Quarterly Report for Quarter Ending June 30, 2026 (Form 10-Q)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements relating to future events or the future financial performance of Digimarc that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. See the discussion regarding forward-looking statements included in this Quarterly Report on Form 10-Q under the caption "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995."

The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. Readers are also urged to carefully review and consider the disclosures made in Part II, Item 1A ("Risk Factors") of this Quarterly Report on Form 10-Q and in the audited consolidated financial statements and related notes included in our 2025 Annual Report, and other reports and filings we have made with the SEC.

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to "Company," "Digimarc," "we," "our," and "us" refer to Digimarc Corporation.

All dollar amounts within the tables below are in thousands. The percentages within the tables may not sum to 100% due to rounding.

Digimarc, Illuminate, and the circle-d logo are registered trademarks of Digimarc Corporation. EVRYTHNG and EVRYTHNG PRODUCT CLOUD are registered trademarks of EVRYTHNG Limited ("EVRYTHNG"), a subsidiary of Digimarc.

Overview

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. The impacts of these threats are evidenced by:

•

Consumers demanding more transparency into how, where, and by whom products are made​.

•

Brands and creators facing rampant counterfeiting and intellectual property theft​.

•

Retailers losing hundreds of billions of dollars annually to shrink and theft​.

•

Enterprises experiencing an increase in information leaks and digital manipulation​.

•

AI-generated content blurring reality, sowing confusion and mistrust.

•

Regulators increasing pressure on companies to prove product authenticity and data integrity.

Our 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. Our 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, we exist to protect the truth in every interaction, spanning both the physical and digital worlds.

Physical Digimarc Solutions	Digital Digimarc Solutions
Anti-Counterfeiting: Restore trust with counterfeit resistant packaging and product verification.	Internal Compliance: Ensure policy compliance and prevent misuse of digital assets.
Counterfeiting Deterrence: Deter digital counterfeiting of global currencies.	Leak Detection: Identify leaked information and its source instantly.
Product Swap Prevention: Reduce weight-based shrink at grocery checkouts.	Piracy Prevention: Gain insight into - and control of - digital asset use.
Recycling: Boost product sustainability while revealing never-before-seen data.	Provenance & Authenticity: Restore trust and ensure fair use of digital assets.
Secure Gift Cards: Fight gift card fraud with automated tamper detection.	Royalty Monitoring: Ensure content creators and owners receive proper payment.

Our commercial solutions run on the Illuminate® platform-a high-performance, hyper-scalable, and ultra-secure software as a service ("SaaS") cloud-based platform for digital connectivity. Tested and trusted by some of the most highly demanding and mission-critical ecosystems in the world, the Illuminate platform provides the tools for the application of advanced digital watermarks and dynamic Quick Response ("QR") codes, Application Programming Interfaces ("APIs") that allow for direct integration into other mission critical systems, AI-assisted authentication workflows, and a centralized repository for capturing insights about digital interactions as well as automating activities based on that information.

The foundational digital watermarking technology used in our commercial solutions is backed by decades of innovation and inventions. It is also the same technology we use to deter digital counterfeiting of global currencies as part of our almost 30-year relationship with the Central Banks. This relationship was the first commercially successful large-scale use of our technologies and today protects hundreds of billions of banknotes in circulation around the world.

Our intellectual property contains many innovations in digital watermarking, content and object recognition, product authentication, and related fields. To protect our inventions, we have implemented an extensive intellectual property protection program that relies on a combination of patent, copyright, trademark and trade secret laws, and nondisclosure agreements and other contracts. As a result, we believe we have one of the world's most extensive patent portfolios in digital watermarking and related fields, with approximately 670 U.S. and foreign patents granted and applications pending as of June 30, 2026. The patents in our portfolio each have a life of approximately 20 years from the patent's effective filing date.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with Generally Accepted Accounting Principles in the United States ("GAAP") requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. There have been no significant changes in our significant accounting policies described in Part II, Item 7 of our 2025 Annual Report.

Results of Operations

The following table presents Consolidated Statements of Operations data for the periods indicated as a percentage of total revenue. Unless stated otherwise, all references in this Management's Discussion and Analysis of Financial Condition and Results of Operations relate to the three and six months ended June 30, 2026, and all changes discussed with respect to such period reflect changes compared to the three and six months ended June 30, 2025.

		Three Months Ended June 30,								Six Months Ended June 30,
		2026				2025				2026				2025
Percentages are percent of total revenue
Revenue:
Subscription			51	%			58	%			54	%			57	%
Service			49	%			42	%			46	%			43	%
Total revenue			100	%			100	%			100	%			100	%
Cost of revenue:
Subscription (1)			6	%			9	%			6	%			8	%
Service (1)			20	%			17	%			19	%			16	%
Amortization expense on acquired intangible assets			16	%			15	%			16	%			13	%
Total cost of revenue			42	%			41	%			41	%			38	%
Gross profit			58	%			59	%			59	%			62	%
Operating expenses:
Sales and marketing			33	%			40	%			30	%			48	%
Research, development and engineering			49	%			57	%			49	%			70	%
General and administrative			140	%			63	%			106	%			59	%
Amortization expense on acquired intangible assets			4	%			4	%			4	%			3	%
Total operating expenses			226	%			164	%			189	%			180	%
Operating loss			(167	)%			(105	)%			(130	)%			(118	)%
Other income, net			3	%			3	%			3	%			3	%
Loss before income taxes			(164	)%			(103	)%			(128	)%			(115	)%
Benefit (provision) for income taxes			-	%			(-	)%			-	%			(-	)%
Net loss			(164	)%			(103	)%			(128	)%			(115	)%
Net loss attributable to non-controlling interest			(-	)%			-	%			(-	)%			-	%
Net loss attributable to Digimarc Corporation			(164	)%			(103	)%			(128	)%			(115	)%

(1)	Cost of revenue for Subscription and Service excludes amortization expense on acquired intangible assets.

Summary

Total revenue for the three months ended June 30, 2026, decreased $0.6 million, or 8%, to $7.4 million, compared to $8.0 million for the three months ended June 30, 2025. Subscription revenue decreased $0.9 million, primarily reflecting a decrease of $0.8 million from the expiration of a commercial contract in October 2025. Service revenue increased $0.3 million, primarily reflecting higher service revenue from existing commercial and government customers.

Total revenue for the six months ended June 30, 2026, decreased $2.4 million, or 14%, to $15.0 million, compared to $17.4 million for the six months ended June 30, 2025. Subscription revenue decreased $1.8 million, primarily reflecting a decrease of $2.3 million from the expiration of two commercial contracts in 2025, partially offset by higher subscription revenue from new and existing commercial contracts. Service revenue decreased $0.6 million, primarily reflecting a $0.5 million decrease in commercial service revenue from HolyGrail 2.0 recycling projects, as that work was previously completed.

Total operating expenses for the three months ended June 30, 2026, increased $3.5 million, or 27%, to $16.7 million, compared to $13.1 million for the three months ended June 30, 2025. The increase primarily reflects increases in stock-based compensation expense of $4.0 million and professional services costs of $0.4 million, partially offset by decreases in cash compensation of $0.3 million, software and hardware costs of $0.2 million, and other costs of $0.4 million. The $4.0 million increase in stock-based compensation expense includes $5.4 million of one-time expense related to the acceleration of unvested equity awards held by our former Chief Executive Officer ("CEO"), partially offset by $1.4 million of lower stock-based compensation expense largely due to a lower number of employee stock grants. The $0.4 million increase in professional services costs includes $0.4 million of one-time costs associated with the recent corporate reorganization. The $0.3 million decrease in cash compensation costs includes $1.0 million of lower costs largely due to lower headcount, partially offset by one-time cash severance costs of $0.7 million paid to the former CEO.

Total operating expenses for the six months ended June 30, 2026, decreased $3.0 million, or 9%, to $28.3 million, compared to $31.3 million for the six months ended June 30, 2025. The decrease primarily reflects decreases in cash compensation costs of $7.7 million, software and hardware costs of $0.5 million, and other costs of $0.4 million, partially offset by increases in stock-based compensation expense of $4.5 million and professional services costs of $1.0 million. The $7.7 million decrease in cash compensation costs includes $5.1 million of lower costs largely due to lower headcount and $2.6 million of lower one-time cash severance costs. The $4.5 million increase in stock-based compensation expense includes $5.4 million of one-time expense related to the acceleration of unvested equity awards held by our former CEO, partially offset by $0.9 million of lower stock-based compensation expense largely due to a lower number of employee stock grants. The $1.0 million increase in professional services costs includes $1.7 million of one-time costs associated with the recent corporate reorganization.

Revenue

		Three Months Ended June 30,								Dollar				Percent				Six Months Ended June 30,								Dollar				Percent
		2026				2025				Increase (Decrease)				Increase (Decrease)				2026				2025				Increase (Decrease)				Increase (Decrease)
Revenue:
Subscription		$	3,742			$	4,624			$	(882	)			(19	)%		$	8,110			$	9,938			$	(1,828	)			(18	)%
Service			3,646				3,386				260				8	%			6,856				7,440				(584	)			(8	)%
Total		$	7,388			$	8,010			$	(622	)			(8	)%		$	14,966			$	17,378			$	(2,412	)			(14	)%
Revenue (as % of total revenue):
Subscription			51	%			58	%											54	%			57	%
Service			49	%			42	%											46	%			43	%
Total			100	%			100	%											100	%			100	%

Subscription

Subscription revenue consists primarily of revenue earned from subscription fees for access to our SaaS platform and products and, to a lesser extent, licensing fees for our software products and intellectual property. The majority of subscription contracts are recurring, paid in advance and recognized over the term of the subscription, which is typically one to three years.

The $0.9 million decrease in subscription revenue for the three months ended June 30, 2026, compared to the corresponding three months ended June 30, 2025, primarily reflects a decrease of $0.8 million from the expiration of a commercial contract in October 2025.

The $1.8 million decrease in subscription revenue for the six months ended June 30, 2026, compared to the corresponding six months ended June 30, 2025, primarily reflects a decrease of $2.3 million from the expiration of two commercial contracts in 2025, partially offset by an increase from new and existing commercial customers.

Service

Service revenue consists primarily of revenue earned from the performance of software development services and, to a lesser extent, professional services. The majority of software development contracts are structured as time and materials agreements. Revenue for services is generally recognized as the services are performed. Billing for services rendered generally occurs within one month after the services are provided. Service contracts can range from days to several years in length. Our contract with the Central Banks, which accounts for the majority of our service revenue, has a contract term through December 31, 2029. The contract is subject to work plans that are reviewed and agreed upon quarterly. The contract provides for predetermined billing rates, which are adjusted annually to account for cost of living variables, and provides for the reimbursement of third party costs incurred to support the work plans.

The $0.3 million increase in service revenue for the three months ended June 30, 2026, compared to the corresponding three months ended June 30, 2025, primarily reflects higher service revenue from existing customers.

