(1) Description of Business and Summary of Significant Accounting Policies

Description of Business

Digimarc, an Oregon corporation, is building the trust layer for the modern world. As artificial intelligence ("AI") accelerates how people produce, share, and interact with the world, the risks of fraud, counterfeiting, and misinformation are growing exponentially.

Digimarc's innovative, highly scalable, and ultra-secure solutions make it possible for consumers, businesses, and intelligent systems to instantly verify what's real, protect what matters, and transact with confidence. Digimarc's solutions for retail loss prevention, product authentication, and digital trust and integrity are built to counter the speed and sophistication of today's AI-enabled threats. Trusted by a consortium of the world's central banks (the "Central Banks") to deter the counterfeiting of global currency, Digimarc exists to protect the truth in every interaction, spanning both the physical and digital worlds.

Principles of Consolidation

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

Use of Estimates

The preparation of the consolidated financial statements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The most significant estimates and judgments made by the Company relate to its revenue accounting policy. Management bases its estimates on historical experience and on other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities, and the measurement and recognition of revenue that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Cash Equivalents

The Company considers all highly liquid marketable securities with original maturities of 90 days or less at the date of acquisition to be cash equivalents. Cash equivalents include commercial paper, federal agency notes, money market securities, corporate notes, and U.S. treasuries, totaling $8,403 and $8,889 at  December 31, 2025 and 2024, respectively. Cash equivalents are carried at either cost or fair value depending on the type of security.

Marketable 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-term marketable securities primarily include commercial paper, federal agency notes, corporate notes, and U.S. treasuries.

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

A decline in the market value of any security that is deemed to be other-than-temporary is charged to earnings. To determine whether an impairment is other-than-temporary, the Company considers 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-temporary impairments identified or recorded by the Company.

Concentrations of Business and Credit Risk

A significant portion of the Company’s 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 subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, and accounts receivable.

The Company places its cash and cash equivalents with major 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 Company’s principal banks, the Company’s investment policy limits its credit exposure to any one financial institution or type of financial instrument by limiting the 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 Company’s 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 less, to be invested in any one industry category, (e.g., financial, energy, etc.), at the time of purchase. As a result, the Company’s credit risk associated with cash and cash equivalents and marketable securities is believed to be minimal.

The Company manages credit risk on accounts receivable by evaluating a customer’s credit worthiness before extending any significant amount of credit. There is a significant concentration of accounts receivable at various times from our largest customers. These customers have significant financial means and a history of paying their invoices. The Company maintains an allowance for its doubtful accounts receivable to reflect any estimated credit losses. See Note 7 for detailed disclosures of the Company's allowance for doubtful accounts.

Contingencies

The Company evaluates all pending or threatened contingencies or commitments, if any, that are reasonably likely to have a material adverse effect on the Company’s operations or financial position. The Company assesses the probability of an adverse outcome and determines if it is remote, reasonably possible or probable as defined in accordance with Accounting Standards Codification (“ASC”) 450 “Contingencies.” If information available prior to the issuance of the financial statements indicates that it is probable that an asset has been impaired 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.

Goodwill

The Company tests goodwill for impairment annually and whenever events or changes in circumstances indicate that the carrying value may exceed the fair value, in accordance with ASC 350 “Intangibles – Goodwill and Other.” The Company operates as a single reporting unit. The Company estimates the fair value of its single reporting unit using a market approach, which takes into account the Company’s market capitalization plus an estimated control premium. In connection with the Company’s annual impairment tests of goodwill as of June 30, 2025 and 2024, it was concluded that there was no impairment to goodwill as the estimated fair value of the Company’s reporting unit significantly exceeded the carrying value.

Impairment of Long-Lived Assets

The Company assesses long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in accordance with ASC 360 “Property, Plant and Equipment.”

Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of the assets to future net undiscounted cash flows expected to be generated by the assets over their remaining useful life. If such assets are considered to be impaired, the impairment would be recognized in operating results at the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on discounted cash flows, observable market values or appraised values, depending on the nature of the assets.

Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Research and Development

Research and development costs are expensed as incurred in accordance with ASC 730 “Research and Development.”

Software Development Costs

Under ASC 985 “Software,” software development costs are to be capitalized beginning when a product’s 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 Company’s products has occurred shortly before general release and, therefore, software development costs qualifying for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs and has charged all such costs to research and development expense.

