Note 5 - Stock-based Compensation

3 Months Ended

Mar. 31, 2024

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 awards, 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 no stock options granted during the three months ended  March 31, 2024 and 2023.

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 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 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 amount of expense to be recognized. The Company recognizes the fair value of the award, after adjusting for any changes in the probability of achievement, on a straight-line basis over the service period of the award, which is generally three years for employee grants.

The fair value of performance restricted stock units 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,
	2024			2023
Stock price	$	39.49		$	22.37
Expected volatility		66.3	%		74.7	%
Risk-free interest rate		4.3	%		4.3	%

Stock-Based Compensation

	Three Months Ended March 31,
	2024		2023
Stock-based compensation:
Cost of revenue	$	253	$	238
Sales and marketing		712		761
Research, development and engineering		618		936
General and administrative		1,248		941
Stock-based compensation expense		2,831		2,876
Capitalized to software and patent costs		17		13
Total stock-based compensation	$	2,848	$	2,889

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

	March 31,		December 31,
	2024		2023
Total unrecognized compensation costs	$	21,772	$	15,370

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, 2024, for all non-vested stock-based awards over weighted average periods through  March 31, 2028, as follows:

	RSAs		RSUs		PRSUs
Weighted average period (in years)		0.68		1.56		2.00

As of March 31, 2024, under the Company’s stock incentive plan, an additional 1,258 shares remained available for future grants. The Company issues new shares upon exercises of stock options, grants of RSAs and vesting of RSU and PRSU awards.

Stock Option Activity

The following table presents the outstanding stock option activity:

			Weighted		Weighted
			Average		Average		Aggregate
	Number of		Exercise		Grant Date		Intrinsic
	Options		Price		Fair Value		Value
Options outstanding, December 31, 2023		1	$	22.15	$	—
Granted		—	$	—	$	—
Exercised		—	$	—	$	—
Forfeited or expired		—	$	—	$	—
Options outstanding, March 31, 2024		1	$	22.15	$	—	$	6
Options exercisable, March 31, 2024		1	$	22.15	$	—	$	6
Options unvested, March 31, 2024		—	$	—	$	—	$	—

The aggregate intrinsic value is based on the closing price of $27.18 per share of Digimarc common stock on March 31, 2024, which would have been received by the optionees had all of the options with exercise prices less than $27.18 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
	Shares			Fair Value
Unvested balance, December 31, 2023		105		$	29.89
Granted		6		$	35.82
Vested		(14	)	$	33.56
Forfeited		(1	)	$	28.06
Unvested balance, March 31, 2024		96		$	29.76

The fair value of RSAs vested is as follows:

	Three Months Ended March 31,
	2024		2023
Fair value of RSAs vested	$	551	$	1,019

Restricted Stock Units Activity

The following table presents the unvested RSU activity:

				Weighted
				Average
	Number of			Grant Date
	Units			Fair Value
Unvested balance, December 31, 2023		442		$	23.77
Granted		154		$	39.46
Vested		(44	)	$	24.93
Forfeited		(14	)	$	22.38
Unvested balance, March 31, 2024		538		$	28.20

The fair value of RSU awards vested is as follows:

	Three Months Ended March 31,
	2024		2023
Fair value of RSU awards vested	$	1,729	$	624

Performance Stock Units Activity

The following table presents the unvested PRSU activity:

				Weighted
				Average
	Number of			Grant Date
	Units			Fair Value
Unvested balance, December 31, 2023		192		$	29.01
Change in units based on performance expectations		30		$	22.37
Granted		59		$	39.49
Vested		(60	)	$	22.37
Forfeited		—		$	—
Unvested balance, March 31, 2024		221		$	32.70

The fair value of PRSU awards vested is as follows:

	Three Months Ended March 31,
	2024		2023
Fair value of PRSU awards vested	$	2,370	$	54