The $0.6 million decrease in service revenue for the six months ended June 30, 2026, compared to the corresponding six months ended June 30, 2025, primarily reflects $0.5 million of lower commercial service revenue from HolyGrail 2.0 recycling projects.

Revenue by geography

		Three Months Ended June 30,								Dollar				Percent				Six Months Ended June 30,								Dollar				Percent
		2026				2025				Increase (Decrease)				Increase (Decrease)				2026				2025				Increase (Decrease)				Increase (Decrease)
Revenue by geography:
Domestic		$	1,371			$	2,327			$	(956	)			(41	)%		$	3,238			$	4,473			$	(1,235	)			(28	)%
International			6,017				5,683				334				6	%			11,728				12,905				(1,177	)			(9	)%
Total		$	7,388			$	8,010			$	(622	)			(8	)%		$	14,966			$	17,378			$	(2,412	)			(14	)%
Revenue (as % of total revenue):
Domestic			19	%			29	%											22	%			26	%
International			81	%			71	%											78	%			74	%
Total			100	%			100	%											100	%			100	%

Domestic

The $1.0 million decrease in domestic revenue for the three months ended June 30, 2026, compared to the corresponding three months ended June 30, 2025, primarily reflects a decrease of $0.8 million from the expiration of a commercial subscription contract with a domestic customer in October 2025.

The $1.2 million decrease in domestic revenue for the six months ended June 30, 2026, compared to the corresponding six months ended June 30, 2025, primarily reflects a decrease of $1.5 million from the expiration of a commercial subscription contract with a domestic customer in October 2025, partially offset by higher commercial subscription revenue from new and existing contracts with domestic customers.

International

The $0.3 million increase in international revenue for the three months ended June 30, 2026, compared to the corresponding three months ended June 30, 2025, primarily reflects higher commercial service and subscription revenue from existing contracts with international customers.

The $1.2 million decrease in international revenue for the six months ended June 30, 2026, compared to the corresponding six months ended June 30, 2025, primarily reflects a decrease of $0.7 million from the expiration of a commercial subscription and service contract with an international customer in April 2025 and $0.5 million of lower commercial service revenue from HolyGrail 2.0 recycling projects.

Revenue by market

		Three Months Ended June 30,								Dollar				Percent				Six Months Ended June 30,								Dollar				Percent
		2026				2025				Increase (Decrease)				Increase (Decrease)				2026				2025				Increase (Decrease)				Increase (Decrease)
Commercial:
Subscription		$	3,442			$	4,324			$	(882	)			(20	)%		$	7,510			$	9,338			$	(1,828	)			(20	)%
Service			202				39				163				418	%			261				835				(574	)			(69	)%
Total Commercial		$	3,644			$	4,363			$	(719	)			(16	)%		$	7,771			$	10,173			$	(2,402	)			(24	)%
Government:
Subscription		$	300			$	300			$	-				-	%		$	600			$	600			$	-				-	%
Service			3,444				3,347				97				3	%			6,595				6,605				(10	)			-	%
Total Government		$	3,744			$	3,647			$	97				3	%		$	7,195			$	7,205			$	(10	)			-	%
Total		$	7,388			$	8,010			$	(622	)			(8	)%		$	14,966			$	17,378			$	(2,412	)			(14	)%
Revenue (as % of total revenue):
Commercial			49	%			54	%											52	%			59	%
Government			51	%			46	%											48	%			41	%
Total			100	%			100	%											100	%			100	%

Commercial

The $0.7 million decrease in commercial revenue for the three months ended June 30, 2026, compared to the corresponding three months ended June 30, 2025, primarily reflects a decrease of $0.8 million from the expiration of a commercial contract in October 2025.

The $2.4 million decrease in commercial revenue for the six months ended June 30, 2026, compared to the corresponding six months ended June 30, 2025, primarily reflects a decrease of $2.3 million from the expiration of two commercial contracts in 2025 and $0.5 million of lower commercial service revenue from HolyGrail 2.0 recycling projects, partially offset by higher commercial subscription revenue from new and existing customers.

Government

The $0.1 million increase in government revenue for the three months ended June 30, 2026, compared to the corresponding three months ended June 30, 2025, reflects $0.1 million of higher government service revenue from the Central Banks.

The insignificant change in government revenue for the six months ended June 30, 2026, compared to the corresponding six months ended June 30, 2025, reflects an insignificant change in government service revenue from the Central Banks.

Annual Recurring Revenue ("ARR")

		As of				As of
		June 30,				June 30,				Dollar				Percent
		2026				2025				Increase (Decrease)				Increase (Decrease)
Ending ARR		$	11,622			$	15,881			$	(4,259	)			(27	)%

Ending ARR decreased $4.3 million from $15.9 million as of June 30, 2025, to $11.6 million as of June 30, 2026, reflecting the expiration of a commercial contract in October 2025 that accounted for $3.1 million of ARR and the step-down in another commercial contract in June 2026 that accounted for $2.6 million of ARR, partially offset by $1.5 million of net increases to ARR from new and existing commercial contracts.

We provide an ARR performance metric to help investors better understand and assess the performance of our business. ARR is calculated as the aggregation of annualized subscription fees from all of our commercial contracts as of the measurement date. ARR does not have any standardized meaning and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue and is not intended to be combined with, or to replace, either of those items. ARR is not a forecast and the contracts at the end of a reporting period used in calculating ARR may or may not be extended or renewed by our customers.

Cost of revenue

Subscription. Cost of subscription revenue primarily includes:

•

internet cloud hosting costs and image search data fees to support our subscription products; and

•

amortization of capitalized patent costs and patent maintenance fees.

Service. Cost of service revenue primarily includes:

•

compensation, benefits, incentive compensation in the form of cash and stock-based compensation and related costs of our software developers, quality assurance personnel, professional services team and other personnel where we bill our customers for time and materials costs;

•

payments to outside contractors that are billed to customers;

•

charges for equipment and software directly used by customers; and

•

travel costs that are billed to customers.

Amortization expense on acquired intangible assets includes:

•

amortization expense recognized on the developed technology intangible asset acquired in the EVRYTHNG acquisition.

Gross profit

		Three Months Ended June 30,								Dollar				Percent				Six Months Ended June 30,								Dollar				Percent
		2026				2025				Increase (Decrease)				Increase (Decrease)				2026				2025				Increase (Decrease)				Increase (Decrease)
Gross Profit:
Subscription (1)		$	3,325			$	3,909			$	(584	)			(15	)%		$	7,238			$	8,479			$	(1,241	)			(15	)%
Service (1)			2,176				2,003				173				9	%			4,008				4,650				(642	)			(14	)%
Amortization expense on acquired intangible assets			(1,201	)			(1,205	)			4				-	%			(2,409	)			(2,337	)			(72	)			(3	)%
Total		$	4,300			$	4,707			$	(407	)			(9	)%		$	8,837			$	10,792			$	(1,955	)			(18	)%
Gross Profit Margin:
Subscription (1)			89	%			85	%											89	%			85	%
Service (1)			60	%			59	%											58	%			63	%
Total			58	%			59	%											59	%			62	%

(1)	Gross Profit and Gross Profit Margin for Subscription and Service excludes amortization expense on acquired intangible assets.

The $0.4 million decrease in total gross profit for the three months ended June 30, 2026, compared to the corresponding three months ended June 30, 2025, primarily reflects $0.6 million of lower revenue, partially offset by $0.2 million of lower cost of revenue.

The $2.0 million decrease in total gross profit for the six months ended June 30, 2026, compared to the corresponding six months ended June 30, 2025, primarily reflects $2.4 million of lower revenue, partially offset by $0.5 million of lower cost of revenue.

The increase in subscription gross profit margin, excluding amortization expense on acquired intangible assets, for the three months ended June 30, 2026, compared to the corresponding three months ended June 30, 2025, primarily reflects $0.3 million of lower cost of subscription revenue, partially offset by $0.9 million of lower subscription revenue.

The increase in subscription gross profit margin, excluding amortization expense on acquired intangible assets, for the six months ended June 30, 2026, compared to the corresponding six months ended June 30, 2025, primarily reflects $0.6 million of lower cost of subscription revenue, partially offset by $1.9 million of lower subscription revenue.

The increase in service gross profit margin, excluding amortization expense on acquired intangible assets, for the three months ended June 30, 2026, compared to the corresponding three months ended June 30, 2025, primarily reflects a more favorable mix of service revenue.

The decrease in service gross profit margin, excluding amortization expense on acquired intangible assets, for the six months ended June 30, 2026, compared to the corresponding six months ended June 30, 2025, primarily reflects a less favorable mix of service revenue.

Operating expenses

Sales and marketing

		Three Months Ended June 30,								Dollar				Percent				Six Months Ended June 30,								Dollar				Percent
		2026				2025				Increase (Decrease)				Increase (Decrease)				2026				2025				Increase (Decrease)				Increase (Decrease)
Sales and marketing		$	2,414			$	3,231			$	(817	)			(25	)%		$	4,496			$	8,309			$	(3,813	)			(46	)%
Sales and marketing (as % of total revenue)			33	%			40	%											30	%			48	%

Sales and marketing expenses consist primarily of:

•

compensation, benefits, incentive compensation in the form of cash and stock-based compensation and related costs of our sales, marketing, product, professional services and customer support personnel;

•

travel and market research costs, and costs associated with marketing programs, such as trade shows, public relations and new product launches;

•

consulting costs for sales and marketing and product initiatives; and

•

the allocation of facilities and information technology costs.

The $0.8 million decrease in sales and marketing expenses for the three months ended June 30, 2026, compared to the corresponding three months ended June 30, 2025, primarily reflects:

•

lower cash compensation costs of $0.4 million largely due to lower headcount; and

•

lower stock-based compensation expense of $0.4 million.

The $3.8 million decrease in sales and marketing expenses for the six months ended June 30, 2026, compared to the corresponding six months ended June 30, 2025, primarily reflects:

•

lower cash compensation costs of $2.1 million largely due to lower headcount;

•

lower one-time cash severance costs of $0.9 million resulting from the reduction in force in 2025; and

•

lower stock-based compensation expense of $0.7 million.

Research, development and engineering

		Three Months Ended June 30,								Dollar				Percent				Six Months Ended June 30,								Dollar				Percent
		2026				2025				Increase (Decrease)				Increase (Decrease)				2026				2025				Increase (Decrease)				Increase (Decrease)
Research, development and engineering		$	3,652			$	4,536			$	(884	)			(19	)%		$	7,399			$	12,170			$	(4,771	)			(39	)%
Research, development and engineering (as % of total revenue)			49	%			57	%											49	%			70	%

Research, development and engineering expenses consist primarily of:

•

compensation, benefits, incentive compensation in the form of cash and stock-based compensation and related costs of our software and hardware developers and quality assurance personnel;

•

payments to outside contractors for software development services;

•

the purchase of materials and services for platform and product development; and

•

the allocation of facilities and information technology costs.

The $0.9 million decrease in research, development and engineering expenses for the three months ended June 30, 2026, compared to the corresponding three months ended June 30, 2025, primarily reflects:

•

lower stock-based compensation expense of $0.6 million; and

•

lower cash compensation costs of $0.3 million largely due to lower headcount.

The $4.8 million decrease in research, development and engineering expenses for the six months ended June 30, 2026, compared to the corresponding six months ended June 30, 2025, primarily reflects:

•

lower cash compensation costs of $2.0 million largely due to lower headcount;

•

lower one-time cash severance costs of $1.6 million resulting from the reduction in force in 2025;

•

lower software and hardware costs of $0.4 million;

•

lower stock-based compensation expense of $0.4 million; and

•

lower professional services costs of $0.3 million.

General and administrative

		Three Months Ended June 30,								Dollar				Percent				Six Months Ended June 30,								Dollar				Percent
		2026				2025				Increase (Decrease)				Increase (Decrease)				2026				2025				Increase (Decrease)				Increase (Decrease)
General and administrative		$	10,311			$	5,078			$	5,233				103	%		$	15,866			$	10,259			$	5,607				55	%
General and administrative (as % of total revenue)			140	%			63	%											106	%			59	%

We incur general and administrative costs in the functional areas of finance, legal, human resources, intellectual property, executive and board of directors. Costs for facilities and information technology are also managed as part of the general and administrative processes. These costs are allocated to sales and marketing, research, development and engineering, and general and administrative based on relative headcount.

General and administrative expenses consist primarily of:

•

compensation, benefits and incentive compensation in the form of cash and stock-based compensation and related costs of our general and administrative personnel;

•

third party and professional fees associated with legal, accounting and human resources functions;

•

costs associated with being a public company;

•

third party costs, including filing and governmental regulatory fees and outside legal fees and translation costs, related to the filing and maintenance of our intellectual property; and

•

the allocation of facilities and information technology costs.

•

higher one-time stock-based compensation expense of $5.4 million related to the acceleration of unvested equity awards held by the former CEO;

•

higher one-time cash severance costs of $0.7 million paid to the former CEO; and

•

higher one-time professional services costs of $0.4 million associated with the recent corporate reorganization; partially offset by

•

lower cash compensation costs of $0.5 million;

•

lower other stock-based compensation expense of $0.4 million; and

•

lower other costs of $0.4 million.

The $5.6 million increase in general and administrative expenses for the six months ended June 30, 2026, compared to the corresponding six months ended June 30, 2025, primarily reflects:

•

higher one-time stock-based compensation expense of $5.4 million related to the acceleration of unvested equity awards held by our former CEO;

•

higher one-time professional services costs of $1.7 million associated with the recent corporate reorganization;

•

higher other stock-based compensation expense of $0.2 million; and

•

higher net severance costs reflecting higher one-time cash severance costs of $0.7 million paid to the former CEO, offset by $0.6 million of lower one-time cash severance costs resulting from the reduction in force in 2025; partially offset by

•

lower cash compensation costs of $1.1 million;

•

lower other professional services costs of $0.6 million; and

•

lower other costs of $0.3 million.

Amortization expense on acquired intangible assets

		Three Months Ended June 30,								Dollar				Percent				Six Months Ended June 30,								Dollar				Percent
		2026				2025				Increase (Decrease)				Increase (Decrease)				2026				2025				Increase (Decrease)				Increase (Decrease)
Amortization expense on acquired intangible assets		$	287			$	288			$	(1	)			(-	)%		$	576			$	559			$	17				3	%
Amortization expense on acquired intangible assets (as % of total revenue)			4	%			4	%											4	%			3	%

Amortization expense on acquired intangible assets relates to amortization expense recognized on the customer relationships intangible asset acquired in the EVRYTHNG acquisition.

The insignificant change in amortization expense on acquired intangible assets for both the three and six-month periods reflects the impact of changes in foreign currency exchange rates.

Stock-based compensation

		Three Months Ended June 30,								Dollar				Percent				Six Months Ended June 30,								Dollar				Percent
		2026				2025				Increase (Decrease)				Increase (Decrease)				2026				2025				Increase (Decrease)				Increase (Decrease)
Cost of revenue		$	401			$	253			$	148				58	%		$	747			$	390			$	357				92	%
Sales and marketing			362				795				(433	)			(54	)%			418				1,150				(732	)			(64	)%
Research, development and engineering			700				1,221				(521	)			(43	)%			1,320				1,628				(308	)			(19	)%
General and administrative			6,462				1,502				4,960				330	%			7,449				1,863				5,586				300	%
Total		$	7,925			$	3,771			$	4,154				110	%		$	9,934			$	5,031			$	4,903				97	%

The $4.2 million increase in stock-based compensation expense for the three months ended June 30, 2026, compared to the corresponding three months ended June 30, 2025, primarily reflects $5.4 million of higher one-time costs due to the acceleration of unvested equity awards held by our former CEO, partially offset by a lower number of employee stock grants.

The $4.9 million increase in stock-based compensation expense for the six months ended June 30, 2026, compared to the corresponding six months ended June 30, 2025, primarily reflects $5.4 million of higher one-time costs due to the acceleration of unvested equity awards held by our former CEO, partially offset by a lower number of employee stock grants.

We anticipate incurring an additional $16.0 million in stock-based compensation expense through June 30, 2030, for stock awards outstanding as of June 30, 2026 including an additional $0.5 million of expense due to the acceleration of unvested equity awards held by our former CEO that will be recognized in the three months ending September 30, 2026.

Other income, net

		Three Months Ended June 30,								Dollar				Percent				Six Months Ended June 30,								Dollar				Percent
		2026				2025				Increase (Decrease)				Increase (Decrease)				2026				2025				Increase (Decrease)				Increase (Decrease)
Other income, net		$	229			$	210				19				9	%		$	400			$	579			$	(179	)			(31	)%
Other income, net (as % of total revenue)			3	%			3	%											3	%			3	%

The insignificant change in other income, net for the three months ended June 30, 2026, compared to the corresponding three months ended June 30, 2025, primarily reflects higher foreign currency gains partially offset by lower interest income due to lower marketable securities balances and interest rates.

The $0.2 million decrease in other income, net for the six months ended June 30, 2026, compared to the corresponding six months ended June 30, 2025, primarily reflects lower interest income due to lower marketable securities balances and interest rates.

Income Taxes

The benefit (provision) for income taxes reflects current taxes and deferred taxes. The effective tax rate for each of the six months ended June 30, 2026 and 2025 was 0%. Our effective tax rate is significantly lower than our statutory tax rate because we have a valuation allowance recorded against our deferred tax assets.

The valuation allowance against deferred tax assets as of June 30, 2026, was $114.9 million, an increase of $2.2 million from $112.7 million as of December 31, 2025.

We continually assess the applicability of a valuation allowance against our deferred tax assets. Based upon the positive and negative evidence available as of June 30, 2026, and largely due to the cumulative loss incurred by us over the last several years, which is considered a significant piece of negative evidence when assessing the realizability of deferred tax assets, a valuation allowance is recorded against our deferred tax assets. We will not record tax benefits on any future losses until it is determined that those tax benefits will be realized. Future reversals of the valuation allowance would result in a tax benefit in the period recognized.

Non-GAAP Financial Measures

The following discussion and analysis includes both financial measures in accordance with GAAP as well as non-GAAP financial measures. Generally, a non-GAAP financial measure is a numerical measure of a company's performance, financial position or cash flows that excludes amounts that are not normally excluded in the most directly comparable measure calculated and presented in accordance with GAAP. Non-GAAP financial measures should be viewed as supplemental to, and should not be considered as alternatives to, GAAP financial measures. Non-GAAP financial measures may not be indicative of the historical operating results of the Company nor are they intended to be predictive of potential future results. Investors should not consider non-GAAP financial measures in isolation or as substitutes for performance measures calculated in accordance with GAAP. Our management uses and relies on Non-GAAP gross profit, Non-GAAP gross profit margin, Non-GAAP operating expenses, Non-GAAP net loss, and Non-GAAP net loss per diluted share, which are all non-GAAP financial measures. We believe that both management and shareholders benefit from referring to the following non-GAAP financial measures in planning, forecasting and analyzing future periods.

Our management uses these non-GAAP financial measures in evaluating its financial and operational decision making and as a means to evaluate period-to-period comparisons. Our management recognizes that the non-GAAP financial measures have inherent limitations because of the described excluded items.

We define Non-GAAP gross profit, Non-GAAP gross profit margin, Non-GAAP operating expenses, Non-GAAP net loss, and Non-GAAP net loss per diluted share excluding the adjustments in the table below. These non-GAAP financial measures are an important measure of our operating performance because they allow management, investors and analysts to evaluate and assess our core operating results from period-to-period after removing non-cash and non-recurring activities that can affect comparability.

We have included a reconciliation of the non-GAAP financial measures we use to their most directly comparable GAAP financial measures. We believe that providing the non-GAAP financial measures, together with the reconciliation to GAAP, helps investors make comparisons between us and other companies. In making any comparisons to other companies, investors need to be aware that companies use different non-GAAP measures to evaluate their financial performance. Investors should pay close attention to the specific definitions being used and to the reconciliation between such measures and the corresponding GAAP measures provided by each company under applicable SEC rules.

The following table presents a reconciliation of Non-GAAP gross profit, Non-GAAP gross profit margin, Non-GAAP operating expenses, Non-GAAP net loss, and Non-GAAP net loss per diluted share for the three months ended June 30, 2026 and 2025:

		Three Months Ended June 30,								Six Months Ended June 30,
		2026				2025				2026				2025
GAAP gross profit		$	4,300			$	4,707			$	8,837			$	10,792
Amortization of acquired intangible assets			1,201				1,205				2,409				2,337
Amortization and write-off of other intangible assets			206				219				414				438
Stock-based compensation			401				253				747				390
Non-GAAP gross profit		$	6,108			$	6,384			$	12,407			$	13,957
Non-GAAP gross profit margin			83	%			80	%			83	%			80	%
GAAP operating expenses		$	16,664			$	13,133			$	28,337			$	31,297
Depreciation and write-off of property and equipment			(146	)			(138	)			(300	)			(284	)
Amortization of acquired intangible assets			(287	)			(288	)			(576	)			(559	)
Amortization and write-off of other intangible assets			(99	)			(227	)			(221	)			(201	)
Amortization of lease right of use assets under operating leases			(122	)			(103	)			(240	)			(201	)
Stock-based compensation			(7,524	)			(3,518	)			(9,187	)			(4,641	)
Corporate reorganization expenses			(433	)			-				(1,656	)			-
Non-GAAP operating expenses		$	8,053			$	8,859			$	16,157			$	25,411
GAAP net loss		$	(12,131	)		$	(8,220	)		$	(19,097	)		$	(19,950	)
Total adjustments to gross profit			1,808				1,677				3,570				3,165
Total adjustments to operating expenses			8,611				4,274				12,180				5,886
Non-GAAP net loss		$	(1,712	)		$	(2,269	)		$	(3,347	)		$	(10,899	)
Non-GAAP net loss attributable to non-controlling interest			(2	)			-				(2	)			-
Non-GAAP net loss attributable to Digimarc Corporation		$	(1,710	)		$	(2,269	)		$	(3,345	)		$	(10,899	)
GAAP net loss per diluted share		$	(0.54	)		$	(0.38	)		$	(0.86	)		$	(0.93	)
Non-GAAP net loss attributable to Digimarc Corporation		$	(1,710	)		$	(2,269	)		$	(3,345	)		$	(10,899	)
Non-GAAP net loss per diluted share attributable to Digimarc Corporation common shareholders		$	(0.08	)		$	(0.11	)		$	(0.15	)		$	(0.51	)

Non-GAAP gross profit for the three months ended June 30, 2026, decreased by $0.3 million compared to the three months ended June 30, 2025. The decrease primarily reflects $0.6 million of lower revenue, partially offset by $0.3 million of lower cost of revenue.

Non-GAAP gross profit for the six months ended June 30, 2026, decreased by $1.6 million compared to the six months ended June 30, 2025. The decrease primarily reflects $2.4 million of lower revenue, partially offset by $0.9 million of lower cost of revenue.

Non-GAAP gross profit margin for the three months ended June 30, 2026, increased to 83% compared to 80% for the three months ended June 30, 2025. The increase primarily reflects $0.3 million of lower cost of subscription revenue and a more favorable mix of service revenue, partially offset by $0.9 million of lower subscription revenue.

Non-GAAP gross profit margin for the six months ended June 30, 2026, increased to 83% compared to 80% for the six months ended June 30, 2025. The increase primarily reflects $0.6 million of lower cost of subscription revenue, partially offset by $1.9 million of lower subscription revenue.

Non-GAAP operating expenses for the three months ended June 30, 2026, decreased by $0.8 million compared to the three months ended June 30, 2025. The decrease primarily reflects decreases of $1.0 million of cash compensation costs largely due to lower headcount, $0.2 million of software and hardware costs, and $0.4 million of other costs, partially offset by $0.7 million of one-time cash severance costs paid to the former CEO.

Non-GAAP operating expenses for the six months ended June 30, 2026, decreased by $9.3 million compared to the six months ended June 30, 2025. The decrease primarily reflects decreases of $5.1 million of cash compensation costs largely due to lower headcount, $2.6 million of one-time cash severance costs, $0.7 million of professional services costs, $0.5 million of software and hardware costs, and $0.4 million of other costs.

Liquidity and Capital Resources

		June 30,				December 31,
		2026				2025
Working capital		$	5,378			$	12,988
Current ratio (1)			1.4:1				2.6:1
Cash, cash equivalents and short-term marketable securities		$	8,755			$	12,866

(1)	The current ratio is calculated by dividing total current assets by total current liabilities.

The $4.1 million decrease in cash, cash equivalents and marketable securities at June 30, 2026, from December 31, 2025, resulted primarily from:

•

$2.6 million of cash used in operations; and

•

$1.5 million of cash used for purchases of common stock related to tax withholding in connection with the vesting of restricted stock, restricted stock units, and performance restricted stock units.

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, and trade accounts receivable. We place our cash and cash equivalents with major banks and financial institutions and at times deposits may exceed insured limits. Marketable securities include commercial paper, corporate notes, and federal agency notes. Our investment policy requires our portfolio to be invested to ensure that the greater of $2.0 million or 20% of the invested funds will be available within 30 days' notice.

Other than cash used for operating needs, which may include short-term marketable securities, our investment policy limits our credit exposure to any one financial institution or type of financial instrument by limiting the maximum of 5% of our cash and cash equivalents and marketable securities or $1.0 million, 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. Our investment policy also limits our credit exposure by limiting to a maximum of 25% of our cash and cash equivalents and marketable securities, or $1.5 million, whichever is lesser, to be invested in any one industry category (e.g., financial, energy, etc.) at the time of purchase. As a result, we believe our credit risk associated with cash and investments to be minimal.

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, we consider whether we have the ability and intent to hold the investment until a market price recovery and 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 us for the three and six months ended June 30, 2026 and 2025.

Cash flows from operating activities

The components of cash flows used in operating activities were:

		Six Months Ended June 30,								Dollar				Percent
		2026				2025				Increase (Decrease)				Increase (Decrease)
Net loss		$	(19,097	)		$	(19,950	)		$	(853	)			(4	)%
Non-cash items included in net loss			14,109				9,362				(4,747	)			(51	)%
Changes in operating assets and liabilities			2,351				414				(1,937	)			(468	)%
Net cash used in operating activities		$	(2,637	)		$	(10,174	)		$	(7,537	)			(74	)%

Cash used in operating activities for the six months ended June 30, 2026, decreased by $7.5 million, compared to the corresponding six months ended June 30, 2025. The decrease reflects $4.7 million of higher non-cash items included in net loss, a $1.9 million favorable change in operating assets and liabilities, and a $0.9 million lower net loss. The increase in non-cash items included in net loss primarily reflects $4.9 million of higher stock-based compensation expense, largely due to the one-time expense related to the acceleration of unvested equity awards held by our former CEO. The favorable change in operating assets and liabilities primarily reflects the timing and amount of vendor payments, customer receipts, and refundable tax credits.

Cash flows from investing activities

Cash flows provided by investing activities for the six months ended June 30, 2026, decreased by $9.0 million, compared to the corresponding six months ended June 30, 2025. The decrease reflects $11.4 million of lower proceeds from maturities of marketable securities, partially offset by $2.2 million of lower purchases of marketable securities.

Cash flows from financing activities

Cash flows used in financing activities for the six months ended June 30, 2026, decreased by $0.9 million, compared to the corresponding six months ended June 30, 2025. The decrease primarily reflects $0.6 million of lower purchases of common stock and $0.3 million of higher issuances of common stock, net of issuance costs.

Future Cash Expectations

Under the rules of ASC Subtopic 205-40 "Presentation of Financial Statements-Going Concern" ("ASC205-40"), 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, such as increasing revenue or the future exercise of outstanding financial assets.

We have a history of incurring negative cash flows, and depending on future results, we may continue to incur negative cash flows in the future. We believe our current cash, cash equivalents, and marketable securities of $8.8 million as of June 30, 2026, will not be sufficient to fund our operations, as currently planned, for at least 12 months from this Form 10-Q filing, unless we are able to grow revenues, raise additional capital, and/or reduce planned operating costs. Under ASC 205-40, substantial doubt exists about our ability to continue as a going concern.

We plan, as necessary, to secure additional capital in the future through increased revenue, partnerships, financing activities, and/or other sources to carry out our planned business activities. If additional capital is not available on acceptable terms, or at all, when required, we may need to take steps to contain costs until such funding is received, which could have a material adverse effect on our business.

Future Revenue Trends

Our commercial subscription revenue for the remainder of fiscal 2026 as compared to fiscal 2025 may be negatively impacted by the expiration of two commercial contracts, one in October 2025 that accounted for $3.1 million of ARR and one in June 2026 that accounted for $2.6 million of ARR.

Shelf Registration

On July 7, 2026, we filed a new shelf registration statement on Form S-3. The new shelf registration statement became effective on July 13, 2026, and expires on July 13, 2029. Under the new shelf registration statement, we may sell securities in one or more offerings up to $50.0 million.

On July 13, 2026, upon our new shelf registration becoming effective, our prior shelf registration statement expired with $67.2 million unused.

Equity Sales Agreement

On June 8, 2026, we entered into a Sales Agreement, whereby we may sell from time to time through Needham & Company, LLC, as our sales agent, our common stock having an aggregate offering price of up to $17.5 million. Needham & Company, LLC, will receive a commission of 3.0% of the gross sales price per share of common stock sold. For the three and six months ended June 30, 2026, we sold 24 thousand shares at an average price of $12.59 per share under this Sales Agreement totaling $0.3 million of net cash proceeds. As of June 30, 2026, there is $17.2 million available for future issuance under this Sales Agreement.

We may sell shares under the shelf registration and/or use similar or other financing means to raise working capital in the future, if necessary, to support continued investment in our growth initiatives. We may also raise capital in the future to fund acquisitions and/or investments in complementary businesses, technologies or product lines. If it becomes necessary to obtain additional financing, we may not be able to do so, or if these funds are available, they may not be available on satisfactory terms. These factors may inhibit our near-term ability to obtain financing.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended. Words such as "may," "might," "plan," "should," "could," "expect," "anticipate," "intend," "believe," "project," "forecast," "estimate," "continue," and variations of such terms or similar expressions are intended to identify such forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, or other statements made by us, are made based on our expectations and beliefs concerning future events impacting us, and are subject to uncertainties and factors (including those specified below), which are difficult to predict and, in many instances, are beyond our control. As a result, our actual results could differ materially from those expressed in or implied by any such forward-looking statements, and investors are cautioned not to place undue reliance on such statements. We believe that the following factors, among others (including those described in Item 1A. "Risk Factors" of our 2025 Annual Report), could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us. Forward-looking statements include but are not limited to statements relating to:

•

trends and sources of future revenue;

•

anticipated revenue to be generated from current contracts;

•

anticipated expenses, costs, margins, provision for income taxes and investment activities;

•

our assumptions and expectations related to stock awards, including future stock-based compensation expense;

•

our belief that we have one of the world's most extensive patent portfolios in digital watermarking and related fields;

•

our beliefs regarding our critical accounting policies;

•

business opportunities that could require that we seek additional financing and our ability to do so;

•

our expected short-term and long-term liquidity positions;

•

our capital expenditure and working capital requirements and our ability to fund our capital expenditure and working capital needs through cash flow from operations or financing;

•

our expectations regarding our ability to meet future financial obligations as they become due within the coming fiscal year;

•

our use of cash, cash equivalents and marketable securities in upcoming quarters and the possibility that our deposits of cash and cash equivalents with major banks and financial institutions may exceed insured limits;

•

protection, development and monetization of our intellectual property portfolio; and

•

our beliefs related to legal proceedings and claims arising in the ordinary course of business.

We believe that the risk factors specified above and the risk factors contained in Part I, Item 1A. "Risk Factors" of our 2025 Annual Report, among others, could affect our future performance and the liquidity and value of our securities and cause our actual results to differ materially from those expressed or implied by forward-looking statements made by us or on our behalf. Investors should understand that it is not possible to predict or identify all risk factors and that there may be other factors that may cause our actual results to differ materially from the forward-looking statements. All forward-looking statements made by us or by persons acting on our behalf apply only as of the date of this Quarterly Report on Form 10-Q. We do not undertake any obligation to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after the date of the filing of this Quarterly Report on Form 10-Q.