Note 5 - Stock-based Compensation

3 Months Ended

Mar. 31, 2023

Notes to Financial Statements

Share-Based Payment Arrangement [Text Block]

5. 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 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 service period of the award.

There were no stock options granted during the three months ended March 31, 2023. There were 1 stock options granted during the three months ended March 31, 2022, as replacement equity awards for vested stock options held by EVRYTHNG employees.

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 Stock Units

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

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

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

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

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

Monte Carlo valuation inputs:

	Three Months Ended March 31,
	2023			2022
Stock price	$	22.37		$	32.02
Expected volatility		74.7	%		82.8	%
Risk-free interest rate		4.3	%		1.8	%

Stock-Based Compensation

	Three Months Ended March 31,
	2023		2022
Stock-based compensation:
Cost of revenue	$	238	$	201
Sales and marketing		761		744
Research, development and engineering		936		507
General and administrative		941		1,016
Stock-based compensation expense		2,876		2,468
Capitalized to software and patent costs		13		36
Total stock-based compensation	$	2,889	$	2,504

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

	March 31,		December 31,
	2023		2022
Total unrecognized compensation costs	$	21,576	$	16,051

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 March 31, 2023, for all non-vested stock-based awards over weighted average periods through March 31, 2027, as follows:

	RSAs		RSUs		PSUs
Weighted average period (in years)		0.90		1.85		2.93

As of March 31, 2023, under the Company’s stock-based compensation plan, an additional 196 shares remained available for future grants. The Company issues new shares upon exercises of stock options, grants of RSAs and vesting of RSU and PSU awards.

Stock Option Activity

The following table presents the outstanding stock option activity:

			Weighted		Weighted
			Average		Average		Aggregate
	Number of		Exercise		Grant Date		Intrinsic
Three Months Ended March 31, 2023:	Options		Price		Fair Value		Value
Outstanding at December 31, 2022		51	$	39.14	$	21.72
Granted		—	$	—	$	—
Exercised		—	$	—	$	—
Forfeited or expired		—	$	—	$	—
Outstanding at March 31, 2023		51	$	39.14	$	21.72	$	—
Exercisable at March 31, 2023		51	$	39.14			$	—
Unvested at March 31, 2023		—	$	—			$	—

The aggregate intrinsic value is based on the closing price of $19.65 per share of Digimarc common stock on March 31, 2023, which would have been received by the optionees had all of the options with exercise prices less than $19.65 per share been exercised on that date.

Restricted Stock Awards Activity

The following table presents the unvested RSA activity:

				Weighted
				Average
	Number of			Grant Date
Three months ended March 31, 2023:	Shares			Fair Value
Unvested balance, December 31, 2022		196		$	32.06
Granted		—		$	—
Vested		(46	)	$	33.29
Forfeited		—		$	44.36
Unvested balance, March 31, 2023		150		$	31.66

The fair value of RSAs vested is as follows:

	Three Months Ended March 31,
	2023		2022
Fair value of RSAs vested	$	1,019	$	1,603

Restricted Stock Units Activity

The following table presents the unvested RSU activity:

				Weighted
				Average
	Number of			Grant Date
Three months ended March 31, 2023:	Shares			Fair Value
Unvested balance, December 31, 2022		370		$	24.77
Granted		270		$	22.37
Vested		(29	)	$	25.52
Forfeited		(45	)	$	25.49
Unvested balance, March 31, 2023		566		$	23.53

The fair value of RSU awards vested is as follows:

	Three Months Ended March 31,
	2023		2022
Fair value of RSU awards vested	$	624	$	47

Performance Stock Units Activity

The following table presents the unvested PSU activity:

				Weighted
				Average
	Number of			Grant Date
Three months ended March 31, 2023:	Shares			Fair Value
Unvested balance, December 31, 2022		67		$	31.92
Change in units based on performance expectations		(6	)	$	(32.02	)
Granted		134		$	27.75
Vested		(2	)	$	(32.02	)
Forfeited		(1	)	$	(32.02	)
Unvested balance, March 31, 2023		192		$	29.01

The fair value of PSU awards vested is as follows:

	Three Months Ended March 31,
	2023		2022
Fair value of PSU awards vested	$	54	$	—