Patent Costs

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. Capitalized patent costs, also referred to as patent prosecution costs, include internal legal labor, professional legal fees, government filing fees and translation fees related to expanding the Company’s patent portfolio.

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 Recognition

See Note 3 for detailed disclosures of the Company’s revenue recognition policy.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718 “Compensation—Stock Compensation,” which requires the measurement and recognition of compensation for all stock-based awards made to employees and directors. These awards include restricted stock awards, restricted stock units, performance restricted stock units, and shares offered for purchase under the Company's Employee Stock Purchase Plan ("ESPP"). The measurement of these awards is based on estimated fair values. The estimated fair value of stock-based awards is recognized over the vesting period of the award using the straight-line method.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740 “Income 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 differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period of enactment.

The Company records valuation allowances on deferred tax assets if, based on available evidence, it is more-likely-than-not that all or some portion of the assets will not be realized.

The Company is subject to income taxes within the U.S. and other countries, and, in the ordinary 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 the provision for income taxes.

Liquidity

Under ASC 205-40 “Presentation of Financial Statements-Going Concern”, companies are required to evaluate whether conditions and/or events raise substantial doubt about their ability to meet their future financial obligations as they become due within one year after the date that the financial statements are issued. This evaluation takes into account a company’s current available cash and projected cash needs over the one year evaluation period but may not consider things beyond its control.  The Company has incurred operating losses and negative cash flows from operating activities the last several years and depending on future results may continue to incur such losses and negative cash flows in the future. The Company believes its currently available cash and marketable securities will satisfy the Company’s projected working capital and capital expenditure requirements for at least the next 12 months.

  Foreign Currency

The Company prepares consolidated financial statements in its reporting currency, the U.S. dollar. The functional currency of the Company’s foreign subsidiaries generally is the applicable local currency. Monetary assets and liabilities denominated in a foreign currency are remeasured at the end of each reporting period, with respective gain or loss recorded in "other income, net" on the Consolidated Statements of Operations. Financial statements of each foreign subsidiary are translated from their respective functional currencies to U.S. dollar, with translation adjustments recorded in "other comprehensive income (loss)" on the Consolidated Statements of Operations and Comprehensive Loss, and foreign currency translation adjustments on the Consolidated Statements of Shareholders’ Equity. Assets and liabilities are translated at the exchange rates as of the balance sheet date. Revenue and expenses are translated using the average exchange rates during the period. Equity transactions are translated at the historical exchange rates. The Company’s foreign exchange exposure is not material to the Company’s consolidated financial condition.

Accounting Pronouncements Issued But Not Yet Adopted

In November 2024, the FASB issued ASU No. 2024-03, “Income Statement (Subtopic 220-40) - Reporting Comprehensive Income - Expense Disaggregation Disclosures”. The ASU requires disaggregated disclosure of income statement expenses, primarily on disaggregation of certain expense captions into specified categories in disclosures within the footnotes to the financial statements. This authoritative guidance will be effective for the Company starting in the fiscal year ending December 31, 2027 for annual periods and in the first quarter of the fiscal year ending December 31, 2028 for interim periods, with early adoption permitted. The Company is currently evaluating the effect of adopting this ASU on the Company’s disclosures.

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

In December 2025, the FASB issued ASU No. 2025‑11, “Interim Reporting (Topic 270): Narrow‑Scope Improvements”, which provides amendments intended to clarify interim disclosure requirements and improve the usability and consistency of interim financial reporting. The amendments are effective for public business entities for interim reporting periods within annual reporting periods beginning after December 15, 2027, and for all other entities for interim reporting periods within annual reporting periods beginning after December 15, 2028, with early adoption permitted. The Company is currently evaluating the effect of adopting this ASU on the Company’s disclosures.

In December 2025, the FASB issued ASU No. 2025‑12, “Codification Improvements,” which includes amendments designed to clarify, correct, or enhance various areas of the FASB Accounting Standards Codification. These amendments do not introduce new accounting requirements but are intended to improve the clarity and consistency of the existing guidance. The amendments are effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods within those annual reporting periods, with early adoption permitted. The Company is currently evaluating the effect of adopting this ASU on the Company’s disclosures.