologies by industry leaders;
imprmm oving our financial perforff mance by enhancing our competitive differentiation;
increasing the scale and rate of growth of our products and services business; and
laying a foundation for continuing innovation.
Current patent licensees include, among others, AlpVision SA, IV, Kantar SAS, NexGuard Labs B.V.,
Nielsen, OverDrive, Inc., Signum Technologies, Teletrax B.V., Verance Corporation (Verance) and Verimatrix,
Inc.
Technology and Intellectual Property
We seek patent protection for our inventions to differen
ff
tiate our products and technologies, mitigate
infringement risks, and develop opportunities for licensing. Our broad patent portfolff
methods, applications, system architectures and processes.
io covers a wide range of
Many of our patents relate to various methods for embedm ding and decoding digital information in video, audio
and images, whether the content is rendered in analog or digital formats. The digital information is generally
embem dded by making subtu le modifications to the fundamental elements of the content itself,ff generally at a signal
processing level. The changes necessary to embedm
noticeable by people during normal use. Because the message is carried by the content itself,ff it is file-forff mat
independent. The embem dded digital information generally survives most normal content transforff mations, including
compression, edits, rotation, scaling, re-samplm ing, file-forff mat transforff mations, copying, scanning and printing.
this information are so subtle
that they are generally not
u
Our intellectual property contains many innovations in digital watermarking, content recognition (sometimes
inting), digital rights management and related fields. To protect our inventions, we have
referred to as fingerprr
implmm emented an extensive intellectuat
l 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 worlds most extensive patent portfolios in digital watermarking and related fields, with approximately
1,100 U.S. and foreign patents and pending patent applications as of December 31, 2016. We continue to develop
and broaden our portfolio in the fields of media identification and management technology and related applications
and systems. We devote significff ant resources to developing and protecting our inventions and continuously seek to
identify and evaluate potential licensees for our patents. The patents in our portfolff
io have a lifeff of approximately 20
years from the effeff ctive filing date, and up to 17 years after
the patent has been granted.
ff
4
For a discussion of activities and costs related to our research and development in the last three years, please
read Research, development and engineering under Part II, Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Markets
Our patented inventions are used in various media identification and management products and solutions
support
ing a variety of media objeb cts, from movies and music to banknotes, secure credentials and consumer
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packaged goods. Each media objeb ct enabled by our inventions creates the potential for several applications, such as:
counterfeiting and piracy deterrence;
online e-publu ication piracy protection;
content identification and media management;
authentication and monitoring;
retail point of sale transaction processing;
linking to networks and providing access to inforff mation; and
enhanced services in support
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of mobile commerce.
We believe the market for most of these applications is in the early stages of development and that existing
solutions represent only a small portion of the potential market for our products, services and technology.
Competition
No single competitor or small number of competitors dominate our market. Our competitors vary depending
on the application of our producdd ts and services. We generally compete with non-digital watermarking technologies
for the security or marketing budgets of the producers and distributors of media objeb cts, documents, products and
advertising. These alternatives include, among other things, encryption-based security systems and technologies and
solutions based on fingerprinting, pattern recognition, and traditional barcodes. Our competitive position in digital
watermarking applications is strong because of our large, high-quality, sophisticated patent portfolio
subsu tantial and growing amount of intellectual property in related media security and management innovations that
span basic technologies, applications, system designs and business processes. Our intellectual property portfolff
allows us to use proprietary technologies that are well-regarded by our customers and partners, and not available to
our competitors without a license. We compete based on the variety of features we offeff
cost/benefit analysis against alternative technologies and solutions. We anticipate that our competitive position
within some markets may be affeff cted by factors such as reluctance to adopt new technologies and by changes in
government regulations.
r and a traditional
and our
io
ff
Backlok g
Based on projeo cted commitments we have for the periods under contract with our respective customers, we
anticipate our current contracts as of Decembem r 31, 2016 will generate a minimum of $31 million in revenue. We
expect approximately $17 million of this amount to be recognized as revenuen
during 2017.
Some factors that lead to increased backlog include:
contracts with new customers;
renewals with current customers;
add-on orders with customers; and
contracts with longer contractual periods replacing contracts with shorter contractual periods.
5
Some factors that lead to decreased backlog include:
recognition of revenuen
associated with backlog currently in place;
contracts with shorter contractual periods replacing contracts with longer contractual periods;
modifications to existing contracts;
contract minimum payments ending; and
expiration of contracts with existing customers.
The mix of these factors, among others, dictates whether our backlog increases or decreases for any given
period. Our backlog may not result in actual revenuen
contracts included in our backlog may be subju ect to modification, cancellation or suspension. We may not realize
revenue on certain contracts, orders or awards included in our backlog or the timing of any realization may change.
in any particular period, because the orders, awards and
Employees
At December 31, 2016, we had 180 full-time emplmm oyees, including 58 in sales, marketing, technical support
and customer support
finance, administration, information technology and legal.
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; 88 in research, development and engineering, including intellectuat
u
l property; and 34 in
Our emplomm yees are not covered by any collective bargaining agreement, and we have never experienced a
work stoppage. We believe that our relations with our emplmm oyees are good.
Available Information
We make available free of charge through our website at www.digimarc.com our Annual Reports on Form 10-
K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these and other reports filed
or furnished by us pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practicabla e after
ff we file these materials with the Securities and Exchange Commission.
ITEM 1A: RISK FACTORS
The following risk factors are those risks of which we are aware and that we consider to be material to our
business. If any of the following risks and uncertainties develops into actual events, our business, financial condition
or results of operations and cash flows could be materially adversely affeff cted. In that case, the trading price of our
common stock could decline. Additionally, we cannot be certain or give any assurance that any actions taken to
reduce known risks and uncertainties will be effecti
ve.
ff
RISKS RELATED TO OUR BUSINESS
u
(1) As a purveyor of disruptive
adopting and implem mentingtt
in campaigni
new and expanded components of our revenue engine that willii need to be tested and proven.
srr or other
reditii our technologyo ,yy our revenues will be defee rred and delayea d. In additioii n, there are
tt
technology, if our channel partnersrr and potent
ial
market participants
ersrr defer or delayll
successfully
,yy or if competitortt
customtt
tt
our technology
s to discii
ff
tt
tt
ll
engage
While the Companys legacy business remains strong, our primary engines of growthhh Digimarc Discover®
and Digimarc Barcodeare subjeb ct to the market forces and adoption curves common to other disrupr
technologies. The market is in early stages of development. The revenuen model anticipates annual subsu criptions are
the primary source of income. If adoption takes longer than anticipated, operating losses will continue.
tive
We expect competing technologies to compete vigorously in the marketplace,
and to fight to preserve their
market share. While we believe that our technology can do what theirs can doonly better, cheaper and fasterrr
the extent they succeed in defending their position, our ability to achieve profitff abla e operations will be impemm ded.
tt
to
6
With respect to our Digimarc Discover and Digimarc Barcode growthww and prospects, our three majoa r avenuen s
for revenue generation include direct sales, web sales, and channel partners. Our growing direct sales force is
relatively new, with an average tenurn e of less than two years with the Company. The redesign of our website to
facilitate web-based sales is evolving. Most of our channel partners are new. Thus, the engine of growth for
en. We are executing strategies intended to make each of these means of revenue
revenues is new and unprov
ff
generation effecti
ve. We face many obvious challenges.
n
(2)2 Our future growth willii depee nd to a material extent on the successful advocacyc of our technology
channel partnersrr to their members and customers, and implm emll
rs and provided by third partirr es.
propagatgg edtt
entation of our technologyo
by channel partnerr
by
ll
in solutions
Our business has long relied on the success of business partners. Our continuing success is largely dependent
uu
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Digimarc Discover and Digimarc
ting Digimarc Discover and Digimarc Barcode. We have entered
urer of over-the-counter pharmaceutical products for the store brand market, to improvm
ff
iency for retailers and provide consumers easier access to product information from enabled smart labels; and
on a new generation of business partners suppor
into agreements with numerous channel partners to propagate and support
Barcode, including brand deployment and pre-media service providers Southern Graphics Systems, LLC, Schawk,
Inc., and Diadeis, and consumer packaging solutions companies WestRock Company and Berry Plastics Group,uu
all who offerff Digimarc Barcode services to national and store brand owners and consumer products suppl
identifiers; Perrigo Company, the worlds largest
Inc., who can perforff m large scale serialization of uniqueqq
manufact
efficff
platforms which provide unprecedented consumer engagement via smartphones, such as Shazam Entertainment
Limited. Digimarc and GS1 US, the U.S. operation of the organization that maintains the global standards for
barcodes, announced a broad collabor
Barcode. GS1 US will educate, train and provide access to services to their 300,000 member businesses. Among
other things, Digimarc and GS1 US intend to improvmm
ff
certified,
collaboration with GS1 Germany.
accurate product information via Digimarc Barcodes. Digimarc has also entered into a similar
ation to help the industries served by GS1 to make effeff ctive use of Digimarc
e product identification for retailers and consumers with brand-
e point-of-sff ale
iers; HP,
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a
Inc.,
If our channel partners are not successfulff
in advocating and deploying our technology, we may not be able to
achieve and sustain profitff able operations. If other business partners who include our technology in their products or
otherwise license our intellectual property for use in their products cease to do so, or we fail to obtain other partners
who will incorporate, embem d, integrate or bundle our technology, or these partners are unsuccessful in their efforff
ts,
expanding deployment of our technology and increasing revenuen s will be adversely affect
ed. Consequently, our
ability to increase revenue could be adversely affeff cted and we may sufferff
addition, if our technology does not perforff m according to market expectations, our future sales would sufferff
customers seek and emplomm y alternative technologies.
other adverse effects to our business. In
as
ff
(3) If leadindd gn companies in the retail and consumer productstt
zeii
institutions downplay,a miniii mi
unable to achieve or sustaitt nii profitablell operations.
or rejee ct the use of our technology,
industriett
ll
ii
s or stantt
dard-settitt ng bodies or
deploymo
ent may be slowll
ed and we maya be
Many of our business endeavors, including the Digimarc Barcode, can be impeded
mm
or frusr
trated by larger,
more influential companies or by standard-setting bodies or institutt
value or use of our technology. A negative position by such compamm nies, bodies or institutions, could result in
obstacles for us that we would be incapable of overcoming and may block or impedmm e the adoption of our technology.
In addition, potential customers may delay or rejee ct initiatives that relate to deployment of our technology. Such a
development would make the achievement of our business objectives in this market difficff ult or impossmm
ions downpln aying, minimizing or rejecting the
ible.
7
(4) We are subject to riskii
and services to achieve and sustaintt
profitabi
le operatiott ns.
skk encountertt ed by companies developio ngii
and relying upon new technologi
ll
es,s productstt
Our business and prospects must be considered in light of the risks and uncertainties to which companies with
new and rapidly evolving technology, products and services are exposed. These risks include the following:
we may be unable to develop sources of new revenue or sustainable growth in revenue because our
current and anticipated technologies, products and services may be inadequate or may be unable to
attract or retain customers;
intense competition and rapid technological change could adversely affeff ct the markets acceptance of
our existing and new products and services;
we may be unable to develop and maintain new technologies upon which our existing and new products
and services are dependent which may cause our products and services to be less sustainable and
compemm titive or which could make it harder for us to expand our revenue and business; and
our licensees may not be able to successfulff
royalties paid to us.
ly enter new markets or grow their businesses, limiting
Some key technologies and solutions of our patent or technology licensees are in the development stage.
Consequently, products incorporating our technology and solutions are undergoing technological change and are in
the early stages of introduction in the marketplace. Delays in the adoption of these products or adverse compemm titive
developments may result in delays in the development of new revenue sources or the growth in our existing revenue
streams. We may be required to incur unanticipated expenditures if product changes or imprmm ovements are required.
Moreover, new industry standards might redefine the products that we or our licensees are able to sell, especially if
these products are only in the prototype stage of development. If product changes or imprmm ovements are required,
success in marketing these products by us or our licensees and achieving or sustaining profitff abia lity from these
products could be delayed or halted.
i
nt portion of our current and potentia
(5)5 A significa
contratt
changes. Such volatility and uncertainty mighi
tt
cts and developll ment of new markets that may involve unpredictable
tt
delaysa
tt
and other
unexpected
t limit our actual revenue in anyn given quarter or year.
l future revenue is subject to commercial and government
We derive a significant portion of our revenuen
from contracts tied to development schedules or development
of new markets, which could shiftff for months, quarters or years as the needs of our customers and the markets in
which they participate change. Government agencies and commercial customers also face budget pressures that
introduce added uncertainty. Any shift in development schedules, the markets in which we or our licensees
participate, or customer procurement processes, which are outside our control and may not be predictable, could
result in delays in bookings forecasted for any particular period, could affeff ct the predictability of our quarterly and
annual results, and might limit our actual revenuen
predictable revenuen
in any given quarter or year, resulting in reduced and less
and adversely affeff cting profitabff
ility.
We are expanding into new markets, which involve inherent risk and unpredictability. In recent years,
ff
ion of smartphones and increased consumer demands for product inforff mation, we
our vision for intuitive, pervasive computing. As we seek to expand outside our areas of historical expertise,
particularly with the proliferat
have investigated other technologies that may provide attractive future opportunities, for examplmm e, in the packaging
and publu ishing markets. These generally include technologies that leverage our strength in signal processing and
support
uu
we lack the history and insight that benefited us in the watermarking field. Although we have extensive experience
in the commercial application of digital watermarking, we are investing in but may not be as well-positioned in these
other disciplines. Accordingly, it may be difficff ult for us to replicate our watermarking success in other technologies
we might pursue.
8
(6) A smallll number of customtt
contract could materially disrii upt our business.
ersrr account for a substantiatt
l portion of our revenue,e and the loss of anyn large
Historically, we have derived a significff ant portion of our revenuen
from a limited numberm of customers. Five
customers represented approximately 73% of our revenue for the year ended December 31, 2016. Most of our
revenue comes from long-term contracts generally having terms of at least three to ten years, with some licenses for
the life of the associated patents, which could be up to 20 years from the effecti
ve date. The agreements with our
licensees generally provide for minimum and/or variable payment obligations. All payment obligations under our
license agreements with Nielsen and Verance ended in 2014. Some contracts we enter into contain termination for
convenience provisions. If we were to lose such a contract for any reason, or if revenue from variable payment
obligations do not replace revenue under the existing fixed payment obligations, our financial results could be
adversely affeff cted.
ff
We expect to continue to depend upon a small number of customers for a significff ant portion of our revenue
for the foreseeable future. The loss of,ff or decline in, orders or backlog from one or more majoa r customers could
reduce our revenue and have a material adverse effeff ct on our financial results.
(7) We were not profitable in 2014, 2015 or 2016 and may not be ablell
future, particularlyll
Sustained lack of prff
record valuatiott n alloll wance againsii
if we were to lose large contracts or fail in our new market developll ment initiatives.
ofitaff
could cause us to incur asset impaim rmii
ent charges for long-ligg ved assetstt and/or//
tott returnrr
to or sustaintt
profitability in the
red taxaa assets.
t our deferff
bilityii
We incurred net losses in 2014, 2015 and 2016 larga ely due to increased levels of investments in our business
to support
uu
from Verance and license fee payments from Nielsen in 2014.
product development and sales growth initiatives, concurrent with the completion of royalty payments
Returning to and maintaining profitabff
ility in the future will depend upon a variety of factors, including our
ability to maintain and obtain more significff ant partnerships like we have with the Central Banks and acquiring new
customers for Digimarc Discover, Digimarc Barcode and Guardian. Profitff abia lity will also depend on our effiff ciency
in executing our business strategy and capitalizing on new opportunities. Various adverse developments, including
the loss of large contracts or cost overruns on our existing contracts, could adversely affeff ct our revenue, margins and
profitabff
ility.
If we continuen
to incur operating losses, an impaimm rment to the carrying value of our long-lived assets,
ment of our long-lived assets when a triggering event occurs that would indicate that the carrying value may
including goodwill, acquired intangible assets, patent assets and property and equipment could result. We test for
impairmm
not be recoverable. Our methodology for assessing impaimm rment may require management to make judgments and
assumptions regarding future cash flows. Our projeo ctions of future cash flows are largely based on historical
experience, and these projections may or may not be achieved. Changes to these financial projeo ctions used in our
impaimm rment analysis could lead to an impaimm rment of all or a portion of our long-lived assets. Any such impaim rment
charge could adversely affeff ct our results of operations and our stock price. We evaluated our long-lived assets for
impairmm
ment. We cannot guarantee, however, that
our long-lived assets will not become impam ired in the future.
ment as of December 31, 2016 and concluded there was no impairmm
We record valuation allowances on our deferred
ff
tax assets if,ff based on available evidence, it is more-likely-
than-not that all or some portion of the assets will not be realized. The determination of whether our deferred tax
assets are realizable requires management to identify and weigh all available positive and negative evidence.
Management considers recent financial perforff mance, projected future taxable income, scheduled reversals of
deferred tax liabilities, tax planning strategies and other evidence in assessing the realizability of our deferred tax
assets. Adjud stments to our deferred tax assets could adversely affect
our results of operations and our stock price.
We recorded a $6.8 million non-cash income tax charge during 2014 to record a full valuation allowance against our
deferred tax assets largely due to the cumulative loss we had incurred over the previous three years, which is
considered a significant piece of negative evidence in assessing the realizability of deferred tax assets. As of
Decembem r 31, 2016 we determined a full valuation allowance was still appropriate given continued losses. We will
not record tax benefits on any future losses until its determined that those tax benefits will be realized.
ff
9
(8)8 We maya be adversely affeff cted by variabilityii
of contracted arrangements.
We periodically agree to modify the terms of contractual arrangements with our customers, partners and
licensees in response to changes in circumstances underlying the original contractuatt
that we will do so in the future. As a result of this practice, the terms of our contractual arrangements with our
customers, partners and licensees may vary over time and, depending on the particular modification, could have a
material adverse effeff ct on our financial position, results of operations or cash flows.
l arrangements, and it is likely
Some of our customers and licensees report royalties to us based on their revenuen
and their interpretation and
allocation of contracted royalty obligations. It is possible that we may not agree with the judgments of our customers
on such matters, and such disagreement may lead to potential disputes and reduced revenuen
could result in a distraction to our management and may not result in increased revenues to us but may nevertheless
result in friction between us and our customers, and potentially the loss of customers, which may ultimately be
harmful to our business.
to us. These disputes
(9)9 The market for our products is highlyll competitive,
compete withi us maya be more successfulff
.
and profitsii
tt
than us in gaininii
and alterll narr
tive technologio es or larger companies that
g market share, which wouldll decrease our revenue
The markets in which we compete for business are intensely compemm titive and rapidly evolving. We expect
competition to continue from both existing competitors and new market entrants. We face competition from other
compamm nies and from alternative technologies, including some of our customers and licensees. We also may face
compemm tition from unexpected sources.
Alternative technologies that may directly or indirectly compete with particular applications of our
watermarking technologies include:
Traditional anti-counterfeiff
(that compete for budgetary outlays) designed to deter counterfeiting, including optically sensitive ink,
magnetic threads and other materials used in the printing of currencies;
ting technologiesa numbem r of solutions used by many government agencies
Image recognitionnn one or several pre-specified or learner d objeb cts or objeb ct classes that can be
recognized, usually together with their two-dimensional positions in the image or three-dimensional
poses in the scene, such as Amazon Firefly or PTC Vuforia, which provides a stand-alone program
illustration of this function;
Radio frequency tagsembem dding a chip that emits a signal when in close proximity with a receiver,
used in some photo identification credentials, labels and tags;
Internet technologiesnumerous existing and potential Internet access and search methods are
competitive with Digimarc mobile systems and the searching capabilities of Guardian;
Digital fingerprr
or video track, that can be used to identifyff an image or track, or authenticate the image or track; and
ints and signaturesa metric, or metrics, compumm ted solely from a source image or audio
Barcodes or QR codesdata-carrying codes, typiyy cally visible in nature (but may be invisible if printed
in ultraviolet- or infrared-responsive inks).
In the competitive environments in which we operate, producdd t generation, development and marketing
processes relating to technology are uncertain and complex, and require accurate prediction of demand as well as
successful management of various risks inherent in technology development. In light of these uncertainties, it is
possible that our failure to successfulff
have a long-term negative effeff ct on our growth and results of operations.
ly accommodate future changes in technologies related to our technology could
New developments are expected to continue, and discoveries by others, including current and potential
compemm titors, possibly could render our services and products noncompetimm tive. Moreover, because of rapid
technological changes, we may be required to expend greater amounts of time and money than anticipated to
develop new products and services, which in turn may require greater revenuen
streams from those products and
services to cover developmental costs. Many of the companies that compete with us for some of our business, as
10
well as other companies with whom we may compete in the future, are larger and may have stronger brand
recognition and greater technical, financial, marketing and political resources than we do. These attributes could
enable these companies to have more success in the market than we have, either by providing better products or
better pricing than we can provide. We may be unable to compete successfulff
ly against current or future participants
in our market or against alternative technologies, and the competitive pressures we face could decrease our revenue
and profitff s in the future.
(10) An increase in our operations outsidedd of the U.S. subjects us to riskii
exposed in our domestictt operatrr iott ns.
skk additioii nal to those to which we are
We believe that revenuen
from sales of products and services to commercial, governmental and other customers
outside the U.S. could represent a growing percentage of our total revenuen
in the future. Digimarc Discover is not
bounded geographically, and we believe Digimarc Barcode will see global deployment. As such, certain contracts
will be made and perforff med, in whole or in part, outside of the U.S. Similarly, for Guardian, we perforff m certain
functions in various jurisdictions outside of the U.S. International operations are subju ect to a number of risks that
can adversely affect
our sales of products and services to customers outside of the U.S., or expose us to additional
expense or liabilities, including the following:
ff
difficulties and costs of staffiff ng, developing and managing foreign operations as a result of distance,
language and cultural diffeff rences;
the effecff
councils and labor unions in some jurisdictions;
t of laws governing emplmm oyee and contractor relationships, and the existence of workers
changes in foreign government regulations and security requirements;
export license requirements, tariffsff and taxes;
trade barriers;
difficulty in protecting intellectual property;
diffiff culty in collecting accounts receivable;
currency fluctuations;
longer payment cycles than those for customers in the U.S; and
political and economic instability.
We do not have an extensive operational infrastructure for international business. We generally depend on
local or international business partners and subcu ontractors for performance of subsu tantial portions of our business.
These factors may result in greater risk of perforff mance problems or of reduced profitff abia lity with respect to our
international programs in these markets. In addition, if foreign customers, in particular foreign government
authorities, terminate or delay the implmm ementation of our products and services, it may be difficuff
not be able, to recover our potential losses.
lt for us, or we may
(11) We depend on our managea ment and keye employees
hire or integr
ate these emplom yeo es,s we maya not be able to meet our commitmett
m
tt
nts.
for our future success. If we are not ablell
to retain,
Our success depends to a significff ant extent on the perforff mance and continued service of our management and
our intellectual property team. The loss of the services of any of these emplmm oyees could limit our growthww or
undermine customer relationships.
uu
Due to the high level of technical expertise that our industry requires, our ability to successfully develop,
our products, services, and intellectual property depends to a significant degree
market, sell, license and support
upon the continued contributions of our key personnel in engineering, sales, marketing, operations, legal and
licensing, many of whom would be difficff ult to replace. We believe our future success will depend in large part upon
our ability to retain our current key emplm oyees and our ability to attract, integrate and retain new personnel in the
future. It may not be practical for us to match the compensation some of our emplmm oyees could garner at other
11
ance or operating results. These circumstances may have a negative effeff ct on the
emplmm oyment. In addition, we may encounter difficff ulties in hiring and retaining emplmm oyees because of concerns
related to our financial performff
market price of our common stock, and emplmm oyees and prospective emplomm yees may factor in the uncertainties
relating to our stability and the value of any equity-based incentives in their decisions regarding emplmm oyment
opportunities and decide to leave our emplmm oy. Moreover, our business is based in large part on patented technology,
which is a unique and sophisticated signal processing technology. New emplm oyees require subsu tantial training,
involving significant resources and management attention. Competition for experienced personnel in our business
can be intense. If we do not succeed in attracting new, qualifieff d personnel or in integrating, retaining and motivating
our current personnel, our growth and ability to deliver producdd ts and services that our customers require may be
hampered. Although our emplmm oyees generally have executed agreements containing non-competition clauses, we do
not assure you that a court would enforff ce all of the terms of these clauses or the agreements generally. If these
clauses were not fully enforff ced, our emplomm yees could freely join our compemm titors. Although we generally attempt to
control access to and distribution of our proprietary inforff mation by our emplomm yees, we do not assure you that the
confidff ential nature of our proprietary information will be maintained in the course of such future emplmm oyment. Any
of these events could have a material adverse effecff
t on our financial and business prospects.
(12) We may acquire or invest in othett
managea ments attent
tt
operations and harm our operatingii
iott n, result in additioii nal dilutio
r companm
ii
ies or technologi
ll
n to our stockholdell
es in thett
results.
future, which couldll divert
rs, increase expexx nses, disrii upt our
We acquired Attributor Corporation (Attributor) in December 2012, and we may in the future acquire, or
rings, enhance our technical capabilities, expand our operations into new markets or otherwise offeff
invest in businesses, products or technologies that we believe could complement or expand our current product and
service offeff
growthww opportunities. The pursuit of potential acquisitions may divert the attention of management and cause us to
incur various expenses related to identifying, investigating and pursuing suitable acquisitions, whether or not they
are consummated.
r
There are inherent risks in integrating and managing acquisitions. We may not be able to assimilate or
integrate the acquired personnel, operations and technologies successfulff
business following an acquisition. We also may not achieve the anticipated benefitff s from an acquired business due
to a number of factors, including:
ly or effeff ctively manage the combined
unanticipated costs or liabilities associated with the acquisition;
incurrence of acquisition-related costs, which would be recognized as a current period expense;
inability to generate suffici
ff
ent revenue to offseff
t acquisition or investment costs;
the inability to maintain relationships with customers and partners of the acquired business;
the need to implmm ement additional controls, procedures and policies;
entry into geographic markets in which we have little or no prior experience, and challenges caused by
distance, language and cultural differences;
differences in foreign labor and emplmm oyment laws, including classification of emplmm oyees and
contractors;
disrupr
tion of our ongoing business;
the potential loss of key emplm oyees; and
use of subsu tantial portions of our available cash to consummate the acquisition.
Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could
adversely affeff ct our financial position. In addition, if an acquired business fails to meet our expectations, our
operating results, business and financial condition may sufferff
.
12
(13) (a) We may not be able to adequateltt yll secure patent or other protect
iott n for our technologio es.
tt
Our business depends in part on securing protection for our proprietary technology and successfully licensing
our technology to third parties. To protect our intellectual property portfolff
copyriyy ght, trademark and trade secret rights, confiden
regularly apply for patents to protect our intellectual property, there is no guarantee that we will secure patent
protection for any particular technology we develop.
io, we rely on a combination of patent,
tiality procedures and licensing arrangements. Although we
ff
Changes in the U.S. and foreign patent laws, or in the interpretation of existing laws, may adversely affeff ct our
ability to secure or enforce patents. For examplem , the U.S. Supreme Court issued a decision in 2014 limiting patent
eligibility of computer implmm emented inventions. The Leahy-Smith America Invents Act of 2011 (the America
Invents Act) also codifies several changes to the U.S. patent laws, including the creation of a post-grant inter partes
review process to challenge patents afteff
the U.S. Patent and Trademark Officff e or comparabla e government authorities in other jurisdictions to review and
reconsider the patentability of any of our inventions claimed in our issued patents. Any such proceeding may result
in one or more of our patent claims becoming limited, or being invalidated altogether. A limitation or invalidation of
our patent claims could adversely affect
r they have issued. The America Invents Act allows third parties to petition
our financial position and our operating results.
ff
Patents have finite lives, and our ability to continue to commercially exploit our patents is limited to the term
of the patents. Our earliest patents began expiring in July 2012. The size and strength of our portfolio depends on the
number of patents that have been granted, offsff et by the number of patents that expire, in any given year. We
continue to develop our patent portfolff
the extent that we have exploited our earlier patents.
io, but we cannot assure you that we will be able to exploit newer patents to
As part of our confidff entiality procedures, we generally enter into non-disclosure agreements with our
emplomm yees, directors, consultants and corporate partners, and attempt to control access to and distribution of our
information. Despite these procedures, third parties
technology, solutions, documentation and other proprietaryrr
could copy or otherwise obtain and make unauthorized use of our technology, solutions or other proprietary
information or independently develop similar technologies, solutions or information. The steps that we have taken to
prevent misappropriation of our solutions, technology or other proprietary inforff mation may not succeed.
We cannot assure you that the protection of our proprietary rights will be adequate or that our competitors will
not independently develop similar technologies, dupluu icate our services or design around any of our patents or other
intellectual property rights.
(b) We may not be successfulff
in enforn
cingii
our intellectual property righi
ts againsii
t thitt
rd parties.
Unlicensed copying and use of our intellectual property or infringement of our intellectual property rights may
result in the loss of revenue to us and cause us other harm. If we encounter a company that we believe is infringing
our intellectual property rights, we may try to negotiate a license arrangement with such party. If we try and are
unable to negotiate a license or secure the agreement of such alleged infringing party to cease its activities, we must
make decisions as to how best to enforce our intellectual property rights, which may result in additional costs.
The process of negotiating a license with a third party can be lengthy, and may take months or even years in
some circumstances. It is possible that third parties who we believe are infringing our intellectual property rights are
unwilling to license our intellectual property from us on terms we can accept, or at all.
If we cannot persuade a third party who we believe is infringing our technology to enter into a license with us,
we may be required to consider other alternar
tives to enforce our rights, including commencing litigation. The
decision to commence litigation over infringement of a patent is complex and may lead to several risks to us,
including the following, among others:
the time, significaff
nt expense and distraction to management of managing such litigation;
the uncertainty of litigation and its potential outcomes;
13
the possibility that in the course of such litigation, the defendant may challenge the validity of our
patents, which could result in a re-examination or post grant review of our patents and the possibility
that our patents may be limited in scope or invalidated altogether;
the potential that the defenff dant may successfully persuade a court that their technology or products do
not infringe our intellectual property rights;
the impamm ct of such litigation on other licensing relationships we have or seek to establish, including the
timing of renewing or entering into such relationships, as applicable, as well as the terms of such
relationships; and
adverse publu icity to us or harm to relationships we have with customers or others.
Also, enforff cement of patent protection throughout the world is generally established on a country-by-country
basis and we may not have as much success enforff cing our patents in foreign jurisdictions.
If we fail to protect our intellectual property rights adequately, if there are adverse changes in applicable laws,
or if we become involved in litigation relating to our intellectual property rights or the intellectual property rights of
others, our business could be seriously harmed. In such cases, the value ascribed to our intellectual property could
diminish, we may incur significff ant legal expenses that could harm our results of operations and our patents or other
intellectual property rights may be limited or invalidated. Any of the foregoing could have a negative effeff ct on the
value of our common stock.
(c) We maya be subject
b
to infringement claims and other
tt
i
litigat
iott n, which could adversely affect
ff
our business.
As more companies engage in business activities relating to digital watermarking, and develop corresponding
intellectual property rights, it is increasingly likely that claims may arise which assert that some of our products or
services infringe upon other parties intellectual property rights. These claims could subju ect us to costly litigation
and divert management resources. These claims may require us to pay significant damages, cease production of
infringing products, terminate our use of infringing technology or develop non-infringing technologies. In these
circumstances, continued use of our technology may require that we acquire licenses to the intellectual property that
is the subju ect of the alleged infringement, and we might not be able to obtain these licenses on commercially
reasonable terms or at all. Our use of protected technology may result in liability that threatens our continuing
operation.
Some of our contracts include indemnity and similar provisions regarding our non-infringement of third-party
intellectual property rights. As deployment of our technology increases, and more companies enter our markets, the
likelihood of a third party lawsuit resulting from these provisions increases. If an infringement arose in a context
governed by such a contract, we may have to refund to our customer amounts already paid to us or pay significant
damages, or we may be sued by the party whose intellectual property has allegedly been infringed upon.
(14)4 If our revenue modelsll and pricing struc
do not gain markerr
not be ablell
tt
to generate new revenue or sustaitt nii existintt g revenue.
tures relating to products and services that are under developmll
t acceptance, the products and services may fail to attract or retain customers and we maya
ent
Some of our business involves embem dding digital watermarks in traditional and digital media, including
consumer product packaging and related marketing materials, secure documents, audio, video and imagery, and
licensing our intellectual property. Our revenuen s result from a combination of development, consulting, subsu cription
and license fees from a variety of media identification and management applications. We launched Digimarc
Discover in 2011 and the Digimarc Barcode in 2014, both of which incorporat
e new business and pricing models.
We have not fully developed revenue models for some applications and licensing endeavors. Because some of our
products and services are not yet well-established in the marketplace, and because some of these products and
services will not directly displace existing solutions, we cannot be certain that the pricing structure for these
products and services will gain market acceptance or be sustainable over time or that the marketing for these
products and services will be effeff ctive.
rr
14
(15) If we are unablell
and integrate new technologies effectivtt ely, our growth and the development of our producdd ts and services could
be delayea d or limited.dd
dards effectively, or if we are unable to develop
to respond to regulator
yr or industryr stantt
e
Our future success will depend in part on our ability to enhance and imprmm ove the responsiveness, functionality
and features of our products and services, and those of our business partners, in accordance with regulatory or
industry standards. Our ability to remain competitive will depend in part on our ability to influence and respond to
emerging industry and governmental standards in a timely and cost-effeff ctive manner. If we are unable to influff ence
these or other standards or respond to these standards effeff ctively, our growth and the development of various
products and services could be delayed or limited.
Our market is characterized by new and evolving technologies. The success of our business will depend on
our ability to develop and integrate new technologies effeff ctively and address the increasingly sophisticated
technological needs of our customers in a timely and cost-effectiv
depend in part on our ability to:
e manner. Our ability to remain competitive will
ff
enhance and improvm
we offeff
r or plan to offeff
r;
e the responsiveness, functionality and other features of the products and services
continue to develop our technical expertise; and
develop and introduce new services, applications and technologies to meet changing customer needs and
preferences and to integrate new technologies.
We do not assure you that we will be successfulff
in responding to these technological and industry challenges
in a timely and cost-effeff ctive manner. If we are unable to develop or integrate new technologies effect
respond to these changing needs, our margins could decrease, and our release of new products and services and the
deployment of our technology could be adversely affeff cted.
ively or
ff
(16)6 We may need to retain additiii onal emplm oye
new business opportunitiestt
to achieve or sustaitt nii profitaff
es or contract labor in the future in order to take advadd ntage of
arising from increased demand, which could increase coststt and impem de our abilityi
bilityii
in the short term.
ll
We have staffeff d our company with the intent of accelerating our product development and sales growthww
initiatives while also focusing on achieving and sustaining profitff abia lity. Our current staffinff g levels could affect
ff
ability to respond to increased demand for our services. In addition, to meet any increased demand and take
advantage of new business opportunities in the future, we may need to increase our workforce through additional
emplmm oyees or contract labor. Although we believe that increasing our workforff ce would potentially support
anticipated growth and profitff ability, it would increase our costs. If we experience such an increase in costs, we may
ility in the short term.
not succeed in achieving or sustaining profitabff
our
uu
(17) The terms and conditiodd
fail to meet deliveryr and other perforff marr
ns of our contratt
nce requirements.
cts could subject us to damagea s, losses and other
tt
expexx nses if we
Our service contracts typiyy cally include provisions imposm ing:
development, delivery and installation schedules;
customer acceptance and testing requirements; and
other performff
ance requirements.
To the extent these provisions involve perforff mance over extended periods of time, risks of noncomplmm iance
ance requirements as promised, or to successfulff
may increase. From time to time we have experienced delays in system implem mentation, timely acceptance of
programs, concerns regarding program perforff mance and other contractuatt
performff
damages, as well as increased costs, lower margins, or compensatory obligations in addition to other losses, such as
harm to our reputation. Any unexpected increases in costs to meet our contractual obligations or any other
requirements necessary to address claims and damages with regard to our customer contracts could have a material
adverse effeff ct on our business and financial results.
l disputes. If we fail to meet contractual
ly resolve customer disputes, we could incur liability for
15
(18) Products deployi
againsii
u
suppor
our technologyo
t us,s divertrr applicll atiott n of our resources from othett
t costs.
ngii
ll
could have unknown defectstt or errors,s which maya give riseii
r purposes or increase our projeo ct implm emll
to claill ms
ii
entation and
Products and services as complex as those we offerff
or develop may contain undetected defecff
ts or errors.
Furthermore, we ofteff n provide complex implmm ementation, integration, customization, consulting and other technical
services in connection with the implmm ementation and ongoing maintenance of our products. Despite testing, defect
errors in our products and services may occur, which could result in delays in the development and implmm ementation
of products and systems, inability to meet customer requirements or expectations in a timely manner, loss of revenue
or market share, increased implm ementation and support
development resources, injun ry to our reputation, increased insurance costs, increased service and warranty costs and
warranty or breach of contract claims. Although we attempt to reducd e the risk of losses resulting from warranty or
breach of contract claims through warranty disclaimers and liability limitation clauses in our sales agreements when
we can, these contractual provisions are sometimes limited and may not be enforceable in every instance. If a court
refusff
es to enforce the liability limiting provisions of our contracts for any reason, or if liabilities arise that were not
contractually limited or adequately covered by insurance, the expense associated with defenff ding these actions or
paying the resultant claims could be significant.
costs, failure to achieve market acceptance, diversion of
s or
uu
ff
ff
(19) The securityii
parties,s which could resultll in the discl
othett
r busineii
systemtt
ss interruptions that could damagea
ii
s used in our product and service offeringsgg maya be circii umvented or sabotagtt
ed by third
osll ure of sensitive infon rmatiott n or private personal infon rmatiott n or cause
our repuee
tation and disruii
ptu our busineii
ss.
t our business, damage our reputation, and expose us to litigation and liability. A party who is able to
Our business relies on computers and other inforff mation technologies, both internal and at customer locations.
The protective measures that we use may not prevent all security breaches, and failure to prevent security breaches
may disruprr
circumvent security measures could misapprop
riate sensitive or proprietary information or materials or cause
interruptuu ions or otherwise damage our products, services and reputation, and the propertytt of our customers. If
unintended parties obtain sensitive data and information, or create bugs or viruses or otherwise sabotage the
functionality of our systems, we may receive negative publu icity, incur liability to our customers or lose the
confidence of our customers, any of which may cause the termination or modification of our contracts. Further, our
insurance coverage may be insufficie
nt to cover losses and liabilities that may result from these events.
a
ff
In addition, we may be required to expend significant capital and other resources to protect ourselves against
the threat of security breaches or to alleviate problems caused by these breaches. Any protection or remedial
measures may not be available at a reasonable price or at all, or may not be entirely effeff ctive if commenced.
(20)0 We maya experxx
financial conditiodd
ience outagesa
n and resultstt of operations.
and disrii uptu iott ns of our infraff
strutt
cture that maya harm our busineii
ss, prospec
s
ts,s
We may be subju ect to outages or disruprr
tions of our infrastructure, including information technology system
failures and network disruptuu ions. Subsu tantially all of our compumm ter and communications hardware is located at a
single facility, our corpor
inadequate, and our disaster recovery planning may not be sufficff
ate headquarters in Beaverton, Oregon. System redundancy may be ineffect
ient for all eventualities.
ive or
ff
rr
If a natural disaster, cybery
incident, weather event, power disruptuu ion, telecommunications failure, act of
terrorism or other event occurred that prevented us from using all or a significff ant portion of our facility and/or
damaged critical infrastructure, it could harm our abia lity to conduct normal business operations.
16
(21) We are periodically involved in the ordinaii
such litigtt atiott n maya adversely affect
ff
ry courserr
of busineii
ss in litigt atiott n, and an adverserr
resolution of
our business, financial conditidd on, resultsll of operations, and cash flows.
From time to time, in our normal course of business, we are a party to various legal claims, actions and
as part of our patent licensing program, we may bring claims or counterclaims of patent
complmm aints. For example,mm
infringement to enforce our patent rights. Given the uncertain nature of litigation, we are not able to estimate the
amount or range of gain or loss that could result from an outcome of litigation. Litigation can be expensive, lengthy,
and disruptuu ive to normal business operations. The results of complmm ex legal proceedings are oftenff
diffiff cult to predict. We could incur costs in excess of any established accruals and, to the extent available, excess
on our
liabia lity insurance. An unfavff orable outcome in any legal proceedings could have a material adverse effect
business, financial condition, results of operations, and cash flows.
uncertain and
ff
RISKS RELATED TO OUR CAPITAL STOCK
Our common stock price maya be volatile,e and you couldll
(22)
((
our common stock.
tt
lose allll or partrr of yoff
ur investment in shares of
The price of shares of our common stock may fluctuate as a result of changes in our operating perforff mance or
prospects and other factors. Some specific factors that may have a significff ant effect
common stock include:
ff
on the price of shares of our
the publu ics reaction to our public disclosures;
actuatt
l or anticipated changes in our operating results or future prospects;
potential unfavff orable changes from originally reported royalties by customers resulting from an audit
performed by us or a third party, or self-cff orrected by the customer;
strategic actions by us or our competitors, such as acquisitions or restructurings;
impamm ct of acquisitions on our liquidity and financial perforff mance;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidance, interpretations or principles applicable to us;
conditions of the industry as a result of changes in financial markets or general economic or political
conditions;
the failure of securities analysts to cover our common stock in the future, or changes in financial
estimates by analysts;
changes in analyst recommendations or earnings estimates regarding us, other comparable companies or
the industry generally, and our ability to meet those estimates;
changes in the amount of dividends paid, if any;
future issuances of our common stock or the perception that future sales could occur; and
volatility in the equity securities market.
(23) Our common stocktt
price may increase or decrease on material newsww or developments.
As a thinly-traded microcap company, volatility in the equity securities market may disproportionately cause
swings in our stock price, upward and downward, on positive and negative developments. We suspect that the
effeff cts of computerized trading also exacerbate fluctuations in our stock price.
17
(24) Our corpor
acquisition of us that shareholdell
rr
ate governance
documents,s our righi
rs maya considerdd
ts agreement and Oregon law maya delaya or prevent an
ur shares.
favorable,ll which could decrease the value of yoff
rr
Our articles of incorporation and bylaws and Oregon law contain provisions that could make it more difficff ult
for a third party to acquire us without the consent of our Board of Directors. These provisions include superuu majoa rity
voting requirements for shareholders to amend our organizational documents and limitations on actions by our
shareholders by written consent. In addition, our Board of Directors has the right to issue preferred
shareholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. In July 2008,
our Board of Directors adopted a rights agreement pursuant to which one one-hundredth (1/100) of a preferre
d stock
purchase right will be issued for each outstanding share of our common stock. In general terms, our rights agreement
works by imposmm ing a significff ant penalty upon any person or groupuu that acquires 15% or more of our outstanding
common stock without the approval of our Board of Directors. Oregon law also restricts the ability to vote shares of
stock acquired in a transaction that causes the acquiring person to control at least one-fifff thff
, one-third or one-half of
the votes entitled to be cast in the election of directors (a control share acquisition). Shares acquired in a control
share acquisition have no voting rights except as authorized by a vote of the shareholders. Although we believe these
provisions protect our shareholders from coercive or otherwise unfair takeover tactics and thereby provide for an
opportunity to receive a higher bid by requiring potential acquirers to negotiate with our Board of Directors, these
provisions apply even if the offerff may be considered beneficff
ial by some shareholders.
stock without
ff
ff
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
ITEM 2: PROPERTIES
We lease our principal administrative, marketing, research, and intellectual property development facility,
which is approximately 47,000 square feet in size and located in Beaverton, Oregon. In July 2015, we entered into
an amendment with the landlord of our corporate offiff ces in Beaverton, Oregon to extend the lease term through
March 2024 for rent payments totaling $5.5 million, payable in monthly installments.
In February 2015, we entered into a new facilities lease agreement for a facility in San Mateo, California,
which is approximately 5,400 square feet in size, with a lease term through March 2020 for rent payments totaling
$1.0 million, payable in monthly installments. We lease this facility for sales, marketing and engineering staff in
support
of our Guardian products and services. See Note 7 of our Notes to Consolidated Financial Statements for
uu
further lease related disclosures.
ITEM 3: LEGAL PROCEEDINGS
We are subju ect from time to time to other legal proceedings and claims arising in the ordinaryrr course of
business. At this time, we do not believe that the resolution of any such matters will have a material adverse effeff ct
on our financial position, results of operations or cash flows.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
18
PART II
ITEM 5: MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock began trading on the Nasdaq Stock Market LLC in October 2008 under the symbol
DMRC. The closing price of our common stock on the Nasdaq Global Market was $26.50 on Februar
ry 17, 2017.
The following table lists the high and low sales prices of our common stock for the periods indicated, as reported by
the Nasdaq Global Market.
Years Ended December 31,
2016
2015
High
Low
High
Low
First quarter ............................................................... $
Second quarter........................................................... $
Third quarter.............................................................. $
Fourth quarter ............................................................ $
44.94 $
32.03 $
40.13 $
38.58 $
26.23 $
25.04 $
30.39 $
26.70 $
29.71 $
45.43 $
49.25 $
39.34 $
21.37
20.90
29.88
21.80
At February 17, 2017, we had 254 shareholders of record of our common stock, as shown in the records of our
agent. Since many holders hold shares in street name, we believe that there is a significaff
ntly larger
ial owners of our common stock than the numberm of record holders.
transferff
number of beneficff
In August 2016, we sold 1,233 shares of our common stock in an underwritten publu ic offerff
ing, plus an
additional 185 shares in full exercise of the underwriters option to purchase additional shares of common stock, at
the price to the public of $30.00 per share. We received $39,953 of cash proceeds, net of discount of $2,447 and
ring, and paid $253 in stock issuance costs for legal and accounting fees.
underwriter fees of $150, from the offeff
In August 2014, we entered into an Equity Distribution Agreement, whereby we could sell from time to time
through Wells Fargo Securities, LLC, as our sales agent, ouruu common stock having an aggregate offeff
to $30,000. Wells Fargo Securities, LLC received from us a commission equal to 2.50% of the gross sales of
common stock for shares having an aggregate offerff
gross sales of common stock thereafter,
December 31, 2015, the Company had sold 1,026 shares under the Equity Distribution Agreement at an average
price of $29.24 resulting in $29,300 of cash proceeds, net of sales commissions of $700, and paid $415 in stock
issuance costs for legal and accounting fees. There are no shares remaining to be sold under the Equity Distribution
Agreement.
for shares sold under the Equity Distribution Agreement. As of
ing price of up to $10,000, and a commission of 2.25% of the
ring price of up
ff
We withhold (repurchase) shares of common stock in connection with the vesting of restricted shares to
satisfy required tax withholding obligations.
19
The following table sets forth information regarding purchases of our equity securities during the three-month
period ended Decemberm 31, 2016:
(c)
Total number
of shares
purchased as
tal number Average price part of publicly
f shares
purchased (1)
paid per
share (1)
or programs
(b)
)
Approximate
dollar value
of shares that
may yet be
purchased
or programs
announced plans under the plans
Period
Month 1
October 1, 2016 to October 31, 2016 ............
$
Month 2
Novembem r 1, 2016 to Novembem r 30, 2016 ....
22,408 $
29.35
Month 3
December 1, 2016 to Decembem r 31, 2016 .....
Total ...................................................................
$
22,408 $
29.35
$
$
$
$
(1) Fully vested shares of common stock withheld (purchased) by us in satisfact
ff
ion of required withholding tax
liability upon vesting of restricted stock.
20
STOCK PERFORMANCE GRAPH
The following graph compares the perforff mance of our common stock with the perforff mance of (i) the Nasdaq
U.S. Index and (ii) a peer groupuu selected by us. The comparison assumes $100 was invested in our common stock on
December 31, 2011 and in each of the two indices at the closing price on that date, and assumes reinvestment of any
dividends. We believe that the compamm nies in the peer groupuu are compamm rable to us in terms of line-of-business, market
capitalization, revenuen , and number of emplm oyees, and therefore, comprmm ise an appropriate peer groupuu for purposes of
compamm ring stock performance. The comparisons in the graph are based on historical data and are not indicative of,ff
nor intended to forecast, future performff
ance of our common stock.
Comparison of Cumulative Total Return
$250
$200
$150
$100
$50
$0
12/31/2011
12/31/2012
12/31/2013
12/31/2014
12/31/2015
12/31/2016
Digimarc Corporation
Nasdaq Index
Peer Group
Companies included in the Peer Group index of the stock performance graph are as follows:
8X8 INC
AWARE INC
BRIGHTCOVE INC
CALLIDUS SOFTWARE INC
CINEDIGM CORP
DATAWATCH CORPORATION
____
__
___
____ ____
__
___
___
__
___
__
___
__
___
__
___
__
__
(1) The peer groupu does not include DTS INC from our 2015 peer group,uu which was acquired in 2016.
eGain CORPORATION
EVOLVING SYSTEMS INC
GLU MOBILE INC
GUIDANAA CE SOFTWARE
IMMERSION CORPORATION
ORBCOMM INC
PDF SOLUTIONS INC
SPARK NETWORKS INC
SUPPORT.COM INC
TOWERSTREAM CORPORATION
ZIX CORPORATION
__
21
ITEM 6:
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction with the consolidated financial
statements and the notes to the consolidated financial statements and Managements Discussion and Analysis of
Financial Condition and Results of Operations, which are included elsewhere in this report.
The following tables set forth our selected financial inforff mation as of and for each of the years in the five-year
period ended Decemberm 31, 2016, which has been derived from audited financial statements as of December 31,
2016, 2015, 2014, 2013 and 2012 and for the years ended December 31, 2016, 2015, 2014, 2013 and 2012.
Statement of Operations Data
Revenue ...................................................
Gross profitff percentage............................
Operating income (loss)...........................
Net income (loss) .....................................
Earnings (loss) per common share:
Earnings (loss) per common
sharebas ic..........................................
Earnings (loss) per common share
diluted ...................................................
Weighted average common shares
2016
$ 21,793
61%
$ (21,920)
$ (21,672)
2015
$ 22,189
Years Ended December 31,
2014
$ 25,658
2013
$ 34,964
60%
$ (17,977)
$ (17,934)
67%
$ (15,223)
$ (15,820)
$
$
(2.36)
(2.36)
$
$
(2.19)
(2.19)
$
$
(2.22)
(2.22)
$
$
$
$
$
2012
44,375
85%
14,594
8,272
1.16
1.12
6,757
6,989
$
$
$
$
77%
(2,412)
(507)
(0.10)
(0.10)
6,866
6,866
outstandingbas ic (in thousands) ........
9,188
Weighted average common shares
outstandingdiluted (in thousands) .....
9,188
Cash dividends declared per common
8,198
8,198
7,187
7,187
share......................................................
$
$
$
0.22
$
0.44
$
0.33
Balance Sheet Data
2016
2015
As of December 31,
2014
2013
2012
Cash, cash equivalents and short-term
marketable securities................................. $
Long-term marketable securities.................. $
Total assets .................................................. $
Long-term liabilities .................................... $
Redeemable preferred stock......................... $
56,134
4,392
78,736
956
50
$
$
$
$
$
36,187
2,999
56,364
226
50
$
$
$
$
$
38,323
749
57,416
203
50
$
$
$
$
$
29,662
5,302
57,197
496
50
$
$
$
$
$
32,269
6,787
57,331
673
50
22
ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Managements Discussion and Analysis of Financial Condition and Results of Operations
l perfor rmance of Digimarc,
dd
contains forward-looking
which involve riskii
skk and uncertainties. Our actual results could diffeff r materially from those anticipated in these
forward-ldd ooking statements. Please see the discii ussion regae
this discii ussion, under the capta ion Fo
some of the uncertainties, riskii
included at the end of
rding forward-ldd ooking statementstt
rward-Ldd ooking Statements, and Item 1A, Ri skii Factorsrr for a discii ussion of
statements relating to future eventstt or the future financia
skk and assumptions associated with these statements.tt
ff
The following discii ussion should be read in conjunction with our consolidatdd ed financial statements and the
related notes and other financial infon rmation appeapp
ring elsell where in this Annual Report on Formrr 10-K.KK
All dollar amounts are in thousandsdd except per share amountstt or unless otherwir
se noted.dd Percentages within
the following tables included in this section maya not foot due to rounding.
Overview
Digimarc Corporation enables governments and enterprises around the world to give digital identities to media
and objects that compumm ters can sense and recognize, and to which they can react. We have developed the Digimarc
Discover®, Digimarc Barcode and Intuitive Computing Platform that are designed to optimize the identification of
all consumer brand imprmm essions, wherever and whenever they may appear, facilitating modern mobile-centric
Digimarc Barcodes, invisible and inaudible barcode-like
shopping. The platform includes means to embedm
inforff mation that is recognizable by smartphones, tablets, industrial scanners, and other computer interfaces, into
virtuat
lly all forms of media content, including consumer product packaging. Digimarc Barcodes have many
applications, including facilitating remarkably faster scanning of products at retail checkout as well as imprmm oved
engagement with smartphone-equipped consumers. The Digimarc Barcode is robust yet imperceptible by people in
ordinary use, allowing for reliable, effiff cient, economical, globally scalable, automatic identification of media
without visible computer codes like traditional barcodes.
Our growth strategy encompasses both our government and commercial businesses. We plan to continue
investing in research and development and sales and marketing to develop and market our products, including
Digimarc Discover, Digimarc Barcode and Guardian, and to continue to expand our intellectuat
l property portfolio.
To protect our significant effoff
rts in creating our technology, we have implm emented an extensive intellectual
property protection program that relies on a combination of patent, copyriyy ght, trademark and trade secret laws, and
nondisclosure agreements and other contracts. As a result, we believe we have one of the worlds most extensive
patent portfolios in the field of digital watermarking and related fields, with approximately 1,100 U.S. and foreign
patents and pending patent applications as of December 31, 2016. We continue to develop and broaden our portfolio
of patented technology in the fields of media identificff ation and management technology and related applications and
systems. We devote significff ant resources to developing and protecting our inventions and continuously seek to
identify and evaluate potential licensees for our patents.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the
U.S. (U.S. GAAP) requires us to make estimates and judgments that affect
liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to bad debts, contingencies, goodwill, income taxes, intangible assets,
marketable securities, propertytt and equipment and revenuen
experience and on other assumptmm ions we believe to be reasonable in the circumstances. Actual results may differff
from these estimates under differen
recognition. We base our estimates on historical
the reported amounts of assets,
t assumptions or conditions.
ff
ff
23
Some of our accounting policies require higher degrees of judgment than others in their application. These
include revenue recognition, goodwill, impairmm
the following critical accounting policies affeff ct our more significant
of our consolidated financial statements.
ff
ment of long-lived assets, contingencies and income taxes. We believe
judgments and estimates used in the preparation
Revenue recognition: We account for customer arrangements that encompass multiple deliverables, such as
ff
ional services, software licenses, and maintenance and suppor
patent licenses, profess
Multipli e-Element Arrangements. For arrangements that include multiple deliverables, we identify and divide the
deliverables into separate units of accounting at inception if certain criteria are met. We apply ASC 985 to software
deliverables when relevant. The consideration for the arrangements under ASC 605-25 is allocated to the separate
units of accounting using the relative selling price method.
t fees, under ASC 605-25
uu
The relative selling price method allocates the consideration based on our specific assumptm ions rather than
assumptmm ions of a marketplace participant, and any discount in the arrangement proportionally to each deliverable on
the basis of each deliverables selling price.
Applicable revenuen
recognition criteria are considered separately for each separate unit of accounting as
follows:
is generally determined based on time and materials. Revenue for development and
Service revenuen
consulting services is recognized as the services are perforff med. Billing for services rendered generally
occurs within one month after
the services are provided.
ff
Subscription revenue, which includes revenue from the sale of Digimarc Discover, Digimarc Barcode
and Guardian products and services, is generally paid in advance and recognized over the term of the
subsu cription, which is generally one to three years.
License revenue is recognized when amounts owed to Digimarc have been earned, are fixed or
determinable (within our normal 30 to 60 day payment terms), and collection is reasonably assured. If
the payment terms extend beyond our normal 30 to 60 days, the fee may not be considered to be fixed or
determinable, and the revenuen would then be recognized when installments are due.
We record revenuen
from certain license agreements upon cash receipt as a result of collectabia lity
not being reasonably assured.
Our standard payment terms for license arrangements are 30 to 60 days. Extended payment terms
on patent license arrangements are not considered to be fixed or determinable if payments are
due beyond our standard payment terms, primarily because of the risk of subsu tantial modification
present in our patent licensing business. As such, revenue on license arrangements with extended
payment terms are recognized as fees become fixed or determi
nable.
rr
Goodwill: We account for business combinations under the acquisition method of accounting in accordance
iness Combinations, where the total purchase price is allocated to the tangible and identified
with ASC 805, Bus
intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is
allocated using the information currently available, and may be adjud sted, up to one-year from acquisition date, after
obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to
preliminary estimates.
ff
Contingent consideration, if any, is recorded at the acquisition date based upon the estimated fair value of the
contingent payments. The fair value of the contingent consideration is re-measured each reporting period with any
adjud stments in fair value being recognized in earnings from operations.
The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less
liabilities assumed is recognized as goodwill.
24
We test goodwill for impamm irment annually in June and whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Such reviews assess the fair value of our assets compared to their
carrying value. We operate as a single reporting unit. We estimate the fair value of our single reporting unit using a
market approach, which takes into account our market capia talization plus an estimated control premium.
In connection with our annual impamm irment test of goodwill as of June 30, 2016 and 2015, we concluded that
there was no impaimm rment because the estimated fair value of our single reporting unit subsu tantially exceeded the
carrying value.
Impairment of long-lived assets: We assess long-lived assets for impaimm rment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable, in accordance with the
provisions of ASC 360 Pr
impamm irment assessment include, but are not limited to, a significant decrease in the market price of a long-lived
asset, a significaff
a current-period operating or cash flow loss combined with a history of operating or cash flow losses.
nt adverse change in legal factors or in the business climate that could affect the value of an asset, or
ent. Conditions that could trigger a long-lived asset
operty, Plant and Equipmi
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets
life. If such
to future net undiscounted cash flows expected to be generated by the assets over their remaining usefulff
assets are considered to be impairm
which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on
discounted cash flows or appraised values, depending on the nature of the assets.
ment would be recognized in operating results at the amount by
ed, the impairmm
Considerable management judgment is required in determining if and when a condition would trigger an
impairmm
ment assessment of our long-lived assets and once such a determination has been made, considerable
management judgment is required to determine the expected net undiscounted future cash flows to be generated by
the assets over their remaining usefulff
lifeff and, if necessary, the fair market value of those assets.
Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Contingencies: We evaluate all pending or threatened contingencies or commitments, if any, that are
ff
on our operations or financial position. We assess the probability
reasonabla y likely to have a material adverse effect
of an adverse outcome and determine if it is remote, reasonably possible or probable as definff ed in accordance with
the provisions of ASC 450 Contingencies. If information available prior to the issuance of our financial statements
indicates that it is probable that an asset has been impamm ired or a liability has been incurred at the date of our financial
statements, and the amount of the loss, or the range of probable loss can be reasonably estimated, then the loss is
accruerr d and charged to operations. If no accrual is made for a loss contingency because one or both of the conditions
pursuant to ASC 450 are not met, but the probability of an adverse outcome is at least reasonably possible, we will
disclose the nature of the contingency and provide an estimate of the possible loss or range of loss, or state that such
an estimate cannot be made.
Income taxes: We record valuation allowances on our deferred tax assets if,ff based on available evidence, it is
more-likely-than-not that all or some portion of the assets will not be realized. The determination of whether our
deferred tax assets are realizable requires management to identify and weigh all available positive and negative
evidence. Management considers recent financial performance, projeo cted future taxable income, scheduled reversals
of deferred tax liabilities, tax planning strategies and other evidence in assessing the realizability of our deferred tax
assets.
We recorded a $6.8 million non-cash income tax charge during the fourth quarter of 2014 to record a full
valuation allowance against our deferred tax assets largely due to the cumulative loss we had incurred over the
previous three years, which is considered a significant piece of negative evidence when assessing the realizability of
deferr
ed tax assets. As of Decemberm 31, 2016, we determined a full valuation allowance was still appropriate due to
ff
continued losses.
25
We are subju ect to federal and state income taxes within the U.S., and, in the ordinary course of business, there
are transactions and calculations where the ultimate tax determination is uncertain. We report a liability (or contra
asset) for unrecognized tax benefits resulting from uncertain tax positions taken (or expected to be taken) on a tax
return. We recognize interest and penalties, if any, related to the unrecognized tax benefits in income tax expense.
Results of Operationsthe Years Ended December 31, 2016 and December 31, 2015
The following tables present our consolidated statements of operations data for the periods indicated.
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Revenue:
Service .....................................................
Subsu cription.............................................
License ....................................................
Total revenue .....................................
$
Cost of revenue:
Service .....................................................
Subsu cription.............................................
License ....................................................
Total cost of revenue..........................
...................................................
Gross profitff
Operating expenses:
Sales and marketing.................................
Research, development and
engineering ...........................................
General and administrative......................
Intellectual property.................................
Total operating expenses....................
Operating loss ...............................................
Other income, net..........................................
Loss before income taxes..............................
Provision for income taxes............................
Net loss ..............................................
$
12,667
5,808
3,318
21,793
5,673
2,410
414
8,497
13,296
11,888
13,394
8,298
1,636
35,216
(21,920)
258
(21,662)
(10)
((21,672))
$
$
12,517
6,377
3,295
22,189
5,488
3,113
346
8,947
13,242
9,275
12,465
7,954
1,525
31,219
(17,977)
109
(17,868)
(66)
((17,934))
26
Revenue:
Service ...............................................
Subsu cription.......................................
..............................................
.
License
Total revenue ...............................
Cost of revenue:
Service ...............................................
Subsu cription.......................................
..............................................
.
License
....................
.
.............................................
Total cost of revenue
Gross profitff
Operating expenses:
Sales and marketing
Research, development and
...........................
.
engineering .............................
........
.
General and administrative................
Intellectual property...........................
Total operating expenses..............
Operating loss .........................................
Other income, net....................................
Loss before income taxes........................
Provision for income taxes......................
Net loss ........................................
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Percentages are percent of total revenue
58%
27
15
100
26
11
2
39
61
55
61
38
8
162
(101)
1
(99)
(99( %))
56%
29
15
100
25
14
2
40
60
42
56
36
7
141
(81)
(81)
(81( %))
Summary
Total revenue decreased $0.4 million or 2% to $21.8 million, primarily the result of lower subsu cription
revenue.
Total operating expenses increased 13% to $35.2 million, primarily reflecting higher investment in sales,
marketing and engineering as we continue to address importa
for Digimarc Discover and Digimarc Barcode.
mm
nt opportunities in market development and delivery
27
Revenue
Revenue:
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
Service .................................... ... $
Subsu cription .......................
License ...................................
.
.......
....
Total...................................... $
12,667
5,808
3,318
21,793
$
$
12,517
6,377
3,295
22,189
$
$
150
(569)
23
((396))
1%
(9)%
1%
(2( )%)
Revenue (as % of total revenue):
Service .................................... ...
.......
.
Subsu cription .......................
....
License ...................................
Total......................................
58%
27%
15%
100%
56%
29%
15%
100%
Service. Service revenuen
consists primarily of software development and consulting services. The majoa rity of
service revenue arrangements are structured as time and materials consulting agreements. Most of our service
revenue is derived from contracts with the Central Banks and government agency contractors. The agreements range
from several months to several years in length, and our longer term contracts are subju ect to work plans that are
reviewed and agreed upon at least annually. These contracts generally provide for billing hours worked at
predetermined rates and, to a lesser extent, reimbursement for third party costs and services. Increases or decreases
in the services provided under these contracts are generally subju ect to both volume and price changes. The volume
of work is generally negotiated at least annually and can be modified as the customers needs change. We also have
provisions in our longer term contracts that allow for specific hourly rate price increases on an annual basis to
account for cost of living variables. Contracts with government agency contractors are generally shorter term in
nature, less linear in billings and less predictable than our longer term contracts because the contracts with
government agency contractors are subju ect to government budgets and funding.
The increase in service revenue was primarily due to more program work with the Central Banks, partially
offsff et by the expiration of minimum support services to IV.
Subscription. Subsu cription revenue includes Digimarc Discover, Digimarc Barcode and Guardian products
and services, and is generally recurring in nature, paid in advance and recognized over the term of the subsu cription.
The decrease in subsu cription revenue was primarily due to lower software license revenue, which is
recognized over the associated 12-month support
uu
period, partially offset by growth in sales of Digimarc Barcode.
License. License revenue originates primarily from licensing our intellectual property where we receive
license fees and/or royalties as our income stream.
The increase in license revenue was insignificant.
28
Revenue by geographyh
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
Revenue by geography:
Domestic ................................. $
International ............................
....... $
.
Total............................
4,776
17,017
21,793
$
$
6,304
15,885
22,189
$
$
(1,528)
1,132
((396))
(24)%
7%
(2( )%)
Revenue (as % of total revenue):
mestic .................................
International ............................
.......
.
Total............................
22%
78%
100%
28%
72%
100%
The decrease in domestic revenuen was primarily due to lower software license revenuen
and the expiration of
minimum suppor
uu
t services to IV.
The increase in international revenue was primarily due to more program work from the Central Banks and
higher license revenue among international customers.
Cost of revenue
Service. Cost of service revenue primarily includes costs that are allocated from research, development and
engineering, and sales and marketing that relate directly to perforff ming services under our customer contracts and
direct costs of program delivery. Costs include:
compemm nsation, benefitsff
costs of our software developers, quality assurance personnel, product managers, business development
managers and other personnel where we bill our customers for time and materials costs;
, incentive compensation in the form of stock-based compensation and related
payments to outside contractors that are billed to customers;
charges for equipment directly used by customers;
depreciation and other charges for machinery, equipment and software directly used by customers;
travel costs directly attributable to development and consulting contracts; and
charges for infrastructurt e and centralized costs of facilities and information technology.
Subscription. Cost of subsu cription revenue primarily includes:
compemm nsation, benefitsff
costs of operations personnel;
, incentive compensation in the form of stock-based compensation and related
;
cost of outside contractors that provide operational support
uu
amortization of existing technology acquired in the acquisition of Attributor;
Internet service provider connectivity charges and image search data fees to suppor
to our subsu cription customers; and
uu
t the services offerff ed
charges for infrastructurt e and centralized costs of facilities and information technology.
License. Cost of license revenue primarily includes:
amortization of capitalized patent costs; and
amortization of patent maintenance fees.
Gross profitii
Gross Profit:ff
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
Service .............................................. $
Subsu cription ......................................
License ..............................................
Total............................................. $
6,994
3,398
2,904
13,296
$
$
7,029
3,264
2,949
13,242
$
$
(35)
134
(45)
54
(0)%
4%
(2)%
0%
Gross Profitff
revenuen
(as % of related
components):
ice ..............................................
Subsu cription ......................................
License ..............................................
Total.............................................
55%
59%
88%
61%
56%%
51%%
89%%
60%%
The increase in total gross profitff was due primarily to higher margins on subsu cription revenue.
The decrease in service gross profit as a percentage of service revenue was insignificant.
The increase in subsu cription gross profitff as a percentage of subsu cription revenue was primarily due to lower
t of our Guardian products and services.
operations and contractor costs in suppor
uu
The decrease in license gross profit as a percentage of license revenue was insignificant.
Operatintt gn expenses
We allocate certain costs of research, development and engineering, sales and marketing, and intellectual
property to cost of revenue when they relate directly to our customer contracts. We record all remaining, or
residual, costs as sales and marketing, research, development and engineering, general and administrative, and
intellectual property expenses.
Sales and marketkk ing
Sales and marketing.................................
Sales and marketing
(as % of total revenue)..........................
Year Ended
December 31,
2016
11,888
$
Year Ended
December 31,
2015
Dollar
Increase
Percent
Increase
$
9,275
$
2,613
28%
55%
42%
Sales and marketing expenses consist primarily of:ff
compemm nsation, benefitsff
costs of sales and marketing emplmm oyees and product managers;
, incentive compensation in the form of stock-based compensation and related
travel and market research costs, and costs associated with marketing programs, such as trade shows,
publu ic relations and new product launches;
30
ff
profess
ional services and outside contractors for product and marketing initiatives; and
charges for infrastructure and centralized costs of facilities and information technology.
The increase in sales and marketing expenses was due primarily to:
increased headcount and compensation-related expenses of $1.8 million;
increased charges for infrastructure and centralized costs of $0.3 million due to increased headcount;
increased travel expenses of $0.2 million; and
increased marketing and professio
ff
nal fees of $0.2 million related to market development activities.
Research, developmo
ent and engineering
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Dollar
Increase
Percent
Increase
Research, development and
engineering ...........................................
$
13,394
$
12,465
$
929
7%
Research, development and
engineering (as % of total revenue) ......
61%
56%
Research, development and engineering expenses arise primarily from three areas that support
uu
our business
model:
Fundamental Research:
investigation of new digital watermarking algorithms to increase robustness and/or
compumm tational efficff
iency;
mobile device usage models and imaging sub-systems in camera-phones;
industry conferen
ff
ce participation and authorship of papers for industry journals;
survey and studt
modeling of intent;
y of human and compumm ter interaction models with a focus on mobile devices and
development of new intellectual
uu
support
ing diagrams and materials;
t
property, including documentation of claims and production of
research in multi-spectral analyses, machine learning, barcodes, QR codes, fingerpri
other content identification technologies;
rr
nting, and
metadata ranking algorithms for matching Internet file content against referen
ff
ce database; and
investigation of subsu trates, printing techniques, and printing technology relating to consumer
packaged goods.
Platforff m Development:
tuniu ng and optimization of implm ementation models to improvmm
attacks and routine transformations, such as JPEG, cropping and printing;
e resistance to non-malicious
mobile platform creation to leverage device-specificff
capaa bia lities (e.g., instruction sets and
Graphics Processing Units);
mobile platform optimization involving usage of multiple sensors simultaneously;
m
embedded
environments;
systems platform creation and tuning for barcode scanners and machine vision
tuniu ng big data analytics transformation and metrics aggregation engine;
31
tuning data-driven Internet crawling infrastructure with policy-driven feedback loop; and
assembly of master book publis
publu ic data sources.
u
hing catalog based on aggregation and reconciliation of multiple
Product Development:
deliver and enhance the Digimarc Barcode;
maintaining the Digimarc Barcode Manager to provide campam ign management and routing
services for the Digimarc Discover platform;
maintaining the web-hosted image enhancement service in suppo
uu
rt of Digimarc Discover
platform;
development and optimization of production level image enhancement tools and quality control
services;
iterative development and release of the Digimarc Discover application for the iOS and Android
platforff ms;
real-time analytics portal to support anti-piracy services for the publishing industry; and
discovery application for publu ishing industry based on social network connections and shared
interests.
Research, development and engineering expenses consist primarily of:ff
compemm nsation, benefitsff
, incentive compensation in the form of stock-based compensation expense,
recruiting and related costs of software and hardware developers and quality assurance personnel;
payments to outside contractors;
the purchase of materials and services for product development; and
charges for infrastructure and centralized costs of facilities and information technology.
The increase in research, development and engineering expenses was due primarily to increased headcount
and compensation-related expenses of $0.7 million.
General and administrative
General and administrative......................
General and administrative (as %
of total revenuen )....................................
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Dollar
Increase
Percent
Increase
$
8,298
$
7,954
$
344
4%
38%
36%
We incur general and administrative costs in the functional areas of finance, legal, human resources, executive
and board of directors. Costs for facilities and information technology are also managed as part of the general and
administrative processes and are allocated to this area as well as each of the areas in cost of revenue, sales and
marketing, research, development and engineering and intellectual property.
General and administrative expenses consist primarily of:ff
compemm nsation, benefitsff
and related costs of general and administrative personnel;
and incentive compensation in the form of stock-based compensation expense
third party and profesff
sional fees associated with legal, accounting and human resources;
32
costs associated with being a public
u
company; and
charges for infrastructure and centralized costs of facilities and information technology.
The increase in general and administrative expenses was due primarily to:
increased compensation-related expenses of $0.5 million; and
increased profesff
sional consulting fees of $0.2 million, partially offseff
t by
decreased charges for infrastructure and centralized costs of $0.3 million, which were allocated out to
sales and marking due to increased headcount.
Intellectual propertytt
Intellectual property.................................
Intellectual property (as %
of total revenuen )....................................
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Dollar
Increase
Percent
Increase
$
1,636
$
1,525
$
111
7%
8%
7%
We incur intellectual property expenses that arise primarily from costs associated with documenting, applying
for, and maintaining domestic and international patents and trademarks.
Gross expenditures for intellectual property costs, before refleff cting the effeff ct of capitalized patent costs,
primarily consist of:ff
compemm nsation, benefitsff
and related costs of attorneys and legal assistants;
and incentive compensation in the form of stock-based compensation expense
third party costs, including filing and governmental regulatory fees and fees for outside legal counsel
and translation costs, each incurred in the patent process;
charges to write-off previously capitalized patent costs for patent assets we abandon;
consulting costs related to marketing our intellectual property portfolio; and
charges for infrastructurt e and centralized costs of facilities and information technology.
Intellectual property expenses can vary from period to period based on the level of capitalized patent activity.
The increase in intellectual property expenses was due primarily to increased compensation-related expenses
of $0.1 million.
Stock-based compensation
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
Cost of revenue........................................
Sales and marketing.................................
Research, development and
engineering ...........................................
General and administrative......................
Intellectual property.................................
Total ...................................................
$
$
709
975
1,381
2,182
306
5,553
$
$
740
775
1,308
1,978
276
5,077
$
$
(31)
200
73
204
30
476
(4)%
26%
6%
10%
11%
9%
The increase in stock-based compemm nsation expense was due primarily to increased headcount. We anticipate
incurring an additional $9,728 in stock-based compensation expense through Decembem r 2020 for unvested restricted
stock awards as of December 31, 2016.
Other income,e net
Other income, net ....................................
Other income, net (as % of
total revenue) ........................................
*
Less than 1%
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Dollar
Increase
Percent
Increase
$
258
$
109
149
137%
1%
*
The increase in other income, net was primarily due to higher interest income as a result of higher cash and
investment balances, higher interest rates on cash and investments, and changes in foreign currency.
Provisiii on for income taxeaa s
The provision for income taxes reflecff
ts current taxes, deferred taxes and withholding taxes in certain foreign
jurisdictions.
For the year ended December 31, 2016, our effeff ctive tax rate was 0% because we have a full valuation
allowance recorded against our defeff rred tax assets. The valuation allowance against deferred tax assets as of
December 31, 2016 was $24.9 million, an increase of $9.5 million from $15.4 million as of December 31, 2015. We
continually assess the applicability of valuation allowance against our deferred tax assets. Based upon the positive
and negative evidence available as of December 31, 2016, and largely due to the cumulative loss incurred by us over
the previous three years, which is considered a significant piece of negative evidence when assessing the
realizability of deferred tax assets, a full valuation allowance is recorded against our deferred tax assets. We will not
record tax benefits on any future losses until its determined that those tax benefits will be realized. All future
reversals of the valuation allowance would result in a tax benefit in the period recognized.
For the year ended December 31, 2015, our effeff ctive tax rate was 0% because we had a full valuation
allowance recorded against our defeff rred tax assets. The valuation allowance against deferred tax assets as of
December 31, 2015 was $15.4 million, an increase of $8.1 million from $7.3 million as of Decembem r 31, 2014.
34
Results of Operationsthe Years Ended December 31, 2015 and December 31, 2014
The following tables present our consolidated statements of operations data for the periods indicated.
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Revenue:
Service .....................................................
Subsu cription.............................................
License ....................................................
Total revenue .....................................
$
Cost of revenue:
Service .....................................................
Subsu cription.............................................
License ....................................................
Total cost of revenue..........................
...................................................
Gross profitff
Operating expenses:
Sales and marketing.................................
Research, development and
engineering ...........................................
General and administrative......................
Intellectual property.................................
Total operating expenses....................
Operating loss ...............................................
Other income, net..........................................
Loss before income taxes..............................
Provision for income taxes............................
Net loss ..............................................
$
12,517
6,377
3,295
22,189
5,488
3,113
346
8,947
13,242
9,275
12,465
7,954
1,525
31,219
(17,977)
109
(17,868)
(66)
((17,934))
$
$
11,727
6,203
7,728
25,658
5,077
3,020
334
8,431
17,227
7,974
13,711
8,972
1,793
32,450
(15,223)
55
(15,168)
(652)
((15,820))
35
Revenue:
Service ...............................................
Subsu cription.......................................
..............................................
.
License
Total revenue ...............................
Cost of revenue:
Service ...............................................
Subsu cription.......................................
..............................................
.
License
....................
.
.............................................
Total cost of revenue
Gross profitff
Operating expenses:
Sales and marketing
Research, development and
...........................
.
engineering .............................
........
.
General and administrative................
Intellectual property...........................
Total operating expenses..............
Operating loss .........................................
Other income, net....................................
Loss before income taxes........................
Provision for income taxes......................
Net loss ........................................
Summary
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Percentages are percent of total revenue
56%
29
15
100
25
14
2
40
60
42
56
36
7
141
(81)
(81)
(81( %))
46%
24
30
100
20
12
1
33
67
31
53
35
7
126
(59)
(59)
(3)
(62( %))
Total revenue decreased $3.5 million or 14% to $22.2 million, refleff cting lower license revenue of $4.4 million
primarily due to the end of royalty payments from Verance in the fourth quarter of 2014 and license payments from
Nielsen in the first quarter of 2014, partially offsff et by growth in service and subsu cription revenue.
Total operating expenses decreased 4% to $31.2 million, reflecting lower spending in research, development
t by higher investment in sales
and engineering, general and administrative and intellectual property, partially offseff
and marketing as we focus on market development and delivery for Digimarc Discover and Digimarc Barcode.
36
Revenue
Revenue:
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
Service ........................................
Subsu cription ................................
License ........................................
Total.......................................
$
$
12,517
6,377
3,295
22,189
$
$
11,727
6,203
7,728
25,658
$
$
790
174
(4,433)
((3,469))
7%
3%
(57)%
)%)
(14(
Revenue (as % of total revenue):
ice ........................................
Subsu cription ................................
License ........................................
Total.......................................
56%
29%
15%
100%
46%
24%
30%
100%
The increase in service revenuen was primarily due to higher billable rates under our agreement with the
Central Banks and increased program work with a government agency contractor.
The increase in subsu cription revenue was primarily due to higher software license revenue, which is
recognized over the associated 12-month support
by lower Guardian revenue.
uu
period, and growthww in Digimarc Barcode revenue, partially offset
The decrease in license revenue was primarily due to the end of royalty payments from Verance in the fourth
quarter of 2014 and license payments from Nielsen in the first quarter of 2014.
yh
Revenue by geographa
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Dollar
Decrease
Percent
Decrease
Revenue by geography:
Domestic .....................................
International ................................
Total.......................................
$
$
6,304
15,885
22,189
$
$
9,596
16,062
25,658
$
$
(3,292)
(177)
((3,469))
(34)%
(1)%
)%)
(14(
Revenue (as % of total revenue):
mestic .....................................
International ................................
Total.......................................
28%
72%
100%
37%
63%
100%
The decrease in domestic revenuen was primarily due to the end of royalty payments from Verance in the
t by higher
fourth quarter of 2014 and license payments from Nielsen in the first quarter of 2014, partially offseff
domestic service and subsu cription revenue.
The decrease in international revenue was primarily due to lower international license revenuen
and lower
Guardian revenue from international customers, partially offset by higher service revenue from the Central Banks.
37
Gross profitii
Gross Profit:ff
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
Service .............................................. $
Subsu cription ......................................
License ..............................................
Total............................................. $
7,029
3,264
2,949
13,242
$
$
6,650
3,183
7,394
17,227
$
$
379
81
(4,445)
((3,985))
6%
3%
(60)%
)%)
(23(
Gross Profitff
revenuen
(as % of related
components):
Service ..............................................
Subsu cription ......................................
License ..............................................
Total.............................................
56%
51%
89%
60%
57%
51%
96%
67%
The decrease in total gross profitff was due primarily to lower license revenue, partially offseff
t by higher service
and subscription revenue.
The decrease in service gross profit as a percentage of service revenue was insignificant.
The change in subsu cription gross profitff as a percentage of subsu cription revenue was insignificaff
nt.
The decrease in license gross profit as a percentage of license revenue was due primarily to lower license
revenue.
Operatintt gn expenses
Sales and marketkk ing
Sales and marketing.................................
Sales and marketing
(as % of total revenue)..........................
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Dollar
Increase
Percent
Increase
$
9,275
$
7,974
$
1,301
16%
42%
31%
The increase in sales and marketing expenses was due primarily to:
increased headcount and compensation-related expenses of $1.1 million;
increased charges for infrastructure and centralized costs of $0.5 million primarily related to increased
headcount; partially offset
by
ff
decreased amortization expense of $0.4 million related to the intangibles acquired in the acquisition of
Attributor.
38
Research, developmo
ent and engineering
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Dollar
Decrease
Percent
Decrease
Research, development and
engineering ...........................................
$
12,465
$
13,711
$
(1,246)
(9)%
Research, development and
engineering (as % of total revenue) ......
56%
53%
The decrease in research, development and engineering expenses was due primarily to:
decreased headcount and compensation-related expenses of $1.0 million; and
decreased use of outside contractors, consultants, and profess
ff
ional services of $0.3 million.
General and administrative
General and administrative......................
General and administrative (as %
of total revenuen )....................................
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Dollar
Decrease
Percent
Decrease
$
7,954
$
8,972
$
(1,018)
(11)%
36%
35%
The decrease in general and administrative expenses was due primarily to:
decreased stock compensation expense of $0.5 million; and
decreased legal costs of $0.4 million.
Intellectual propertytt
Intellectual property.................................
Intellectual property (as %
of total revenuen )....................................
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Dollar
Decrease
Percent
Decrease
$
1,525
$
1,793
$
(268)
(15)%
7%
7%
The decrease in intellectual property expenses was due primarily to:
decreased headcount and compensation-related expenses of $0.2 million; and
decreased consulting fees of $0.2 million for a third party intellectual property marketing study
performed in 2014; partially offsff et by
increased write-offff of abandoned patent costs of $0.2 million.
39
Stock-based compensation
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
Cost of revenue........................................
Sales and marketing.................................
Research, development and
engineering ...........................................
General and administrative......................
Intellectual property.................................
Total ...................................................
$
$
740
775
1,308
1,978
276
5,077
$
$
545
674
1,406
2,454
324
5,403
$
$
195
101
(98)
(476)
(48)
((326))
36%
15%
(7)%
(19)%
(15)%
(6( )%)
Stock-based compensation expense decreased as all outstanding stock options were fully vested by January
2015, which was partially offseff
t by expense on new hire stock grants.
Other income,e net
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Other income, net ....................................
Other income, net (as % of
total revenue) ........................................
$
109
$
*
55
*
Dollar
Increase
Percent
Increase
54
98%
*
Less than 1%
The increase in other income, net was primarily due to higher interest income as a result of higher cash and
investment balances.
Provisiii on for income taxeaa s
For the year ended Decembem r 31, 2015, we recognized an income tax provision of $0.1 million on a pretax
loss of $17.9 million, resulting in an effeff ctive tax rate of 0%. The valuation allowance against deferred tax assets as
of Decemberm 31, 2015 was $15.4 million, an increase of $8.1 million from $7.3 million as of December 31, 2014.
For the year ended Decembem r 31, 2014, we recognized an income tax provision of $0.7 million on a pretax
loss of $15.2 million, resulting in an effeff ctive tax rate of (4%). The income tax provision included a $6.8 million
non-cash charge during the fourth quarter of 2014 to record a full valuation allowance against our deferff
assets.
red tax
Liquidity and Capital Resources
December 31,
2016
December 31,
2015
Working capital.............................................
Current ratio (1) ............................................
Cash, cash equivalents and short-term
marketable securities..................................
Long-term marketable securities...................
Total cash, cash equivalents and all
marketable securities..................................
$
$
$
$
58,461
14.1:1
56,134
4,392
60,526
$
$
$
$
37,610
9.0:1
36,187
2,999
39,186
(1) The current (liquidity) ratio is calculated by dividing total current assets by total current liabilities.
40
The $21.3 million increase in cash, cash equivalents and marketable securities at December 31, 2016 from
December 31, 2015 resulted primarily from:
proceeds from the sale of common stock in an underwritten publu ic offeff
ring; and
proceeds from stock option exercises; partially offsff et by
cash used in operations;
purchases of property and equipment and capitalized patent costs; and
purchases of common stock related to the vesting of restricted stock.
Financial instruments that potentially subju ect 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
majoa r banks and financial institutions and at times deposits may exceed insured limits. Marketable securities include
federal agency notes, commercial paper, corporate notes, pre-refunded municipal bonds and U.S. treasuries. Our
investment policy requires the portfolff
funds will be available within 30 days notice.
io to be invested to ensure that the greater of $3 million or 7% of the invested
Other than cash used for operating needs, which may include short-term marketable securities, our investment
ion or typeyy
of financial instrument by limiting the
policy limits our credit exposure to any one financial institutt
maximum of 5% of our cash and cash equivalents and marketable securities or $1 million, whichever is greater, to
be invested in any one issuer except for the U.S. government, U.S. federal agencies and U.S. backed securities,
which have no limits, at the time of purchase. Our investment policy also limits our credit exposure by limiting to a
maximum of 40% of our cash and cash equivalents and marketable securities, or $15 million, whichever is greater,
to be invested in any one industry category, (e.g., financial or energy industries), at the time of purchase. As a result,
we believe our credit risk associated with cash and investments to be minimal. A decline in the market value of any
y results in a reduction in carrying amount to fair value.
security below cost that is deemed to be other-than-temporar
To determine whether an impam irment is other-than-temporm ary, 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-temporar
recorded by us in the years ended Decemberm 31, 2016, 2015 and 2014.
y impaimm rments identified or
mm
mm
Cash flows from operating activities
The components of operating cash flows were:
Net loss ....................................................
Non-cash items ........................................
Changes in operating assets and
liabilities ...............................................
gg activities .......
Net cash used in operatin
p
Net loss ....................................................
Non-cash items ........................................
Changes in operating assets and
liabilities ...............................................
gg activities .......
Net cash used in operatin
p
Year Ended
December 31,
2016
(21,672) $
Year Ended
December 31,
2015
(17,934) $
$
8,010
7,503
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
(3,738)
507
(202)
((13,864)) $
$
691
((9,740)) $
(893)
((4,124))
Year Ended
December 31,
2015
(17,934) $
Year Ended
December 31,
2014
(15,820) $
$
7,503
9,779
Dollar
Increase
(Decrease)
Percent
Increase
(Decrease)
(2,114)
(2,276)
(21)%
7%
(129)%
)%)
(42(
(13)%
(23)%
200%
)%)
(45(
691
((9,740)) $
(692)
((6,733)) $
1,383
((3,007))
$
41
Cash flows used in operating activities in 2016 compamm red to 2015 increased by $4.1 million, primarily as a
result of a higher net loss and by changes in operating assets and liabilities, partially offsff et by higher non-cash items.
The higher net loss was primarily due to higher operating expenses. The changes in operating assets and liabilities
was primarily due to changes in other current assets, and deferred rent due to the terms of our amended lease
agreement. The higher non-cash items was primarily due to higher stock-based compemm nsation expense.
Cash flows used in operating activities in 2015 compamm red to 2014 increased by $3.0 million, primarily as the
result of a higher net loss and lower non-cash items, partially offsff et by changes in operating assets and liabilities.
of no
The higher net loss was primarily due to lower revenues. The decrease in non-cash items reflects the impactm
non-cash charge for deferred income taxes in 2015. The changes in operating assets and liabilities was primarily due
to changes in other current assets.
Cash flows from investingii
s
activitieii
Cash flows used in investing activities in 2016 compamm red to 2015 increased by $10.3 million from $5.2
million to $15.5 million, primarily as a result of higher net purchases of marketable securities from cash received in
our underwritten publu ic offeff
ring and higher capital expenditures for leasehold imprmm ovements.
Cash flows used in investing activities in 2015 compamm red to 2014 increased by $0.8 million from $4.4 million
to $5.2 million, primarily as a result of higher net purchases of marketable securities, partially offsff et by lower
purchases of property and equipment and capitalized patent costs.
Cash flows from financingn activities
ii
Cash flows provided by financing activities in 2016 compared
mm
to 2015 increased $25.9 million from $12.0
million to $37.8 million, primarily as a result of higher cash proceeds from the sale of common stock in our
underwritten publu ic offeff
ring.
Cash flows provided by financing activities in 2015 compared to 2014 decreased by $1.4 million from $13.4
million to $12.0 million, primarily as a result of lower cash proceeds from the sale of common stock, partially offsff et
by no cash dividends paid in 2015.
Future cash expectations
tt
In August 2016, we sold 1,233 shares of our common stock in an underwritten publiu
c offerff
ing, plus an
additional 185 shares in full exercise of the underwriters option to purchase additional shares of common stock, at
the price to the public
underwriter fees of $150, from the offeff
of $30.00 per share. We received $39,953 of cash proceeds, net of discount of $2,447 and
ring, and paid $253 in stock issuance costs for legal and accounting fees.
u
We believe that our current cash, cash equivalents, and short-term marketable securities balances will satisfyff
our projeo cted working capital and capital expenditure requirements for at least the next 12 months. We have a $100
million shelf registration statement in place, of which $42,550 was allocated for sales of our common stock under
our underwritten publu ic offeri
Equity Distribution Agreement entered into in August 2014. The shelf registration statement expires in May 2017.
We may use similar or other financing means to raise working capital in the future, if necessary, to support
continued investment in our growthww 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.
ng in August 2016 and $30,000 was allocated for sales of our common stock under the
uu
ff
Contractual Obligations
In July 2015, we entered intonn an amendmentnn with the landlord of ouruu corporate officff es in Beaverton, Oregon to
extend the lease term throhh ugh March 2024 for rent payments totaling $5.5 million, payabla e in monthly installmentsnn .
42
In February 2015, we entered into a new facilities lease agreement in San Mateo, California with a lease term
through March 2020 for rent payments totaling $1.0 million, payable in monthly installments.
The following table presents our contractuatt
l obligations as of December 31, 2016:
Total operating lease obligations ...................................
Maturities by Period
Total
$ 6,350
Less than
1 year
$
784
1-3 years
$ 2,015
3 - 5 years
$ 1,652
More than
5 years
$ 1,899
We cannot make a reasonably reliable estimate of the period of potential cash settlement of our unrecognized
tax benefits of $0.5 million and, thereforff e, have not included the unrecognized tax benefits in the table of contractual
obligations as of December 31, 2016.
Off-Bff
alance Sheet Arrangements
Other than the contractual obligations noted above, we do not have any off-ff balance sheet arrangements that
t on our financial condition, changes in financial
have or are reasonably likely to have a current or future effecff
condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is
material to investors.
Forward-Lookink g Statements
This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Words such as may,
plan, should, could, expect, anticipate, intend, believe, project, forecast, estimate, continue,
and variations of such terms or similar expressions are intended to identifyff 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 beliefsff concerning future events impacmm ting us, and
below), which are difficff ult to predict and, in many
are subju ect to uncertainties and factors (including those specifiedff
instances, are beyond our control. As a result, our actual results could differff materially from those expressed in or
impliedmm
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), could affeff ct our future perforff mance and the liquidity and value of our securities and cause our actual
results to differ materially from those expressed or implmm ied by forward-looking statements made by us. Forward-
looking statements include but are not limited to statements relating to:
concentration of revenuen with few customers comprising a large majoa rity of the revenue;
revenue trends and expectations;
our future level of investment in our business, including investment in research, development and
engineering of products and technology, development and protection of our intellectual property, sales
growthww initiatives and development of new market opportunities;
our ability to imprmm ove margins;
anticipated expenses, costs, margins, provision for income taxes and investment activities in the
foreseeable future;
anticipated revenue to be generated from current contracts, renewals, and as a result of new programs;
variability of contracted arrangements;
our profitaff bia lity in future periods;
business opportuni
t
ties that could require that we seek additional financing;
the size and growth of our markets;
the existence of international growthww opportunities and our future investment in such opportunities;
43
the sources of our future revenue;
our expected short-term and long-term liquidity positions;
our capital expenditure and working capital requirements and our ability to fund our capital expenditure
and working capital needs through cash flow from operations;
capital market conditions, interest rate volatility and other limitations on the availability of capital,
which could have an impam ct on our cost of capital and our ability to access the capital markets;
our use of cash, cash equivalents and marketable securities in upcoming quarters;
anticipated levels of backlog in future periods;
the success of our products, including Digimarc Discover, Digimarc Barcode and Guardian;aa
our ability to innovate and enhance our competitive differff entiation;
protection, development and monetization of our intellectuat
l property portfolff
io;
our plans and intentions with respect to our joint venturt es; and
other risks detailed in our filings with the Securities and Exchange Commission, including the risk
factors set forth in Item 1A. Risk Factors.
ff
We believe that the factors specifieff d above and the risk factors contained in Item 1A, Risk Factors, among
our future perforff mance and the liquidity and value of our securities and cause our actual results
others, could affect
to differff materially from those expressed or implmm ied 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 diffeff
looking statements made by us or by persons acting on our behalf apply only as of the date of this Annual Report.
We do not undertake any obligation to publu icly update or revise any forward-looking statements to refleff ct future
events, information or circumstances that arise afteff
r materially from the forward-looking statements. All forward-
r the date of the filing of this Annual Report on Form 10-K.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the
io. We attemptmm to ensure the safetff y and preservation of our invested principal funds by
amount of interest income we can earn on our investment portfolio. We do not use derivative financial instruments
in our investment portfolff
limiting default risk, market risk and investment risk. We mitigate default risk by investing in low-risk securities. At
December 31, 2016, we had an investment portfolff
io of federal agency notes, commercial paper, corporate notes, pre-
refunff ded municipal bonds, U.S. treasuries and money market securities, including those classified as cash
equivalents, and short- and long-term marketable securities, totaling $59.8 million. The original maturities of our
investment portfolio range from 12 to 520 plus days with an average interest rate of 0.96%. If market interest rates
were to decrease immediately and uniforff mly by 10% from levels as of December 31, 2016, the decline of the fair
market value of the fixed income portfolio would not be material.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements and the accompanying Notes that are filed as part of this Annual
Report are listed under Part III, Item 15, Exhibits and Financial Statement Schedules and are set forth beginning on
page F-1 immediately following the signature page of this Form 10-K.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
44
ITEM 9A: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Offiff cer and Chief Financial Offiff cer, have
carried out an evaluation of the effeff ctiveness of our disclosure controls and procedures (as definff ed in Rules 13a-
15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this Form 10-K.
Based on our evaluation, our Chief Executive Offiff cer and Chief Financial Officff er have concluded that our
disclosure controls and procedurdd es, as of the end of the period covered by this Form 10-K, were effect
that information required to be disclosed by us in reports that we file or submu
1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SECs rules and
forms, and (ii) accumulated and communicated to our management, including our principal executive officff er and
principal financial offiff cer, as appropriate to allow timely decisions regarding required disclosure.
ive in ensuring
it under the Securities Exchange Act of
ff
Managements Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting
as definff ed in Rules 13a-15(f)ff and 15d-15(f)ff under the Securities Exchange Act of 1934. Our internal control over
financial reporting is a process designed to provide reasonabla e assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.
Any control
tt
system, no matter how well conceived and operated, and because of inhern
only reasonabla e, not absolute, assurauu nce that the objectives of the contrott
continn nue monitoring ouruu intenn rnal control
tt
proceduresuu
that may be required to ensureuu the ongoing integrity of ouruu consolidated financial statementsnn .
s over financial reportirr ng and will modify or implmm ementnn additional contrott
entnn limitations, can provide
l system are met. Manaa gementnn is committed to
ls and
With the participation of our Chief Executive Offiff cer and Chief Financial Officff er, management conducted an
evaluation of the effeff ctiveness of internal control over financial reporting based on the framework established in
Internal Controt
Treadway Commission, (COSO). Based on this evaluation, management has concluded that internal control over
financial reporting was effeff ctive as of the end of the period covered by this Form 10-K based on those criteria.
Int egrated Frameworkrr (2013) issued by the Committee of Sponsoring Organizations of the
lll
There was no change in our internal control over financial reporting that occurred during the quarter ended
December 31, 2016, that has materially affected,
financial reporting.
ff
or is reasonably likely to materially affeff ct, our internal control over
Our independent auditors have issued an audit report on the effeff ctiveness of our internal control over financial
reporting as of December 31, 2016, which is included herein.
45
Report of Independent Registered Public Accounting Firm
The Boarda
Digimarc Corporation:
of Directors and Shareholders
We have audited Digimarc Corporations (the Company) internal control over financial reporting as of
December 31, 2016, based on criteria established in Internal Controt
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is
responsible for maintaining effecti
effeff ctiveness of internal control over financial reporting, included in the accompanying Managements Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Companys internal
control over financial reporting based on our audit.
ve internal control over financial reporting and for its assessment of the
Int egrated Frameworkrr (2013) issued by the
lll
ff
We conducted our audit in accordance with the standards of the Public
u
Company Accounting Oversight Board
(United States). Those standards require that we plan and perforff m the audit to obtain reasonable assurance about
whether effeff ctive internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effeff ctiveness of internal control based on the
assessed risk. Our audit also included perforff ming such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A compamm nys internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonabla e detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the compamm ny are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys
assets that could have a material effeff ct on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effecff
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
tiveness to future periods are subju ect to the risk that
In our opinion, the Company maintained, in all material respects, effeff ctive internal control over financial
reporting as of December 31, 2016, based on criteria established in Internal Contrott
(2013) issued by COSO.
Int egrated Frameworkrr
lll
We also have audited, in accordance with the standards of the Public
u
Company Accounting Oversight Board
(United States), the consolidated balance sheets of Digimarc Corporation and subsidiaries as of December 31, 2016
and 2015, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the
years in the three-year period ended December 31, 2016, and our report dated Februar
unqualified opinion on those consolidated financial statements.
ry 23, 2017 expressed an
/s/ KPMG LLP
Portland, Oregon
February 23, 2017
ITEM 9B: OTHER INFORMATION
None
46
Certain information required by Part III of this Annuan l Report on Form 10-K is incorporated herein by
referff ence to the Proxy Statement for our 2016 annual meeting of shareholders, which we intend to file no later than
120 days afteff
r the end of the fiscal year covered by this Annual Report on Form 10-K.
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Code of Ethics
We have adopted a Code of Business Conduct that applies to our principal executive offiff cer, principal
financial offiff cer and controller, as well as a Code of Ethics for Financial Profesff
financial officff er and controller. We have made these codes available in the Corporate Governance section of our
rporate-go-
website at www.digii marc.com/about/ctt ompam ny/co//
provision of the codes, or subsu tantively amend the codes, we will disclose that fact on our website within four
business days.
vernance. If we waive, or implmm icitly waive, any material
sionals that applies to our principal
The other information required by this item is incorporated herein by reference to the information in the Proxy
Statement, which we intend to file with the SEC no later than 120 days afteff
this Annual Report on Form 10-K under the captions Election of Directors, Management, Report of the
Governance and Nominating Committee of the Board of DirectorsAu dit Committee, and Other Matters
Section 16(a) Beneficial Ownership Reporting Compliance.
r the end of the fiscal year covered by
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the information in the Proxy
Statement, which we intend to file with the SEC no later than 120 days afteff
this Annual Report on Form 10-K, under the captions Director Compensation, Executive Compensation,
Compensation Committee Interlocks and Insider Participation and Compensation Committee Report.
r the end of the fiscal year covered by
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to the information in the Proxy
Statement, which we intend to file with the SEC no later than 120 days afteff
this Annual Report on Form 10-K, under the captions Security Ownership of Certain Beneficff
Management and Equity Compensation Plan Information.
r the end of the fiscal year covered by
ial Owners and
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated herein by reference to the information in the Proxy
Statement, which we intend to file with the SEC no later than 120 days afteff
this Annual Report on Form 10-K under the caption Election of DirectorsDetermination of Independence, and
Related Person Transactions.
r the end of the fiscal year covered by
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to the information in the Proxy
Statement, which we intend to file with the SEC no later than 120 days afteff
this Annual Report on Form 10-K, under the caption Audit Fees.
r the end of the fiscal year covered by
47
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following documents are filed as part of this Annual Report on Form 10-K:
(i) Report of Independent Registered Publu ic Accounting Firm
(ii) Consolidated Balance Sheets as of December 31, 2016 and 2015
(iii) Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
(iv) Consolidated Statements of Shareholders Equity for the years ended December 31, 2016, 2015 and
2014
(v) Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
(vi) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All schedules have been omitted since they are not required or are not applicable or the requiqq red information is
shown in the consolidated financial statements or related notes.
(a)(3) Exhibits
See the Exhibit Index at page E-1 of this Annual Report on Form 10-K.
48
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: February 23, 2017
DIGIMARC CORPORATION
By:
/S/ CHARLES BECK
Charles Beck
ii
Title:
Chiefe Financial Officeff
r
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/S/ BRUCRR
E DAVIS
Bruce Davis
/S/ CHARLES BECK
Charles Beck
/S/ GARY DESTEFANO
o
Gary DeStefanff
/S/ RICHARD L. KING
Richard L. King
/S/ WILLIAM J. MILLER
William J. Miller
/S/ JAMES T. RICHARDSON
James T. Richardson
/S/ ANDRAA
EW WALTER
Andrew Walter
/S/ BERNAR
RR
D WHITNEY
Bernard Whitney
Chief Executive Offiff cer and Chairman of the
Board of Directors
(Principal Executive Offiff cer)
February 23, 2017
Chief Financial Offiff cer and Treasurer
(Principal Financial and Accounting Offiff cer)
February 23, 2017
Februar
ry 23, 2017
February 23, 2017
February 23, 2017
February 23, 2017
Februar
ry 23, 2017
February 23, 2017
Director
Director
Director
Director
Director
Director
49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
u
Report of Independent Registered Public
Accounting Firm ................................................................................
Consolidated Balance Sheets ...............................................................................................................................
Consolidated Statements of Operations...............................................................................................................
Consolidated Statements of Shareholders Equity...............................................................................................
Consolidated Statements of Cash Flows..............................................................................................................
Notes to Consolidated Financial Statements .......................................................................................................
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-1
Report of Independent Registered Public Accounting Firm
The Boarda
Digimarc Corporation:
of Directors and Shareholders
We have audited the accompanying consolidated balance sheets of Digimarc Corporation and subsidiaries (the
Company) as of December 31, 2016 and 2015, and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the years in the three-year period ended December 31, 2016. These
consolidated financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Publu ic Company Accounting Oversight
Board (United States). Those standards require that we plan and perforff m the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence support
the accounting principles used and significff ant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
ing the amounts and disclosures in the financial statements. An audit also includes assessing
uu
In our opinion, the consolidated financial statements referr
ed to above present fairly, in all material respects,
the financial position of Digimarc Corporation and subsidiaries as of December 31, 2016 and 2015, and the results
of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in
conforff mity with U.S. generally accepted accounting principles.
ff
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board
(United States), the Companys internal control over financial reporting as of December 31, 2016, based on criteria
established in Internal Contrott
Organizations of the Treadway Commission (COSO), and our report dated February 23, 2017 expressed an
unqualified opinion on the effeff ctiveness of the Companys internal control over financial reporting.
Int egrated Frameworkrr (2013) issued by the Committee of Sponsoring
lll
u
/s/ KPMG LLP
Portland, Oregon
February 23, 2017
F-2
DIGIMARC CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
2016
December 31,
2015
Current assets:
ASSETS
Cash and cash equivalents ................................................................................
Marketable securities........................................................................................
Trade accounts receivable, net .........................................................................
Other current assets ..........................................................................................
Total current assets .....................................................................................
Marketable securities .............................................................................................
Property and equipment, net ..................................................................................
Intangibles, net.......................................................................................................
Goodwill ................................................................................................................
Other assets............................................................................................................
Total assets..................................................................................................
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable and other accrued liabilities ................................................
ff
revenue ..............................................................................................
Deferred
Total current liabilities................................................................................
red rent and other long-term liabilities..........................................................
Total liabilities ............................................................................................
Deferff
Commitments and contingencies (Note 13)
Shareholders equity:
ff
Preferre
d stock (par value $0.001 per share, 2,500 authorized, 10 shares
issued and outstanding at December 31, 2016 and 2015)..............................
Common stock (par value $0.001 per share, 50,000 authorized, 10,523 and
8,919 shares issued and outstanding at December 31, 2016 and 2015,
respectively) ..................................................................................................
Additional paid-in capital .................................................................................
it .........................................................................................
Accumulated deficff
Total shareholders equity...........................................................................
Total liabilities and shareholders equq ityy ....................................................
$
$
$
$
See Notes to Consolidated Financial Statements.
$
$
$
11,638
44,496
5,078
1,695
62,907
4,392
3,570
6,422
1,114
331
78,736
1,523
2,923
4,446
956
5,402
3,160
33,027
4,616
1,487
42,290
2,999
3,010
6,613
1,114
338
56,364
1,657
3,023
4,680
226
4,906
50
50
11
120,985
(47,712)
73,334
78,736
$
9
77,439
(26,040)
51,458
56,364
F-3
DIGIMARC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Revenue:
Service.............................................................................................
Subsu cription.....................................................................................
License ............................................................................................
.............................................................................
Total revenuen
$
Cost of revenue:
Service.............................................................................................
Subsu cription.....................................................................................
License ............................................................................................
Total cost of revenue..................................................................
...........................................................................................
Gross profitff
Operating expenses:
Sales and marketing ........................................................................
Research, development and engineering .........................................
General and administrative..............................................................
Intellectual property ........................................................................
Total operating expenses............................................................
Operating loss .......................................................................................
Other income, net..................................................................................
Loss before income taxes......................................................................
Provision for income taxes ...................................................................
Net loss ......................................................................................
Earnings (loss) per common share:
ss per common sharebas ic ............................................................
Loss per common sharediluted .........................................................
Weighted average common shares outstandingbas ic...................
Weighted average common shares outstandingdiluted................
Cash dividends declared per common share .........................................
$
$
$
$
$
$
12,667
5,808
3,318
21,793
5,673
2,410
414
8,497
13,296
12,517
6,377
3,295
22,189
5,488
3,113
346
8,947
13,242
11,888
13,394
8,298
1,636
35,216
(21,920)
258
(21,662)
(10)
((21,6, 72)) $
9,275
12,465
7,954
1,525
31,219
(17,977)
109
(17,868)
(66)
(1( 7,,934)) $
(2.36) $
(2.36) $
9,188
9,188
$
(2.19) $
(2.19) $
8,198
8,198
$
11,727
6,203
7,728
25,658
5,077
3,020
334
8,431
17,227
7,974
13,711
8,972
1,793
32,450
(15,223)
55
(15,168)
(652)
((15,8, 20))
(2.22)
(2.22)
7,187
7,187
0.22
See Notes to Consolidated Financial Statements.
F-4
DIGIMARC CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands)
BALANCE AT DECEMBER 31, 2013 ..................
Issuance of common stock, net of issuance costs ......
Exercise of stock options...........................................
Issuance of restritt cted common stock.........................
Forfeiture of restricted common stock.......................
Purchase and retirement of common stock ................
Stock-based compensation ........................................
Tax impamm ct from stock-based awards ........................
Net loss......................................................................
Cash dividends declared............................................
BALANCE AT DECEMBER 31, 2014 ..................
Issuance of common stock, net of issuance costs ......
Exercise of stock options...........................................
Issuance of restritt cted common stock.........................
Forfeiture of restricted common stock.......................
Purchase and retirement of common stock ................
Stock-based compensation ........................................
Net loss......................................................................
Cash dividends declared............................................
BALANCE AT DECEMBER 31,, 2015 ..................
Issuance of common stock, net of issuance costs ......
Exercise of stock options...........................................
Issuance of restritt cted common stock.........................
Forfeiture of restricted common stock.......................
Purchase and retirement of common stock ................
Stock-based compensation ........................................
Net loss......................................................................
Cash dividends declared............................................
BALANCE AT DECEMBER 31,, 2016 ..................
Common Stock
Shares
7,401
684
202
283
(38)
(105)
8,427 $
342
111
150
(31)
(80)
8,,919 $
Preferr
ed Stock
ff
Shares Amount
50
50
50
1,418
69
212
(12)
(83)
10,,523 $
50
10
10 $
10 $
10 $
Amount
7
1
Additional
Paid-in
Capital
Retained
Earnings
(Accumulated
Deficit)
Total
Shareholders'
Equity
41,498
15,988
1,487
(2,392)
5,580
(1,939)
8 $ 60,222
12,895
1
1,514
(2,443)
5,251
9 $ 77,,439
39,698
2
668
(2,537)
5,717
11 $ 120,9, 85
9,368
(15,820)
(1,654)
(8,106) $
(17,934)
(2( 6,,040)) $
(21,672)
(4( 7,,712)) $
50,923
15,989
1,487
(2,392)
5,580
(1,939)
(15,820)
(1,654)
52,174
12,896
1,514
(2,443)
5,251
(17,934)
51,,458
39,700
668
(2,537)
5,717
(21,672)
73,,334
$
$
$
See Notes to Consolidated Financial Statements.
F-5
DIGIMARC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net loss............................................................................................
Adjud stments to reconcile net loss to net cash used in
operating activities:
Depreciation, amortization and write-off of property and
equipment................................................................................
Amortization and write-offff of intangibles..................................
Changes in allowance for doubtfu
accounts .............................
Stock-based compensation.........................................................
ed income taxes ...............................................................
ff
Deferr
Changes in operating assets and liabilities:
ulff
Trade accounts receivable ....................................................
Other current assets ..............................................................
Other assets...........................................................................
Accounts payabla e and other accruer d liabilities.....................
ff
revenue ..................................................................
Deferred
Net cash used in operating activities ...............................
Cash flows from investing activities:
a
Purchase of property and equipment ...............................................
Capitalized
patent costs ...................................................................
Maturity of marketable securities....................................................
Purchase of marketable securities ...................................................
Net cash used in investing activities ...............................
Cash flows from financing activities:
Issuance of common stock, net of issuance costs.......................
Exercise of stock options ...........................................................
Purchase of common stock ........................................................
Cash dividends paid ...................................................................
Net cash provided by financing activities .......................
Net increase (decrease) in cash and cash equivalents .....
Cash and cash equivalents at beginning of period ..........
Cash and cash equq ivalents at end of perp iod.....................
uu
Suppl
uu
Suppl
emental disclosure of cash flow information:
sh received (paid) for income taxes, net......................................
emental schedule of non-cash investing activities:
Property and equipment and patent costs in accounts payable........
Stock-based compensation capitalized to software and patent
costs..............................................................................................
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Year Ended
December 31,
2014
$
(21,672) $
(17,934) $
(15,820)
1,336
1,121
5,553
(462)
(208)
7
637
(176)
(13,864)
(1,837)
(790)
41,052
(53,914)
(15,489)
39,700
668
(2,537)
37,831
8,478
3,160
11,638
$
1,237
1,196
(7)
5,077
(64)
1,124
40
125
(534)
(9,740)
(1,218)
(895)
42,264
(45,340)
(5,189)
12,896
1,514
(2,443)
11,967
(2,962)
6,122
3,160
(38) $
1,233
35
164
$
$
73
174
$
$
$
$
974
1,340
(23)
5,403
2,085
1,316
(1,028)
192
(635)
(537)
(6,733)
(1,399)
(1,190)
28,074
(29,871)
(4,386)
15,989
1,487
(2,392)
(1,654)
13,430
2,311
3,811
6,122
263
140
177
$
$
$
$
See Notes to Consolidated Financial Statements.
F-6
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(1) Description of Business and Summary of Significant Accounting Policies
Description of Business
Digimarc Corporation (Digimarc or the Company), an Oregon corporation, enables governments and
enterprrr
ises around the world to give digital identities to media and objects that compumm ters can sense and recognize,
and to which they can react. The Company has developed the Digimarc Discover®, Digimarc Barcode and Intuitive
Computing Platforff m that are designed to optimize the identification
and whenever they may appear, facilitating modern mobile-centric shopping. The platforff m includes means to embedm
Digimarc Barcodes, invisible and inaudible barcode-like information that is recognizable by smartpht ones, tablets,
industrial scanners, and other compumm ter interfaces
product packaging. Digimarc Barcodes have many applications, including facilitating remarkably faster scanning of
products at retail checkout as well as improvmm
Barcode is robust yet impemm rceptible by people in ordinary use, allowing for reliable, effiff cient, economical, globally
scalabla e, automatic identification of media without visible computer codes like traditional barcodes.
ed engagement with smartphone-equipped consumers. The Digimarc
into virtually all forms of media content, including consumer
of all consumer brand impremm ssions, wherever
ff
ff
Principles of Consolidll atdd iott n
The consolidated financial statements include the accounts of Digimarc and its wholly-owned subsu idiaries. All
intercompany transactions and balances have been eliminated.
Use of Estimtt
atestt
The preparation of the consolidated financial statements in accordance with accounting principles generally
accepted in the U.S. requires management to make estimates and judgments that affeff ct the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Certain of the
Companys accounting policies require higher degrees of judgment than others in their application. These include
revenue recognition, goodwill, impamm irment of long-lived assets, contingencies and income taxes. Management bases
its estimates on historical experience and on other assumptions that are believed to be reasonabla e in the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and
from these estimates under
liabilities that are not readily apparent from other sources. Actual results may differff
different assumptions or conditions.
Reclassifii cations
Certain prior period amounts in the accompanying consolidated financial statements and notes thereto have
been reclassified to conform to current period presentation. These reclassifications had no material effeff ct on the
results of operations or financial position for any period presented.
Cash Equivalentstt
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 primarily money market securities, corporate
notes and certificff ates of deposits totaling $10,881 and $2,401 at Decemberm 31, 2016 and 2015, respectively. Cash
equivalents are carried at cost or amortized cost, which approximates market.
F-7
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Marketablell Securities
The Company considers all investments with original maturities over 90 days that mature in less than one-year
from the balance sheet date to be short-term marketable securities. Short- and long-term marketable securities
primarily include federal agency notes, commercial paper, corporate notes, pre-refunff ded municipal bonds and U.S.
treasuries. The Companys marketable securities are classified as held-to-maturity and are reported at amortized
cost, which approximates market.
A decline in the market value of any security below amortized cost that is deemed to be other-than-temporary
results in a reduction in the carrying amount. The impamm irment is charged to earnings and a new cost basis for the
security is established. To determine whether an impairm
whether it has the ability and intent to hold the investment until a market price recovery and considers whether
evidence indicating that the cost of the investment is recoverable outweighs evidence to the contrary. There have
been no other-than-temporar
ment is other-than-tempormm ary, the Company considers
ments identified or recorded by the Company.
y impairmm
mm
Premiums and discounts are amortized or accreted over the life of the related security as an adjud stment to
ive interest method. Under this method, dividend and interest
yield using a method that approximates the effect
income are recognized when earned.
ff
Fair Value of Financiali
Instruments
Accounting Standards Certificff ation (ASC) 820 Fa
ir Value Measurements and Disclosures defines fair
value, establishes a framework for measuring fair value under generally accepted accounting principles in the U.S.,
and enhances disclosures about fair value measurements. ASC 820 describes a fair value hierarchy based on three
levels of inpun
measure fair value, which are the following:
ts, of which the first two are considered observable and the last unobservabla e, that may be used to
Level 1Pricing inpun ts are quoted prices available in active markets for identical investments as of the
reporting date.
Level 2Pricing inpun ts are quoted for similar investments, or inpun ts that are observable, either directly
or indirectly, for subsu tantially the full term through corroboration with observable market data. Level 2
includes investments valued at quoted prices adjud sted for legal or contractual restrictions specificff
these investments.
to
Level 3Pricing inpun ts are unobservable for the investment; that is, the inpun ts refleff ct the reporting
entitys own assumptions about the assumptions market participants would use in pricing the asset or
liability.
The estimated fair values of the Companys financial instruments, which include cash equivalents, accounts
receivable, accounts payable and other accrued liabilities approximate their carrying values due to the short-term
nature of these instruments. The Company records marketable securities at amortized cost, which approximates fair
value.
The Companys fair value hierarchy for its cash equivalents and marketable securities as of December 31,
2016 and 2015, respectively, was as follows:
December 31, 2016
Money market securities.................................................
Federal agency notes ......................................................
Commercial paper ..........................................................
Corporate notes...............................................................
Pre-refunff ded municipal bonds (1) ..................................
U.S. treasuries.................................................................
Total ...............................................................................
Level 1
$ 1,218
$ 1,218
Level 2
Level 3
Total
$
$
16,810
16,757
15,753
6,716
2,515
$ 58,551
$
$ 1,218
16,810
16,757
15,753
6,716
2,515
$ 59,769
F-8
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
December 31, 2015
Money market securities.......................................... $
Federal agency notes ...............................................
U.S. treasuries..........................................................
Corporate notes........................................................
Pre-refunff ded municipal bonds (1) ...........................
Commercial paper ...................................................
Certificates of deposits ............................................
Total ........................................................................ $
Level 1
Level 2
Level 3
Total
2,001
2,001
$
$
11,722
7,059
6,884
4,747
3,794
2,220
$ 36,426
$
2,001
$
11,722
7,059
6,884
4,747
3,794
2,220
$ 38,427
(1)
Pre-refunded municipal bonds are collateralized by U.S. treasuries.
The fair value maturities of the Companys cash equivalents and marketable securities as of December 31,
2016 are as follows:
Cash equivalents and marketable securities...................
Total
$ 59,769
Less than
1 year
$ 55,377
Maturities by Period
1-5
years
$ 4,392
$
5 - 10
years
More than
10 years
$
Concentratiott ns of Business and Creditii Riskii
A significaff
nt portion of the Compamm nys business depends on a limited number of large contracts. The loss of
any large contract may result in loss of revenue and margin on a prospective basis. Financial instruments that
potentially subju ect Digimarc to concentrations of credit risk consist primarily of cash and cash equivalents,
marketable securities, and accounts receivable. Digimarc places its cash and cash equivalents with majoa r banks and
financial institutions and at times deposits may exceed insured limits. Other than cash used for operating needs,
which may include short-term marketable securities with the Companys principal banks, Digimarcs investment
policy limits its credit exposure to any one financial institution or typeyy
maximum of 5% of its cash equivalents and marketable securities or $1,000, 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. The Companys investment policy also limits its credit exposure by limiting the
maximum of 40% of its cash equivalents and marketable securities, or $15,000, whichever is greater, to be invested
in any one industry category, (e.g., financial or energy industries), at the time of purchase. As a result, Digimarcs
credit risk associated with cash and cash equivalents and marketable securities is believed to be minimal.
of financial instrume
nt by limiting the
rr
Contingencies
The Company evaluates all pending or threatened contingencies or commitments, if any, that are reasonably
likely to have a material adverse effeff ct on the Companys operations or financial position. The Company assesses
the probability of an adverse outcome and determines if it is remote, reasonabla y possible or probabla e as defined in
accordance with the provisions of ASC 450 Contingencies. If information available prior to the issuance of the
financial statements indicates that it is probable that an asset has been impam ired or a liability has been incurred at the
date of the financial statements, and the amount of the loss, or the range of probable loss can be reasonably
estimated, then the loss is accrued and charged to operations. If no accrual is made for a loss contingency because
one or both of the conditions pursuant to ASC 450 are not met, but the probability of an adverse outcome is at least
reasonably possible, the Company will disclose the nature of the contingency and provide an estimate of the possible
loss or range of loss, or state that such an estimate cannot be made.
F-9
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Equity Method Investments
The Company accounts for its joint ventures under the equity method of accounting pursuant to ASC 323
estmentsEqu ity Method and Joint Ventures. Under the equity method, investments are carried at cost, plus or
Inv
minus the Companys proportionate share, based on present ownership interests, of:ff (a) the investees profitff or loss
after
ff
profit or loss; and (c) certain other adjustments. Distributions received from the investee (such as dividends) reduce
the carrying amount of the investment.
the date of acquisition; (b) changes in the Companys equity that have not been recognized in the investees
Goodwill
The Company accounts for business combinations under the acquisition method of accounting in accordance
iness Combinations, where the total purchase price is allocated to the tangible and identified
with ASC 805, Bus
intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is
allocated using the information currently available, and may be adjud sted, up to one-year from acquisition date, after
obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to
preliminary estimates.
ff
Contingent consideration, if any, is recorded at the acquisition date based upon the estimated fair value of the
contingent payments. The fair value of the contingent consideration is re-measured each reporting period with any
adjud stments in fair value being recognized in earnings from operations.
The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less
liabilities assumed is recognized as goodwill.
The Company tests goodwill for impairmm
ment annually in June and whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Such reviews assess the fair value of the
Companys assets compared to their carrying value. 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 Companys
market capitalization plus an estimated control premium.
Impaim rmii
ent of Long-Ligg
ved Assetstt
The Company assesses long-lived assets for impairmm
ment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable, in accordance with the provisions of ASC 360
Pr operty, Plant
and Equipmi
ent.
l
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets
life. If such
to future net undiscounted cash flows expected to be generated by the assets over their remaining usefulff
assets are considered to be impairm
which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on
discounted cash flows or appraised values, depending on the nature of the assets.
ed, the impamm irment would be recognized in operating results at the amount by
Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Research and Developmo
ent
Research and development costs are expensed as incurred in accordance with ASC 730 Re
search and
Development.
F-10
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Software Development Coststt
Under ASC 985 Softwff are, softwff
are development costs are to be capitalized beginning when a products
technological feasibility has been established and ending when a product is made available for general release to
customers. To date, the establishment of technological feasibility of the Companys products has occurred shortly
beforff e general release and, therefore,
Accordingly, the Company has not capia talized any software development costs and has charged all such costs to
research and development expense.
software development costs qualifyiff ng for capitalization have been immaterial.
ff
Patent Coststt
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 award date, which
varies depending on the pendency period of the application, generally approximating seventeen years. Capitalized
patent costs, also referr
ed to as patent prosecution costs, include internal legal labor, profesff
government filing fees and translation fees related to expanding the Companys patent portfolff
sional legal fees,
io.
ff
Costs associated with the maintenance and annuity fees of patents are accounted for as prepaid assets at the
time of payment and amortized over the shorter of the maintenance period or remaining life of the related patent.
Revenue Recogno
ition
See Note 2 for detailed disclosures of the Companys revenue recognition policy.
Stock-
Ba-
tt
sed Compensation
The Company accounts for stock-based compemm nsation in accordance with ASC 718 CompensationStock
Compensation, which requires the measurement and recognition of compensation for all stock-based awards made
to emplmm oyees and directors including stock options and restricted stock based on estimated fair values.
For stock option awards, the Company uses the Black-Scholes option pricing model as its method of
valuation. The Companys determination of the fair value on the date of grant is affeff cted by its stock price as well as
assumptions regarding a number of subju ective variables. These variables include, but are not limited to, the expected
lifeff of the award, the Companys expected stock price volatility over the term of the award, the risk-free interest rate
and the expected dividend yield. Although the fair value of stock-based awards is determined in accordance with
ASC 718 and SAB No. 107 Shared-Based Payma
ent, the Black-Scholes option pricing model requires the input
subju ective assumptions, and other reasonable assumptions could provide diffeff
ring results.
of
n
The fair value of restricted stock awards is based on the fair market value of the Companys common stock on
the date of the grant (measurement date), and is recognized over the vesting period of the award using the straight-
line method.
Income Taxeaa s
The Company accounts for income taxes in accordance with ASC 740 Incom
e Taxes utilizing the asset and
liability method. Under the asset and liability method, deferred income taxes reflect the future tax consequences of
differences between the tax basis of assets and liabilities and their financial reporting amounts. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary diffeff rences are expected to be recovered or settled. The effeff ct on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period of enactment.
The Company records valuation allowances on deferred tax assets if,ff based on available evidence, it is more-
likely-than-not that all or some portion of the assets will not be realized.
F-11
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The Company is subju ect to federal and state income taxes within the U.S., and, in the ordinaryrr course of
business, there are transactions and calculations where the ultimate tax determination is uncertain. The Company
reports a liability (or contra asset) for unrecognized tax benefits resulting from uncertain tax positions taken (or
expected to be taken) on a tax return. The Company recognizes interest and penalties, if any, related to the
unrecognized tax benefits in income tax expense.
Accountintt gn Pronouncements Issued But Not Yet Adopdd
ted
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
ue from Contrat
of promised goods or services to customers in an amount that
ctstt with Customersrr (TopTT ic 606)6 . ASU No. 2014-09 provides specific
the effecff
tive date of the new revenue standard for public
ff December 31, 2017, and interim periods beginning in the
(ASU) No. 2014-09, Reven
guidance to recognize revenue to depict the transferff
refleff cts the consideration to which the entity expects to be entitled in exchange for those goods or services. The
ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effeff ctive. In August
2015, the FASB issued ASU No. 2015-14 to deferff
entities
by one-year to annual reporting periods beginning after
first interim period within the year of adoption. Earlier application is permitted only as of annual reporting periods
beginning afteff
has developed an implmm ementation plan to adopt this new guidance. As part of this plan, the Company is currently
assessing the potential future impamm ct of this standard on the Companys financial condition, results of operations and
disclosures. Based on procedurdd es performed to date, the impactm
not expected to have a material impamm ct on the Company, however, the Company will continue to evaluate this
assessment. The Company is not far enough along in the evaluation of the impactm
revenue to make any conclusions at this time. The guidance permits the use of either the retrospective or cumulm ative
effeff ct transition method. The Company plans to utilize the cumulative effeff ct transition method and will adopt this
standard effect
r December 15, 2016, including interim reporting periods within that reporting period. The Company
of this standard on service and license revenues is
of the standard on subsu cription
ive Januan ry 1, 2018.
u
ff
In February 2016, the FASB issued ASU No. 2016-02, Le
ases (TopiTT
c 842), which superuu
sedes Topic 840,
Leases. ASU No. 2016-02 increases the transparency and compamm rability of organizations by recognizing lease assets
and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance
requires that operating leases recognize a right-of-uff
se asset and a lease liability measured at the present value of the
lease payments in the statement of financial position, recognize a single lease cost allocated over the lease term on a
generally straight-line basis, and classify all cash payments within operating activities in the statement of cash flows.
The amendments in this update are effeff ctive for fiscal years beginning afteff
r December 31, 2018, and interim periods
beginning in the first interim period within the year of adoption. Early adoption is permitted. In transition, lessees
and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a
modified retrospective approach, which includes a numbem r of optional practical expedients that entities may elect to
apply. While the Company is currently assessing the potential future impamm ct of adopting this standard, the Company
expects the primary impam ct will be the recognition, on a discounted basis, of our minimum commitments under non-
cancelable operating leases on our consolidated balance sheets, resulting in the recording of right of use assets and
lease obligations. The Companys minimum commitments under non-cancelable operating leases are disclosed in
Note 7.
In March 2016, the FASB issued ASU No. 2016-09, Compensation Stock Compensation: Improvements to
TT
718). ASU No. 2016-09 simplifies the accounting for share-
Employee Share-Based Payment Accounting (Topic
based payment transactions, including accounting for income taxes, forfeiff
requirements, and classificff ation in the statement of cash flows. The amendments in this update are effeff ctive for
r December 31, 2016, and interim periods beginning in the first interim period within the
fiscal years beginning afteff
year of adoption. Early adoption is permitted. Any adjud stments should be refleff cted as of the beginning of the fiscal
year that includes that interim period. Effeff ctive January 1, 2017, the Company made a policy election to account for
forfeiff
election will result in an immaterial adjustment to opening retained earnings. Also effect
Company will provide emplmm oyees the option to elect the minimum or the maximum statutory tax-withholding rate to
be applied on the exercise or vesting of stock-based awards. Upon adoption of this standard, deferred tax assets will
be recorded for previously unrecognized excess tax benefits as of December 31, 2016, which we expect will be
tures of stock-based awards when they occur versus estimating and applying a forfeiff
ture rate. The policy
ive January 1, 2017, the
tures, statutory tax withholding
ff
F-12
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
offsff et by valuation allowance. Any future excess tax benefits will be recognized in the income tax provision when
realized and would be offseff
t by any required valuation allowance. The adoption of the standard is not expected to
have a material impamm ct on the Companys financial condition, results of operations, cash flows and disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flowsww Classifici
ation of Certain
c 230). ASU No. 2016-15 adds or clarifies guidance on specific cash flow
Cash Receipts and Cash Payments (TopiTT
issues to reducd e diversity in practice in how certain transactions are classified in the statement of cash flows. The
amendments in this update are effeff ctive for fiscal years beginning after Decembem r 31, 2017, and interim periods
beginning in the first interim period within the year of adoption. Early adoption is permitted. Any adjud stments
should be refleff cted as of the beginning of the fiscal year that includes that interim period. The amendments in this
update are to be applied retros
practicable if retrospective application would be imprmm acticable. The Company is currently assessing the potential
future impamm ct of this standard on its cash flows and disclosures.
pectively to all periods presented but may apply it prospectively from the earliest date
tt
(2) Revenue Recognition
The Company derives its revenue primarily from profess
ff
ional services, subsu criptions and licensing of its
intellectual property:
Service revenue consists primarily of software development and consulting services. The majoa rity of
service revenue arrangements are structured as time and materials consulting agreements.
Subsu cription revenue includes Digimarc Discover, Digimarc Barcode and Guardian products and
services, is generally recurring, paid in advance and recognized over the term of the subsu cription.
License revenue originates primarily from licensing the Companys intellectual property where the
Company receives license fees and/or royalties as its income stream.
Revenue is recognized in accordance with ASC 605 Re
venue Recognition and ASC 985 Softwff are when
the following four criteria are met:
(i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred,
(iii) the fee is fixed or determinable, and
(iv) collection is reasonably assured or probabla e.
Some customer arrangements encompass multiple deliverables, such as profesff
sional services, software
uu
fees. For arrangements that include multiple deliverables, the Company
licenses, and maintenance and support
identifies separate units of accounting at inception based on the consensus reached under ASC 605-25 Multiple-
Element Arrangements, which provides that revenue arrangements with multiple deliverables should be divided
into separate units of accounting if certain criteria are met. The Company applies ASC 985 to software deliverables
when relevant. The consideration for the arrangements under ASC 605-25 is allocated to the separate units of
accounting using the relative selling price method.
The relative selling price method allocates the consideration based on the Companys specificff
assumptm ions
rather than assumptions of a marketplace participant, and any discount in the arrangement proportionally to each
deliverable on the basis of each deliverables selling price.
F-13
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Applicable revenue recognition criteria are considered separately for each separate unit of accounting as
follows:
is generally determined based on time and materials. Revenue for development and
Service revenuen
consulting services is recognized as the services are perforff med. Billing for services rendered generally
occurs within one month after
the services are provided.
ff
Subscription revenue, which includes revenue from the sale of Digimarc Discover, Digimarc Barcode
and Guardian products and services, is generally paid in advance and recognized over the term of the
subsu cription, which is generally one to three years.
License revenue is recognized when amounts owed to the Company have been earned, are fixed or
determinable (within the Companys normal 30 to 60 day payment terms), and collection is reasonabla y
assured. If the payment terms extend beyond the normal 30 to 60 days, the fee may not be considered to
be fixed or determinable, and the revenue would then be recognized when installments are due.
The Company records revenue from certain license agreements upon cash receipt as a result of
collectability not being reasonably assured.
The Companys standard payment terms for license arrangements are 30 to 60 days. Extended
payment terms on patent license arrangements are not considered to be fixed or determinable if
payments are due beyond the Companys standard payment terms, primarily because of the risk
of substantial modification present in the Companys patent licensing business. As such, revenue
on license arrangements with extended payment terms are recognized as fees become fixed or
determinable.
ff
Deferre
d revenue consists of billings in advance for profess
ff
ional services, subsu criptions and licenses for which
revenue has not been earned.
(3) Segment Inforff mation
Geographic Infon rmation
The Company derives its revenuen
from a single reporting segment: media management solutions. Revenue is
generated in this segment through development services, subsu criptions and licensing of intellectual property. The
Company markets its products in the U.S. and in non-U.S. countries through its sales and licensing personnel.
Revenue by geographic area, based upon the bill-to location, was as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2015
2016
2014
Domestic ...................................................................... $
International (1)............................................................
Total........................................................................ $
4,776 $
17,017
21,793 $
6,304 $
15,885
22,189 $
9,596
16,062
25,658
(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.
F-14
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Majoa r Customers
Customers who accounted for 10% or more of the Companys revenue are as follows:
Central Banks
Verance Corporation ("Verance") ..................
......................................................
.
.....
.
62%
*
57%
*
47%
12%
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Year Ended
December 31,
2014
*
Less than 10%
In Septemberm 2014, the Company extended the patent license agreement with Verance through 2023, in effeff ct
waiving any future royalties and license fees, in exchange for a $1.0 million license fee payment. The license fee
payment was recorded as revenuen
upon receipt in the third quarter of 2014.
Long-lived assets by geographical area
The Companys long-lived assets are all domestic, domiciled in the U.S.
(4) Stock-Bk ased Compensation
Stock-based compensation includes expense charges for all stock-based awards to emplmm oyees and directors.
These awards include option grants and restricted stock awards.
Stock-based compensation expense related to internal labor is capitalized to software and patents based on
direct labor hours charged to capitalized software and patent costs.
Determtt
ining Fair Value
Stock Options
Valuation and Amortizaii
tion Method. The Company estimates the fair value of stock options granted using the
Black-Scholes option valuation model. The Company amortizes the fair value of all awards on a straight-line basis
over the requisite service periods, which are generally the vesting periods.
Expected Life. The expected lifeff of awards granted represents the period of time that they are expected to be
outstanding. The Company determines the expected life based on historical experience with similar awards, giving
terms, vesting schedules and pre-vesting and post-vesting forfeff itures. Stock options
consideration to the contractual
granted generally vest over three to four years for emplomm yee grants and one to two years for director grants, and have
contractual terms of ten years.
t
Expected Volatility. The Company estimates the volatility of its common stock at the date of grant based on
the historical volatility of its common stock based on historical prices over the most recent period commensurate
with the expected life of the award.
Riskii
-Fkk
reFF e Interest Rate. The Company determines the risk-freeff
interest rate using current U.S. treasury yields
for bonds with a maturity commensurate with the expected life of the award.
Expected Dividend Yield.l The expected dividend yield is derived by the Companys expected annual dividend
rate over the expected term divided by the fair value of the Companys common stock at the grant date.
There were no stock options granted during the years ended December 31, 2016, 2015 and 2014.
F-15
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The Company records stock-based compemm nsation expense for stock option awards only for those awards that
are expected to vest.
Restricted Stock
The fair value of restricted stock awarded is based on the fair market value of the Companys common stock
on the date of the grant (measurement date), and is recognized over the vesting period of the award using the
straight-line method.
The Company records stock-based compensation expense for restricted stock awards only for those awards
that are expected to vest.
Stock-based Compensation
Stock-based compensation:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2015
2016
2014
Cost of revenue ......................................................... $
.................................................
.
Sales and marketing
Research, development and engineering..................
General and administrative ......................................
Intellectual property.................................................
..........
.
.........
.
Stock-based compensation expense .........
to software and patent costs ...
Capitalized
a
Total stock-based compepmm nsation ................................... $
709 $
975
1,381
2,182
306
5,553
164
5,717 $
740 $
775
1,308
1,978
276
5,077
174
5,251 $
545
674
1,406
2,454
324
5,403
177
5,580
The following table sets forth total unrecognized compensation cost related to non-vested stock-based awards
granted under all equity compensation plans:
Total unrecognized compensation costs........................ $
9,728 $
9,549 $
tal unrecognized compensation costs will be adjud sted for any future forfeit
ff
ures.
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2015
2016
2014
11,206
The Company expects to recognize the total unrecognized compensation costs as of December 31, 2016 for
stock options and restricted stock over weighted average periods through December 2020 as follows:
Weighted average period .................................................
Stock
Options
0.0 years
Restricted
Stock
1.3 years
(5) Earnings Per Common Share
The Company calculates basic and diluted earnings per common share in accordance with ASC 260 Ear
Per Share, using the two-class method because the Companys unvested restricted stock is a participating security
since these awards contain non-forfeiff
allocated to each class of common stock and participating security as if all of the earnings for the period had been
distributed.
table rights to receive dividends. Under the two-class method, earnings are
ningsgg
F-16
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Basic earnings per common share excludes dilution and is calculated by dividing earnings to common shares
by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share
is calculated by dividing earnings to common shares by the weighted-average number of common shares, as
adjud sted for the potentially dilutive effeff ct of stock options. The following table reconciles earnings (loss) per
common share for the years ended December 31, 2016, 2015 and 2014:
Year Ended
Year Ended
Year Ended
December 31, December 31, December 31,
2015
2016
2014
Basic Earnings (Loss) per Common Share:
NumNN eratortt
:
Net loss..................................................................... $
Distributed earnings to common shares ...................
Distributed earnings to participating securities ........
Total distributed earnings.........................................
Undistributed loss allocable to common shares .......
Undistributed earnings allocable to participating
securities................................................................
Total undistributed loss ............................................
Loss to common sharesbas ic ................................ $
Denominatott r
Weighted average common shares outstanding
basic ......................................................................
Basic earningsg (los
(
s)) perp
common share .................. $
(21,672) $
(21,672)
(17,934) $
(17,934)
(15,820)
1,553
101
1,654
(17,474)
(21,672)
(21,672) $
(17,934)
(17,934) $
(17,474)
(15,921)
9,188
((2.36)) $
8,198
((2.19)) $
7,187
(2( .22))
Year Ended
Year Ended
Year Ended
December 31, December 31, December 31,
2015
2016
2014
Diluted Earnings (Loss) per Common Share:
NumNN eratortt
:
Loss to common sharesbas ic ................................ $
Undistributed earnings allocated to participating
(21,672) $
(17,934) $
(15,921)
securities................................................................
Undistributed earnir ngs reallocated to participating
securities................................................................
Loss to common sharesdiluted ............................. $
Denominatott r
Weighted average common shares outstanding
basic ......................................................................
Dilutive effeff ct of stock options ................................
Weighted average common shares outstanding
dilutive ..................................................................
Diluted earningsg (los
(
s)) perp
common share ............... $
(21,672) $
(17,934) $
(15,921)
9,188
8,198
7,187
9,188
((2.36)) $
8,198
((2.19)) $
7,187
(2( .22))
There were 0, 0 and 175 common stock equivalents related to stock options that were anti-dilutive and
excluded from diluted earnings per common share for the years ended December 31, 2016, 2015 and 2014,
respectively, because their exercise prices were higher than the average market price of the underlying common
stock for the period.
There were 187, 230 and 217 common stock equivalents related to stock options that were anti-dilutive and
excluded from diluted earnings per common share for the years ended December 31, 2016, 2015 and 2014,
respectively, because the Company incurred a net loss for the period.
F-17
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(6) Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount.
December 31, December 31,
2016
2015
Trade accounts receivable.......................................
Allowance for doubtfu
accounts .............................
Trade accounts receivable, net ..............................
n
Unpaid
receivable .......................................................
red revenue included in trade accounts
deferff
ulff
.
.... $
....
...... $
.
.......... $
.
5,093 $
(15)
5,078 $
4,631
(15)
4,616
2,245 $
2,012
Allowance for doubtfut
l accounts
The allowance for doubtfu
ulff
accounts is the Companys best estimate of the amount of probable credit losses in
the Companys existing trade accounts receivable. The Company determines the allowance based on historical
write-offff experience and current information. The Company reviews its allowance for doubtfu
accounts each
r all means of collection have been
reporting period. Account balances are charged against the allowance afteff
exhausted and the potential for recoveryrr
is considered remote.
ulff
Unpaid deferred revenue
The unpaid deferred revenuen
that are included in trade accounts receivable are billed in accordance with the
provisions of the contracts with the Companys customers. Unpaid
customers are not included in trade accounts receivabla e nor deferff
n
red revenuen .
deferff
red revenuen
from the Companys cash-basis
Majoa r customers
Customers who accounted for 10% or more of trade accounts receivable, net are as follows:
Central Banks...........................................................
57%
62%
December 31,
2016
December 31,
2015
(7) Property and Equipment
Property and Equipmi
ent
Property and equipment are stated at cost. Repairs and maintenance are charged to expense when incurred.
F-18
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Depreciation on property and equipment is calculated using the straight-line method over the estimated usefulff
lives of the assets, generally two to ten years. Leasehold improvements are amortized using the straight-line method
over the shorter of the estimated usefulff
life or the lease term.
December 31, December 31,
2016
2015
Officff e furniture and fixtures ......................................... $
are ........................................................................
Softwff
Equipment.....................................................................
ements ..............................................
Leasehold improvmm
Gross property and equipment.................................
Less accumulm ated depreciation and amortization..........
Proppertyy and equq ippment, net.................................... $
1,168 $
2,146
4,071
1,617
9,002
(5,432)
3,570 $
1,068
1,748
3,416
1,276
7,508
(4,498)
3,010
Leases
Future minimum lease payments under non-cancelable operating leases are as follows:
Year ending December 31:
2017 ..................................................................................
2018 ..................................................................................
2019 ..................................................................................
2020 ..................................................................................
2021 ..................................................................................
.........................................................................
Thereafter
nts ........................................
Total minimum lease pap ymey
ff
Operating
Leases
$
$
784
992
1,023
848
804
1,899
6,350
Rent expense on the operating leases was as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2015
2016
2014
Rent expense ............................................................... $
1,022 $
1,045 $
951
Intangibles
Intangible assets are reviewed for impaimm rment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. No impamm irment charges were recorded for the years ended
December 31, 2016, 2015 and 2014.
Amortization of capitalized patent costs associated with the application and award of patents in the U.S. and
various other countries are capitalized and amortized on a straight-line basis over the term of the patents as
determined at the award date, which varies depending on the pendency period of the application, generally
approximating seventeen years.
F-19
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Amortization of intangible assets acquired is calculated using the straight-line method over the estimated
lives of the assets.
usefulff
a
Capitalized
Intangible assets acquired:
patent costs.................................................
Estimated
Life
)
(years)
(y
17-20
December 31, December 31,
2016
2015
$
7,281 $
6,779
Purchased patents and intellectual property.............
Existing technology .................................................
Customer relationships ............................................
Backlog....................................................................
Tradenames..............................................................
Non-solicitation agreements ....................................
Gross intangible assets ..................................................
Accumulated amortization ............................................
Intanggibles, net ..............................................................
3-10
5
7
2
3
1
250
1,560
290
760
290
120
10,551
(4,129)
6,422 $
250
1,560
290
760
290
120
10,049
(3,436)
6,613
$
Amortization expense on intangible assets was as follows:
Amortization expense.................................................... $
693 $
722 $
1,047
intangible assets recorded at December 31, 2016, the estimated future aggregate amortization expense for
the years ending December 31, 2017 through 2021 is approximately as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2015
2016
2014
Year ending December 31:
2017 ................................................................................. $
2018 .................................................................................
2019 .................................................................................
2020 .................................................................................
2021 .................................................................................
Amortization
Expense
657
364
344
300
238
(9) Shareholders Equity
Preferred Stock
In June 2008, the Board of Directors authorized 2,500 shares of preferred
of Directors has the authority to issue the undesignated preferred
The Boarda
determine the powers, prefeff rences and rights and the qualifications, limitations or restrictions granted to or imposmm ed
upon any wholly unissued series of undesignated preferff
red stock and to fix the number of shares constituting any
series and the designation of such series, without any further vote or action by the shareholders. The issuance of
stock may have the effeff ct of delaying, deferring or preventing a change of control of the Company without
ff
preferred
further action by shareholders and may adversely affeff ct the voting and other rights of the holders of common stock.
stock in one or more series and to
stock, par value $0.001 per share.
ff
ff
The Board of Directors authorized 10 shares of Series A Redeemable Nonvoting Preferred
ed) that were issued to certain executive offiff cers at the time of formation. The Series A Preferff
ff
Preferr
voting rights, except as required by law, and may be redeemed at the option of the Companys Board of Directors at
any time on or after
stock (Series A
June 18, 2013.
red has no
ff
ff
F-20
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The Series A Preferff
red is redeemable based on the stated fair value of $5.00 per share. The Series A Preferff
red
has no dividend rights and no rights to the undistributed earnings of the Company.
ComCC mon Stock
In June 2008, the Board of Directors authorized 50,000 shares of common stock, par value $0.001 per share.
red stock, holders of common stock are entitled to receive ratably those dividends as
itted to a vote of its shareholders, including the election of directors. Subju ect to preferen
The holders of Digimarc common stock are entitled to one vote for each share held of record on all matters
submu
to any then outstanding preferff
may be declared by the Board of Directors out of funds legally available for such purpose, as well as any
distributions to the Companys shareholders. In the event of the Companys liquidation, dissolution or winding up,
holders of common stock are entitled to share ratably in all of the Companys assets remaining after
liabilities and the liquidation preferen
preemptmm ive or other subsu cription or conversion rights. There are no redemptmm ion or sinking fund provisions applicable
to the common stock. All outstanding shares of common stock are fully paid and non-assessable.
d stock. Holders of common stock have no
ce of any then outstanding preferre
ces that may be granted
payment of
ff
ff
ff
ff
In August 2016, the Company sold 1,233 shares of its common stock in an underwritten public offeff
ring, plus
an additional 185 shares in full exercise of the underwriters option to purchase additional shares of common stock,
at the price to the public
$2,447 and underwriww ter fees of $150, from the offeff
accounting fees.
of $30.00 per share. The Company received $39,953 of cash proceeds, net of discount of
ring, and paid $253 in stock issuance costs for legal and
u
In August 2014, the Company entered into an Equity Distribution Agreement, whereby the Company could
ing price of up to $30,000. As of December 31, 2015, the Company had sold 1,026 shares under the
sell from time to time through Wells Fargo Securities, LLC, as sales agent, the Companys common stock having an
aggregate offerff
Equity Distribution Agreement at an average price of $29.24 resulting in $29,300 of cash proceeds, net of sales
commissions of $700, and paid $415 in stock issuance costs for legal and accounting fees. There are no shares
remaining to be sold under the Equity Distribution Agreement.
Stock Incentive Plan
In July 2008, the Companys Board of Directors initially adopted the 2008 Incentive Plan (2008 Plan). The
2008 Plan provides for the grant of stock options, stock appreciation rights, stock awards, restricted stock, stock
units, perforff mance shares, perforff mance units, and cash-based awards, which may be granted to offiff cers, directors,
emplmm oyees, consultants, agents, advisors and independent contractors who provide services to the Company and its
ff
affiliate
d companies.
The 2008 Plan authorizes the issuance of up to 3,500 shares of common stock. The shares authorized under
the 2008 Plan are subju ect to adjud stment in the event of a stock split, stock dividend, recapitalization or similar event.
Shares issued under the 2008 Plan will consist of authorized and unissued shares or shares held by the Company as
treasury shares. If an award granted under the 2008 Plan lapses, expires, terminates or is forfeiff
without having been fully exercised or without the issuance of all the shares subju ect to the award, the shares covered
by that award will again be available for issuance under the 2008 Plan. Shares that are (i) tendered by a participant
or retained by the Company as payment for the purchase price of an award or to satisfyff
tax withholding obligations
or (ii) covered by an award that is settled in cash, or in some manner that some or all of the shares covered by the
award are not issued, will again be available for issuance under the 2008 Plan. In addition, awards granted as
subsu titute awards in connection with acquisition transactions will not reduce the numbem r of shares authorized for
issuance under the 2008 Plan.
ted or surrendered
As of December 31, 2016, under all of the Companys stock-based compemm nsation plans, equity awards to
purchase an additional 1,325 shares were authorized for future grants under the plans.
F-21
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Stock Options
The Company issues new shares upon option exercises.
Options granted, exercised and forfeited
ff
under the stock incentive plan are summarized as follows:
Options outstanding, December 31, 2013.......................
Granted......................................................................
Exercised...................................................................
or expired...................................................
ff
Forfeited
Options outstanding, December 31, 2014.......................
Granted......................................................................
Exercised...................................................................
or expired...................................................
ff
Forfeited
Options outstanding, December 31, 2015.......................
Granted......................................................................
Exercised...................................................................
or expired...................................................
ff
Forfeited
Options outstanding, December 31, 2016.......................
Options exercisable, December 31, 2016 .......................
Options
813
Weighted
Average
Exercise
Price
$ 15.44
(202) $ 10.48
(10) $ 24.35
$ 16.97
601
(111) $ 13.61
$ 17.73
9.64
$ 19.06
$ 19.06
490
(69) $
421
421
$
$
$
Weighted
Average
Grant Date
Fair Value
7.96
$
6.48
9.84
8.42
7.25
8.69
6.75
9.01
$
$
$
$
Aggregate
Intrinsic
Value
$ 4,601
$ 4,601
The aggregate intrinsic value is based on the closing price of $30.00 per share of Digimarc common stock on
December 31, 2016, which would have been received by the optionees had all of the options with exercise prices
less than $30.00 per share been exercised on that date.
The following table summarizes information about stock options outstanding at December 31, 2016:
Options Outstanding
Options Exercisable
Weighted
emaining Average
Contractual Exercise
Weighted
Remaining Average
Contractual Exercise
Number
Number
Outstanding Life (Years)
Price
Outstanding Life (Years)
Price
140
106
175
421
1.91 $
9.68
3.08 $ 15.63
4.49 $ 28.64
3.28 $ 19.06
140
106
175
421
1.91 $
9.68
3.08 $ 15.63
4.49 $ 28.64
3.28 $ 19.06
Exercise Price
$9.64 - $9.91 .........................................................
$14.99 - $18.01 .....................................................
$27.61 - $30.01 .....................................................
$9.64 - $30.01 .......................................................
Restricted Stock
The Compensation Committee of the Board of Directors has awarded shares of restricted stock under the
Companys 2008 Plan to certain emplmm oyees. The shares subju ect to the restricted stock awards vest over a certain
period, usually four years, following the date of the grant. Specificff
by Restricted Stock Agreements between the Company and the award recipients.
terms of the restricted stock awards are governed
F-22
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
The following table reconciles the unvested balance of restricted stock:
Unvested balance, December 31, 2013 ...........................
Granted ......................................................................
Vested........................................................................
....................................................................
ff
Forfeited
Unvested balance, December 31, 2014 ...........................
Granted ......................................................................
Vested........................................................................
....................................................................
ff
Forfeited
Unvested balance, December 31, 2015 ...........................
Granted ......................................................................
Vested........................................................................
....................................................................
ff
Forfeited
Unvested balance, December 31, 2016 ...........................
Number fof
Shares
Weighted
Average
Grant Date
Fair Value
19.89
$
448
28.79
$
283
23.56
(191) $
25.44
(38) $
23.09
$
502
28.96
$
150
24.78
(213) $
23.96
(31) $
24.30
$
408
29.42
$
212
25.50
(223) $
29.15
(12) $
26.28
$
385
The following table indicates the fair value of all restricted stock awards that vested during the years ended
December 31, 2016, 2015 and 2014:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2015
2016
2014
Fair value of restricted stock awards vested................. $
6,688 $
6,350 $
5,632
(10) Defined Contribution Plan
The Company sponsors an emplm oyee retirement savings plan (the Plan) which qualifieff s as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code. The Plan combim nes both an emplmm oyee savings plan
and company matching plan into one plan under Section 401(k), including a 401(k) Roth option. Emplmm oyees become
eligible to participate in the Plan at the beginning of the month following the emplm oyees hire date. Emplmm oyees may
contribute up to 75% of their pay to the Plan, subju ect to the limitations of the Internal Revenue Code. Company
matching contributions are mandatory under the Plan.
The Company made matching contributions in the aggregate amount as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2015
2016
2014
Matching contributions ................................................. $
775 $
523 $
511
1) Joint Venture and Related Party Transactions
In June 2009, the Company entered into two joint venture agreements with Nielsen to launch two new
compamm nies: TVaura LLC (in which Digimarc holds a 51% ownership interest) and TVaura Mobile LLC (in which
Digimarc holds a 49% ownership interest). The two joint venture agreements and a revised patent license agreement
expanded and replaced the previous license and services agreement between the Company and Nielsen that had been
in operation since late 2007. Under the joint venture agreements, the Company and Nielsen agreed to work together
to develop new products and services, including the expansion and deployment of those products and services that
were in development under the prior agreement.
F-23
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
Under the terms of the revised patent license agreement, Nielsen agreed to pay Digimarc $18,750 during the
period from July 2009 through January 2014, and Digimarc granted to Nielsen a non-exclusive license to Digimarcs
patents for use within Nielsens business. The term of the license continues until the expiration of the last patent
under the license. The payment terms extended beyond the Companys normal 30 to 60 day payment terms, thus the
license revenue was recognized when the installments were due.
In March 2012, Digimarc and Nielsen decided to reduce investments in their two joint venturtt es to minimal
levels while assessing alternative approaches to achieving each of their goals in the emerging market opportunity of
synchronized second screen television.
In October 2015, Digimarc and Nielsen reactivated the TVaura Mobile LLC joint venture to develop solutions
for programmers and advertisers to engage with consumers on second screens and otherwise provide enhanced
flexibility to brand strategies targeting modern consumers. The enhanced cooperation represents another building
block in developing the market for Digimarc Discover and Digimarc Barcode. Neither Digimarc nor Nielsen has
contributed any capital to the joint venture since reactivation.
As of December 31, 2016, botht Digimarc and Nielsen continued to assess the market opportunities of the
TVaura LLC joint venturt e.
The Companys investment in each joint venture was $0 as of Decembem r 31, 2016 and 2015.
Pursuant to the terms of the agreements and ASC 810 Consolidatdd ion, the joint ventures are not consolidated
with the Company because the minority member of each joint venture has subsu tantive participating rights, or veto
rights, such that no member has majoa rity control.
Related Partytt Transactions
Summarized financial information for TVaura LLC has not been provided as the disclosures are immaterial to
the Companys filing given the operations of the joint venture were suspended during the last three fiscal years. The
joint venture had no revenuen
or expenses for the years ended December 31, 2016, 2015 and 2014, and there were no
assets or liabilities as of Decembem r 31, 2016 and 2015.
Summarized financial data for TVaura Mobile LLC:
Current assets.........................................................
Noncurrent assets ...................................................
Current liabilities ...................................................
Noncurrent liabilities .............................................
$
$
$
$
40
$
$
11
$
$
45
10
December 31,
2016
December 31,
2015
Year Ended
December 31,
2016
Year Ended
December 31,
2015
Year Ended
December 31,
2014
Revenue.............................................................. $
........................................................ $
Gross profitff
Operating expenses ............................................ $
Net loss from continuing operations .................. $
The Company's pro-rata sharene t loss............ $
The Company's loss on investment .................... $
$
$
5
$
(5) $
$
$
$
$
5
$
(5) $
$
$
5
(5)
F-24
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(12) Income Taxes
The provision (benefit) for income taxes reflects current taxes, deferred taxes, and withholding taxes. The
ff
e tax rates for the years ended December 31, 2016, 2015 and 2014 were 0%, 0% and (4)%, respectively. The
effectiv
Company continues to provide for a full valuation allowance to offsff et its net deferred tax assets until such time it is
more likely than not the tax assets or portions thereof will be realized.
During 2015, the Company amended its 2012 federal tax return to carrybr
the tax liability, which resulted in a tax refund of $1.3 million.
ff
offset
ack the tax loss generated in 2014 to
Components of tax provision (benefit)ff
allocated to continuing operations include the foff llowing:
Year Ended
Year Ended
Year Ended
December 31, December 31, December 31,
2015
2016
2014
Current:
Federal........................................................................ $
State............................................................................
Foreign .......................................................................
Sub-total................................................................ $
Deferred:
Federal........................................................................ $
State............................................................................
Foreign .......................................................................
Sub-total................................................................ $
Total tax provision (benefitff )....................................... $
$
(11)
21
10 $
$
$
10 $
(2) $
49
19
66 $
$
$
66 $
(3,378)
1
5
(3,372)
3,516
508
4,024
652
The reconciliation of the statutory federal income tax rate to the Companys effective income tax rate is as
follows:
Income taxes computed at statutor
yrr
Increases (decreases) resulting from:
State income taxes, net of federal
tt
rates ..............
Year Ended
December 31,
2016
%
Year Ended
December 31,
2015
%
Year Ended
December 31,
2014
%
$
(7,369) 34% $
(6,081) 34% $
(5,159) 34%
tax benefit......................................................
of federal graduated rates .....................
Impactm
Federal and state research
and experimentation credits...........................
Change in valuation allowance.........................
Other.................................................................
Total............................................................
(1,219)
6%
0%
(1,298)
(4)
7%
0%
(700)
5%
(1,112)
5%
9,468 (44)%
(1)%
0% $
242
10
(917)
5%
8,132 (45)%
(1)%
0% $
234
66
(563)
4%
6,916 (46)%
(1)%
(4)%
158
652
$
F-25
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
ff
Deferred
income taxes reflect the net tax effeff cts of temporary diffeff
rences between the carrying amounts of
assets and liabia lities for financial reporting purposes and the amounts used for income tax purposes. The tax effects
of significaff
nt items comprising the Companys deferred tax assets and deferred tax liabilities are as follows:
ff
Year Ended
Year Ended
December 31, December 31,
2016
2015
Deferff
red tax assets:
Stock based compensation........................................ $
Federal and state net operating losses.......................
Goodwill...................................................................
Accrued compensation .............................................
Deferred
rent.............................................................
ff
Federal and state research and experimentation
credit......................................................................
AMT credit ...............................................................
Intangible asset differen
ces ......................................
Other.........................................................................
Total gross defeff rred tax assets..........................
Less valuation allowance..........................................
ff
1,524 $
21,089
715
19
344
3,434
92
253
39
27,509
(24,888)
Net deferred tax assets...................................... $
2,621 $
1,751
12,551
826
51
62
2,322
92
167
74
17,896
(15,420)
2,476
Deferff
red tax liabilities:
Patent expenditures................................................... $
ces .............................................
Fixed asset differen
ff
ff
Total gross deferred
tax liabilities .................... $
(2,012) $
(609)
(2,621) $
(2,017)
(459)
(2,476)
Total net deferre
ff
d tax assets ............................. $
$
The Company had a valuation allowance of $24,888 and $15,420 on deferff
red tax assets as of December 31,
2016 and 2015, respectively, an increase of $9,468 during the year ended December 31, 2016.
As of December 31, 2016, the Company has federal and state net operating loss carry-forwards of $63,309 and
$81,436, respectively, which have a carry-forward of 5 to 20 years depending on the jurisdiction. The gross
deferred tax assets for federal and state net operating loss carryforwards acquired in the Attributor acquisition have
been reduced to the amount of losses allowed to be utilized in the post-acquisition period before expiration after
considering the applicable limitations of IRC Sec. 382.
As of December 31, 2016, the Company has federal and state research and experimental tax credits of $4,303
and $1,390, respectively, which have a carry-forward of 5 to 20 years depending on the jurisdiction.
The Company records accrued interest and penalties associated with uncertain tax positions in income tax
expense in the consolidated statements of operations. For the years ended December 31, 2016, 2015 and 2014, the
Company recognized accrued interest and penalties associated with uncertain tax positions of $0, $4 and $6,
respectively. The Company does not anticipate any of its unrecognized benefitsff will significff antly increase or
decrease within the next 12 months.
F-26
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
A summary reconciliation of the Companys uncertain tax positions is as follows:
Year Ended Year Ended
Year Ended
December 31, December 31, December 31,
2015
2016
2014
Beginning balance........................................................ $
Addition for current year tax positions...................
Addition for prior year tax positions
Reduction for prior year positions resolved during
the current year....................................................
Endingg balance .........................................................
.
.....
...........................
.
.
.....
.... $
425 $
100
2
(41)
486 $
306 $
74
45
425 $
219
58
29
306
Uncertain tax positions are classified as a long-term liability (or a contra deferred tax asset) on the
consolidated balance sheets for uncertain tax positions taken (or expected to be taken) on a tax return.
The Companys open tax years subju ect to examination in the U.S. federal jurisdiction are 2012 through 2015
and applicable state jurisdictions for the tax years 2012 through 2015. To the extent allowed by law, the taxing
authorities may have the right to examine prior periods where net operating losses or tax credits were generated and
carried forward, and make adjustments up to the amount of the net operating loss or tax credit carryforward.
(13) Commitments and Contingencies
Certain of the Companys product license and services agreements include an indemnification provision for
claims from third parties relating to the Companys intellectual property. Such indemnification provisions are
accounted for in accordance with ASC 450 Contingencies. To date, there have been no claims made under such
indemnification provisions.
The Company is subju ect from time to time to other legal proceedings and claims arising in the ordinary course
of business.
F-27
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(14) Quarterly Financial Inforff mationUnaudited
March 31
June 30
September 30
December 31
Quarter Ending
$
$ 3,148
1,494
815
5,457
2,094
3,363
......................................................... $ 3,250
1,463
867
5,580
2,190
3,390
2016
Service revenuen
Subsu cription revenue .................................................
License revenue .........................................................
Total revenue .............................................................
Total cost revenue......................................................
Gross profitff ................................................................
Gross profitff percent, service revenue ........................
Gross profitff percent, subsu cription revenue ................
Gross profitff percent, license revenue.........................
Gross profitff percent, total ..........................................
Sales and marketing................................................... $ 2,955
3,305
Research, development and engineering ...................
2,170
General and administrative ........................................
434
Intellectual property...................................................
(5,474)
Operating loss............................................................
Net loss ......................................................................
(5,435)
Earnings (loss) per common share:
Loss per common sharebas ic ................................. $ (0.64) $ (0.62) $
Loss per common sharediluted .............................. $ (0.64) $ (0.62) $
Weighted average common shares outstanding
$ 2,856
3,379
1,976
462
(5,310)
(5,283)
55%
60%
88%
62%
56%
55%
89%
61%
$
$
$
3,252
1,417
907
5,576
2,162
3,414
55%
58%
88%
61%
2,945
3,291
2,039
394
(5,255)
(5,198)
3,017
1,434
729
5,180
2,051
3,129
54%
61%
85%
60%
3,132
3,419
2,113
346
(5,881)
(5,756)
(0.55) $
(0.55) $
(0.57)
(0.57)
basic........................................................................
8,533
8,587
9,506
10,111
Weighted average common shares outstanding
diluted.....................................................................
8,533
8,587
9,506
10,111
F-28
DIGIMARC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
March 31
June 30
September 30
December 31
Quarter Ending
......................................................
....$ 3,501
1,716
772
5,989
2,416
3,573
2015
.
Service revenuen
..................................................
.
Subsu cription revenue
........................................................
.
License revenue ..
.
.....
Total revenue .........................................................
.
...........
Total cost revenue ...........................................
.................................................................
.
Gross profitff
.........................
.
Gross profitff percent, service revenue
.
....
Gross profitff percent, subsu cription revenue .............
.
..........
Gross profitff percent, license revenue................
....
Gross profitff percent, total ........................................
.
Sales and marketing
Research, development and engineering .....................
.
General and administrative....................................
.....
.
Intellectual property............................................
........
.....
.
Operating loss........................................................
Net loss ..............................................................
.........
.
Earnings (loss) per common share:
Loss per common sharebas ic
Loss per common sharediluted
Weighted average common shares outstanding
....................................................$ 2,090
3,084
2,206
367
(4,174)
(4,150)
55%
56%
89%
60%
54%
48%
90%
58%
$
$
$ 3,235
1,670
893
5,798
2,449
3,349
$ 2,098
3,025
1,980
291
(4,045)
(4,012)
..................................$ (0.52) $ (0.50) $
...............................$ (0.52) $ (0.50) $
.
.
$
$
3,072
1,561
753
5,386
2,098
3,288
61%
48%
89%
61%
2,309
3,236
1,847
367
(4,471)
(4,469)
2,709
1,430
877
5,016
1,984
3,032
55%
52%
90%
60%
2,778
3,120
1,921
500
(5,287)
(5,303)
(0.54) $
(0.54) $
(0.62)
(0.62)
basic................................................
.........................
.
7,960
8,029
Weighted average common shares outstanding
diluted..............................................................
........
.
7,960
8,029
8,309
8,309
8,485
8,485
F-29
EXHIBIT INDEX
The agreements included or incorporated by referen
ce as exhibits to this report may contain representations
and warranties by each of the parties to the applicable agreement. These representations and warranties have been
made solely for the benefit of the other party or parties to the applicable agreement and:
ff
• were not intended to be treated as categorical statements of fact, but rather as a means of allocating the
risk to one of the parties if those statements prove to be inaccurate;
• were qualifieff d by disclosures that were made to the other party or parties in connection with the
negotiation of the applicable agreement, which disclosures are not necessarily reflecte
agreement;
ff
d in the
• may apply standards of materiality that are diffeff
rent from materiality under the securities laws; and
• were made only as of the date of the applicable agreement or other date or dates that may be specified in
the agreement.
Accordingly, these representations and warranties may not describe the actual state of affaff
irs as of the date
they were made or at any other time. Additional information about Digimarc may be found elsewhere in this Annual
Report on Form 10-K and in Digimarcs other publu ic filings, which are available without charge through the SECs
website at http://www.sec.gov.
Exhibit
Number
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
Exhibit Description
Separation Agreement among DMRC Corporation, DMRC LLC, Digimarc Corporation and, with
respect to certain sections, L-1 Identity Solutions, Inc. (incorporated by referff ence to Exhibit 2.1 to
Amendment No. 2 to the Companys Registration Statement on Form 10, filed with the Commission
on August 13, 2008 (File No. 001-34108))
Agreement and Plan of Merger dated April 30, 2010 between Digimarc Corporation, a Delaware
corporation, and Digimarc Oregon Corporation, an Oregon corporation (incorporated by reference to
Exhibit 2.1 to the Companys Current Report on Form 8-K, filed with the Commission on May 4,
2010 (File No. 001-34108))
Articles of Incorporation of Digimarc Corporation (incorporated by referff ence to Exhibit 3.1 to the
Companys Current Report on Form 8-K, filed with the Commission on May 4, 2010 (File No. 001-
34108))
Bylaws of Digimarc Corporation (incorporated by referff ence to Exhibit 3.2 to the Companys Current
Report on Form 8-K, filed with the Commission on May 4, 2010 (File No. 001-34108))
Specimen common stock certificate of Digimarc Corporation (incorporated by referff ence to Exhibit
4.1 to the Companys Quarterly Report on Form 10-Q, filed with the Commission on July 25, 2014
(File No. 001-34108))
Rights Agreement, dated July 31, 2008, between Digimarc Corporation and Computershare Trust
Company, N.A. as Rights Agent (incorpor
Report on Form 10-K, filed with the Commission on February 27, 2009 (File No. 001-34108))
ated by reference to Exhibit 4.2 to the Companys Annual
r
Second Amendment of Rights Agreement, effect
ive as of November 5, 2013, made by Digimarc
Corporation and acknokk wledged by Broadridge Corporate Issuer Solutions, Inc., as Rights Agent
(incorporated by referff ence to Exhibit 4.2 to the Companys Quarterly Report on Form 10-Q, filed
with the Commission on July 25, 2014 (File No. 001-34108))
ff
Form of Certificff ate of Designation of Series R Preferr
Agreement filed as Exhibit 4.2 hereto)
ff
ed Stock (attached as an exhibit to the Rights
4.5
Form of Rights Certificate (attached as an exhibit to the Rights Agreement filed as Exhibit 4.2 hereto)
E-1
Exhibit
Number
10.1
10.2
*10.3
*10.4
*10.5
*10.6
*10.7
*10.8
*10.9
10.10
10.11
10.12
10.13
Exhibit Description
License Agreement between DMRC Corporation and L-1 Identity Solutions Operating Company
(incorporated by referff ence to Exhibit 10.2 to Amendment No. 4 to the Companys Registration
Statement on Form 10, filed with the Commission on October 2, 2008 (File No. 001-34108))(1)
t Deterrence System Development and License Agreement, dated as of December 6, 2012,
nce
Counterfeiff
between Digimarc Corporation and the Bank for International Settlements (incorporated by refereff
to Exhibit 10.2 to the Companys amended Annual Report on Form 10-K/A, filed with the
Commission on August 7, 2013 (File No. 001-34108))(5)
Form of Indemnificff ation Agreementnn between DMRC Corporation and each of its executive officff ers and
directors (incorporated by reference to Exhibit 10.5 to Amendmentnn No. 2 to the Companys Registratt
tion
Statement on Form 10, filed with the Commission on August 13, 2008 (File No. 001-34108))
Emplmm oyment Agreement, effecff
Bruce Davis (incorporated by referff ence to Exhibit 10.1 to the Companys Current Report on Form 8-
K, filed with the Commission on August 5, 2014 (File No. 001-34108))
tive as of November 1, 2014, between Digimarc Corporation and
Digimarc Corporation 2008 Incentive Plan, as amended (incorporated by referff ence to Exhibit 10.1 to
the Companys Quarterly Report on Form 10-Q, filed with the Commission on April 25, 2014
(File No. 001-34108))
Form of Notice of Stock Option Award and Stock Option Award Agreement under the Digimarcaa
Corporation 2008 Incentive Plan (incorporated by reference to Exhibit 10.8 to the Companys Quarterly
Report on Form 10-Q, filed with the Commission on November 24, 2008 (File No. 001-34108))
Equity Compensation Program for Nonemployee Directors under the Digimarc Corporation 2008
Incentive Plan (as amended on February 21, 2011, February 20, 2014 and March 27, 2015)
(incorporated by referff ence to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q, filed
with the Commission on April 28, 2015 (File No. 001-34108))
Form of Indemnification Agreement between Digimarc Corporation and each of its executive officff ers
and directors (incorporated by reference to Exhibit 10.1 to Digimarc Corporations Annual Report on
Form 10-K, as filed by Digimarc Corporation with the Securities and Exchange Commission on
March 13, 2006 (File No. 000-28317))
Form of Change of Control Retention Agreement entered into by and between Digimarc Corpora
and each of Messrs. Chamness, Meyer, Beck and Rodriguez (incorpor
to the Companys Annual Report on Form 10-K, filed with the Commission on February 25, 2016
(File No. 001-34108))
tion
ated by reference to Exhibit 10.9
rr
r
Patent License Agreement, dated as of June 11, 2009 between Digimarc Corporation and The Nielsen
Compamm ny (US), LLC (incorporated by referen
ff
on Form 10-Q, filed with the Commission on July 31, 2009 (File No. 001-34108))(2)
ce to Exhibit 10.1 to the Companys Quarterly Report
Limited Liability Company I Agreement, dated June 11, 2009 between Digimarc Corporation and
The Nielsen Company (US), LLC (incorporated by reference to Exhibit 10.2 to the Companys
Quarterly Report on Form 10-Q, filed with the Commission on July 31, 2009 (File No. 001-
34108))(2)
Limited Liability Company II Agreement, dated June 11, 2009 between Digimarc Corporation and The
Nielsen Company (US), LLC (incorporated
Report on Form 10-Q, filed with the Commission on July 31, 2009 (File No. 001-34108))(2)
by reference to Exhibit 10.3 to the Companys Quarterly
rr
Lease Agreement, dated March 22, 2004, between Digimarc Corporation and PS Business Parks,
L.P., as amended on May 13, 2010 (incorporated by referff ence to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q, filed with the Commission on July 30, 2010 (File No. 001-34108))
E-2
Exhibit
Number
10.14
10.15
10.16
10.17
Second Amendment to Lease, dated July 31, 2015, by and between PD Offiff ce Owner 9, L.P. and
Digimarc Corporation (incorporated by referff ence to Exhibit 10.1 to the Companys Quarterly Report
on Form 10-Q, filed with the Commission on October 30, 2015 (File No. 001-34108))
Exhibit Description
Patent License Agreement, effeff ctive as of October 5, 2010, between Digimarc Corporation and IV
Digital Multimedia Inventions, LLC (incorporated by refereff
nce to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q, filed with the Commission on April 28,2016 (File No. 001-
34108))(4)
Grant-Back License Agreement, dated October 5, 2010, between Digimarc Corporation and IV
Digital Multimedia Inventions, LLC (incorpor
Annual Report on Form 10-K, filed with the Commission on March 3, 2011 (File No. 001-34108))(3)
rated by referff ence to Exhibit 10.13 to the Companys
Patent Rights Agreement, dated October 5, 2010, between Digimarc Corporation and IV Digital
Multimedia Inventions, LLC (incorporated by referff ence to Exhibit 10.14 to the Companys Annual
Report on Form 10-K, filed with the Commission on March 3, 2011 (File No. 001-34108))
10.18 Work Agreement, dated October 5, 2010, by and among Digimarc Corporation, Invention Law
Group,uu P.C. and IV Digital Multimedia Inventions, LLC (incorpor
the Companys Quarterly Report on Form 10-K, filed with the Commission on April 28, 2016 (File
No. 001-34108))(4)
ated by reference to Exhibit 10.2 to
r
21.1
23.1
31.1
31.2
32.1
32.2
List of Subsu idiaries
Consent of Independent Registered Publu ic Accounting Firm
Rule 13a-14(a)/15d-14(a) Certificff ation of Chief Executive Offiff cer
Rule 13a-14(a)/15d-14(a) Certificff ation of Chief Financial Offiff cer
Section 1350 Certificff ation of Chief Executive Offiff cer
Section 1350 Certificff ation of Chief Financial Offiff cer
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definff
ition Linkbaskk
e Document
101.LAB XBRL Taxonomy Extension Labea
l Linkbaskk
e Document
101.PRE XBRL Taxonomy Extension Label Linkbaskk
e Document
* Management contract or compensatory plan or arrangement.
Schedules and certain exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-
K. Digimarc hereby undertakes to furnish to the Securities and Exchange Commission (the Commission)
copies of the omitted schedules and exhibits upon request by the Commission.
(1) Confidff ential treatment has been granted for certain portions omitted from this exhibit pursuant to an order
granted by the Commission on October 21, 2008, under Rule 24b-2 of the Securities Exchange Act of 1934, as
amended. Confidff ential portions of this exhibit have been separately filed with the Securities and Exchange
Commission.
(2) Confidff ential treatment has been granted for certain portions omitted from this exhibit pursuant to an order
granted by the Commission on September 10, 2009, under Rule 24b-2 under the Securities Exchange Act of
ff
1934, as amended. Confiden
Exchange Commission.
tial portions of this exhibit have been separately filed with the Securities and
E-3
(3) Confidff ential treatment has been granted for certain portions omitted from this exhibit pursuant to an order
granted by the Commission on March 17, 2011, under Rule 24b-2 under the Securities Exchange Act of 1934,
as amended. Confidff ential portions of this exhibit have been separately filed with the Securities and Exchange
Commission.
(4) Confidff ential treatment has been granted for certain portions omitted from this exhibit pursuant to an order
granted by the Commission on May 6, 2016, under Rule 24b-2 under the Securities Exchange Act of 1934, as
amended. Confidff ential portions of this exhibit have been separately filed with the Securities and Exchange
Commission.
(5) Confidff ential treatment has been granted for certain portions omitted from this exhibit pursuant to an order
granted by the Commission on Septemberm 3, 2013, under Rule 24b-2 under the Securities Exchange Act of
1934, as amended. Confideff
Exchange Commission.
ntial portions of this exhibit have been separately filed with the Securities and
E-4
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
Bruce Davis
Bruce Davis
Chairman of the Board and Chief Executive Officer
Chairman and Chief Executive Officer
Digimarc Corporation
William J. Miller
Independent Director and Consultant
Robert Chamness
Executive Vice President, Chief Legal Officer and Secretary
Former Chairman and Chief Executive Officer
Charles Beck
Avid Technology, Inc.
James T. Richardson
Executive Vice President, Chief Financial Officer and Treasurer
Joel Meyer
Independent Director and Consultant
Executive Vice President Intellectual Property
Former Senior Vice President and Chief Financial Officer
WebTrends
Richard L. King
Independent Director and Consultant
Former President and Chief Operating Officer
Albertsons Inc.
Bern Whitney
Tony Rodriguez
Executive Vice President, Chief Technology Officer
TRANSFER AGENT
Broadridge Corporate Issuer Solutions, Inc.
Independent Director and Consultant
P. O. Box 1342, Brentwood, NY 11717
(866) 321 8022
shareholder@broadridge.com
www.broadridge.com
Partner
FLG Partners, LLC
Gary DeStefano
Independent Director and Consultant
Former President of Global Operations
Nike, Inc.
Andrew J. Walter
Independent Director and Consultant
Former Vice President of Global Business Services
The Procter & Gamble Company
DIGIMARC CORPORATION
9405 SW Gemini Drive, Beaverton, OR 97008 USA
T: +1 800 DIGIMARC (344 4627)
T: +1 503 469 4800
F: +1 503 469 4777
www.digimarc.com