Note 4 - Stock-based Compensation

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Share-Based Payment Arrangement [Text Block]

(4) Stock-Based Compensation

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

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

Determining Fair Value

Stock Options

The Company estimates the fair value of stock options on the date of grant (measurement date) using the Black-Scholes option pricing model. The Company recognizes the fair value of stock option awards on a straight-line basis over the vesting period of the award.

There were 1 stock options granted during the year ended December 31, 2022 as replacement equity awards for vested stock options held by EVRYTHNG employees. No stock options were granted during the year ended December 31, 2021. 

Restricted Stock

The fair value of restricted stock 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 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 stock unit (“PSU”) awards that vest upon meeting a performance condition, such as the Company exceeding a future annual recurring revenue target, and a service condition is determined based on the probability of achievement of the performance criteria as of each reporting date (measurement date). The probability of achievement is subject to judgment, and could change from period to period, impacting the fair value of the award. 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 fair value of PSU awards that vest upon meeting a market condition, such as the Company exceeding shareholder returns as compared to an index of peer companies, and a service condition 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.

Although the fair value of stock-based awards is determined in accordance with ASC 718 and Staff Accounting Bulletin (“SAB”) No. 107 “Shared-Based Payment,” the Monte Carlo Simulation model requires the input of subjective assumptions, and other reasonable assumptions could provide differing results.

The following inputs are used in the Monte Carlo Simulation 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 Simulation Inputs:

	Year Ended			Year Ended
	December 31,			December 31,
	2022			2021
Stock price	$	32.02		$	—
Expected volatility		82.8	%		—
Risk-free interest rate		1.8	%		—

Stock-based Compensation

	Year Ended		Year Ended
	December 31,		December 31,
	2022		2021
Stock-based compensation:
Cost of revenue	$	913	$	693
Sales and marketing		3,842		2,691
Research, development and engineering		2,646		1,590
General and administrative		3,888		6,962
Stock-based compensation expense		11,289		11,936
Capitalized to software and patent costs		128		136
Total stock-based compensation	$	11,417	$	12,072

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

	Year Ended		Year Ended
	December 31,		December 31,
	2022		2021
Total unrecognized compensation costs	$	16,051	$	11,301

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, 2022 for all non-vested stock-based awards over weighted average periods through December 31, 2026 as follows:

	Restricted
	Stock		RSUs		PSUs
Weighted average period (in years)		1.05		1.83		1.88

As of December 31, 2022, under the Company’s stock-based compensation plan, an additional 582 shares remained available for future grants. The Company issues new shares upon exercises of stock options, grants of restricted stock awards and vesting of RSU and PSU awards.

Stock Option Activity

The following tables present the outstanding stock option activity:

				Weighted		Weighted
				Average		Average		Aggregate
				Exercise		Grant Date		Intrinsic
	Options			Price		Fair Value		Value
Options outstanding, December 31, 2020		305		$	27.94	$	12.65
Granted		—		$	—	$	—
Exercised		(220	)	$	27.31	$	17.36
Forfeited or expired		(35	)	$	15.36	$	7.36
Options outstanding, December 31, 2021		50		$	39.54	$	22.23
Granted		1		$	22.15	$	—
Exercised		—		$	—	$	—
Forfeited or expired		—		$	—	$	—
Options outstanding, December 31, 2022		51		$	39.14	$	21.72	$	—
Options exercisable, December 31, 2022		51		$	39.14			$	—
Options unvested, December 31, 2022		—		$	—			$	—

The aggregate intrinsic value is based on the closing price of $18.49 per share of Digimarc common stock on December 30, 2022, which would have been received by the optionees had all of the options with exercise prices less than $18.49 per share been exercised on that date.

The following table summarizes information about stock option awards outstanding December 31, 2022: 

	Options Outstanding						Options Exercisable
					Weighted						Weighted
			Remaining		Average				Remaining		Average
	Number		Contractual		Exercise		Number		Contractual		Exercise
Exercise Price	Outstanding		Life (Years)		Price		Outstanding		Life (Years)		Price
$15.36 - $24.99		1		7.85	$	22.15		1		7.85	$	22.15
$25.01 - $34.99		—		-	$	—		—		-	$	—
$35.01 - $39.54		50		0.61	$	39.54		50		0.61	$	39.54
$15.36 - $39.54		51		0.77	$	39.14		51		0.77	$	39.14

Restricted Stock Activity

The following table reconciles the unvested balance of restricted stock awards:

				Weighted
				Average
	Number of			Grant Date
	Shares			Fair Value
Unvested balance, December 31, 2020		416		$	28.20
Granted		255		$	40.53
Vested		(246	)	$	29.76
Forfeited		(65	)	$	33.64
Unvested balance, December 31, 2021		360		$	34.90
Granted		54		$	18.36
Vested		(187	)	$	32.72
Forfeited		(31	)	$	36.90
Unvested balance, December 31, 2022		196		$	32.06

The fair value of restricted stock awards vested is as follows:

	Year Ended		Year Ended
	December 31,		December 31,
	2022		2021
Fair value of restricted stock awards vested	$	4,445	$	8,957

Restricted Stock Units Activity

The following table reconciles the unvested balance of restricted stock unit awards:

				Weighted
				Average
	Number of			Grant Date
	Units			Fair Value
Unvested balance, December 31, 2020		45		$	15.36
Granted		—		$	—
Vested		(30	)	$	15.36
Forfeited		(15	)	$	15.36
Unvested balance, December 31, 2021		—		$	—
Granted		601		$	26.31
Vested		(144	)	$	30.25
Forfeited		(87	)	$	26.31
Unvested balance, December 31, 2022		370		$	24.77

The fair value of RSU awards vested is as follows:

	Year Ended		Year Ended
	December 31,		December 31,
	2022		2021
Fair value of RSU awards vested	$	2,509	$	1,050

Performance Restricted Stock Units Activity

The following table reconciles the unvested balance of performance restricted stock unit awards: 

				Weighted
				Average
	Number of			Grant Date
	Units			Fair Value
Unvested balance, December 31, 2019		—		$	—
Granted		124		$	11.08
Vested		—		$	—
Forfeited		—		$	—
Unvested balance, December 31, 2020		124		$	11.08
Granted		—		$	—
Vested (1)		(82	)	$	15.54
Forfeited (1)		(42	)	$	11.08
Unvested balance, December 31, 2021		—		$	—
Granted		73		$	31.93
Vested		—		$	-
Forfeited		(6	)	$	(32.02	)
Unvested balance, December 31, 2022		67		$	31.92

(1) Includes the impact of the modification of 21 PRSUs which were cancelled and reissued at a grant date fair value of $28.93.

The fair value of PRSU awards vested is as follows:

	Year Ended		Year Ended
	December 31,		December 31,
	2022		2021
Fair value of PRSU awards vested	$	—	$	2,886