(5) Stock-Based Compensation

Stock-based compensation includes expense charges for all stock-based awards to employees and directors. These awards include restricted stock awards, restricted stock units, performance restricted stock units, and shares offered for purchase under the Company's ESPP.

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

Determining Fair Value

Restricted Stock Awards

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

Restricted Stock Units

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

Performance Restricted Stock Units

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

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

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

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

Expected Volatility. The Company estimates the volatility of its common stock at the date of grant based on the historical volatility of its common stock based on historical prices over the most recent period commensurate with the term of the award.

Risk-Free Interest Rate. The Company determines the risk-free interest rate using current U.S. treasury yields for bonds with a maturity commensurate with the term of the award.

Monte Carlo Valuation Inputs:

Employee Stock Purchase Program

The fair value of shares offered for purchase under the Company's ESPP is determined at the beginning of each offering period (measurement date) using the Black-Scholes valuation model. The Company recognizes the fair value of the award on a straight-line basis over the service period of the award, which is eighteen months.

The following inputs are used in the Black-Scholes valuation model to estimate the fair value:

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

Expected Volatility. The Company estimates the volatility of its common stock at the measurement date based on the historical volatility of its common stock based on historical prices over the most recent period commensurate with the term of the award.

Risk-Free Interest Rate. The Company determines the risk-free interest rate using current U.S. treasury yields for bonds with a maturity commensurate with each term of the offering period.

Term. The term represents the number of months between the start of the offering period and each purchase date in the offering period. 

Black-Scholes Valuation Inputs:

Stock-based Compensation

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

Total unrecognized compensation costs will be adjusted for any future forfeitures if and when they occur.

The Company expects to recognize the total unrecognized compensation costs as of  December 31, 2025 for all non-vested stock-based awards over weighted average periods through December 31, 2029 as follows:

As of December 31, 2025, under the Company’s stock incentive plan, an additional 2,282 shares remained available for future grants, and under the Company's ESPP, an additional 189 shares remained available for future offering periods. The Company issues new shares upon grants of RSAs, upon vesting of RSU and PRSU awards, and upon purchase of ESPP shares.

Restricted Stock Awards Activity

The following table presents the unvested balance of RSA activity:

The fair value of RSAs vested is as follows:

Restricted Stock Units Activity

The following table presents the unvested balance of RSU awards activity:

The fair value of RSU awards vested is as follows:

Performance Restricted Stock Units Activity

The following table presents the unvested balance of PRSU awards activity: 

The fair value of PRSU awards vested is as follows:

Employee Stock Purchase Plan Activity

On February 25, 2025, the Board of Directors approved the adoption of the Digimarc Corporation ESPP allowing eligible employees to voluntarily purchase shares of the Company's common stock at 85% of the lower of the market price at the start of the offering period or on the purchase date of each six-month purchase period within an eighteen-month offering window. If the market price of the Company's common stock on the purchase date is lower than the market price at the start of the offering period, participants are rolled over into a subsequent offering period, resulting in a reset of the offering price and the eighteen-month offering window. Employees can authorize anywhere between 1% to 15% of their base salary to purchase shares under the ESPP, subject to the U.S. Internal Revenue Code ("IRC") annual limitations. 

ESPP activity is as follows: