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Dynamic quotes 
OFFON

DIGIMARC CORPORATION

(DMRC)
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DIGIMARC : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/06/2021 | 06:03am EDT
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 Annual
Report on Form 10-K for the year ended December 31, 2020 filed on February 26,
2021 (our "2020 Annual Report"), and other reports and filings we have made with
the U.S. Securities and Exchange Commission ("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 are in thousands except per share amounts or unless otherwise noted. The percentages within the tables may not sum to 100% due to rounding.

Digimarc, Digimarc Barcode and Digimarc Discover are registered trademarks of Digimarc Corporation.


Overview

Digimarc Corporation is a pioneer in the automatic identification of media,
including packaging, other commercial print, digital images, audio and video.
The Digimarc Platform takes industry beyond the barcode, providing innovative
and comprehensive automatic identification software and services to simplify
search and transform information discovery. The Digimarc Platform enables
applications that benefit retailers and consumer brands, national and state
government agencies, media and entertainment industries, and others.

The Digimarc Platform features three core capabilities for the identification,
discovery and quality management of media. Digimarc Barcode integrates the
identification function, which is a novel data carrier encoded into media in
ways that are generally imperceptible to people, permitting the carrier to be
repeated many times over the surface of the enhanced media. Digimarc Discover
represents the discovery function, which is software for computing devices and
network interfaces that recognize and decode indicia of the identity of media.
These include, but are not limited to, Digimarc Barcodes, Quick Response Codes,
Universal Product Codes, certain other GS1 approved one-dimensional codes and
relevant contextual data. Digimarc Verify incorporates the quality management
function, a suite of software tools used to inspect and verify that the
identification and discovery of media are both accurate and effective. Together,
these core capabilities enable organizations, application developers, and other
solution providers to build new and improve existing automatic identification
solutions.

The Digimarc Platform enables customers to create digital identities for media objects and provides many benefits for connected media, including:

• Security: An imperceptible and indestructible data carrier encoded in the

object provides a unique identification, whether in a digital image, video

or audio file, or in graphics printed, embossed or etched on paper,

cardboard, plastic, metal, or other material. Among other things, this

identification supports strong authentication.

• Brand Protection: A unique identifier ("ID") enables fraud deterrence

across many use cases, from preventing "barcode swapping" and

counterfeiting of currency, media, and goods to detection of use or

distribution of physical products and digital images and e-publications.

• Traceability: The ID can carry serial numbers for easier tracking of

individual items or entire lots. This has many uses, from ensuring product

legitimacy to preventing product pirating to quickly identifying products

for recall based on source provenance and sales destination.

• Sustainability: The ID can contain information specific to packaging

content as an aid to broader and more efficient recycling. For example, a

microscopic pattern embossed in plastic packaging can identify the

materials used and their composition to aid sorting and recapture.

Similarly, enhanced labels for fresh foods can be used to dynamically

        adjust pricing and thus reduce food waste proactively.


     •  Engagement: Consumers can directly interact with enhanced objects by

merely scanning the item with their enabled smartphones. Brands can share

additional product information online including recipes, instructions for

        use and recycling, information about ingredients and sources, how-to
        videos, coupons, and more.


                                       20
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     •  Efficiency: Connected items, reliably scanned by machines and mobile
        devices, can enhance supply chain efficiencies, from parts matching in
        manufacturing to faster and more accurate inventory scanning and faster
        and easier front-of-store checkout experiences.


Our inventions provide a powerful document security element, giving rise to a
long-term relationship with a consortium of central banks (the "Central Banks")
and many leading companies in the information technology industry. We and our
business partners have successfully propagated the use of our technology in
music, movies, television broadcasts, digital images, e-publications and printed
materials. Digimarc Barcode is used in these applications to improve media
rights and asset management, reduce piracy and counterfeiting losses, improve
marketing programs, permit more efficient and effective distribution of valuable
media content, and enhance consumer entertainment and commercial experiences.

Digimarc Barcode can be used to enhance all forms of media and is generally
imperceptible to human senses, but quickly detected by computers, networks, or
other digital devices like smartphones and tablets. Unlike traditional barcodes
and tags, our solution does not require content owners to give up valuable
visual space on their media content, nor does it affect their media content's
overall layout or aesthetics. Digimarc Barcode is generally imperceptible in
regular use and does all that visible barcodes do, but performs better. Our
Digimarc Discover software delivers a range of rich media experiences to its
readers on their smartphones or tablets across multiple media formats, including
print, audio and video. Unique to Digimarc Discover is its seamless multi-modal
use of various content identification technologies as needed, including Digimarc
Barcode, when present.

Our intellectual property contains many innovations in digital watermarking,
object content recognition, digital rights management, 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 1,000 U.S. and
foreign patents granted and applications pending as of June 30, 2021. The
patents in our portfolio each have a life of approximately 20 years from the
patent's effective filing date.

For a discussion of activities and costs related to our research and development, see "Results of Operations - Summary - Research, development and engineering."


Forging a Sustainable Future

At Digimarc, the environment is an essential stakeholder in everything we do,
and we are committed to harnessing our culture of innovation to mitigate the
visible and increasingly damaging effects of rising greenhouse gas emissions. We
support a sustainable future by improving plastic sortation at recycling
facilities to keep plastic out of landfills and oceans. Our technologies play a
meaningful role in reducing food waste and educating consumers on package
recyclability.

The Digimarc Platform features automatic identification software and services
that help reduce food waste, increase traceability, and promote a circular
economy by educating consumers on recycling options and improving plastic
sortation at waste facilities. Digimarc Barcode applied to plastic packaging,
labels, corrugate and other materials, can significantly help to address
pressing environmental issues, such as climate change and the proliferation of
plastic in our environment.

• Recycling: Digimarc works with leading consumer brands to optimize

packaging for the circular economy. Digimarc Barcode enables better

detection and sortation of plastics, improving the economics and

efficiencies of the recycling value chain. And, as part of the Association

        des Industries de Marque ("AIM") HolyGrail 2.0 project focused on
        pioneering the use of digital watermarks, Digimarc can better enable
        companies to reach their recycling and sustainability goals.

     •  Traceability: Product traceability across the global supply chain
is
        increasingly essential for consumer brands and food manufacturers to
        promote consumer safety, mitigate risk, and gain real-time insight into

product locations in warehouses and distribution centers. Using Digimarc

technologies for packaging supports these business needs with batch-lot

and item-level traceability by applying serialized or custom identifiers

and additional data to product packaging.



Together with our customers and partners around the world, we drive positive
impacts across global supply chains. Our efforts prioritize people and the
planet by aiming to eliminate waste and helping our customers meet their
sustainability goals. As consumption trends and behaviors evolve, we are
listening to our partners, their customers and other critical stakeholders, all
of whom expect us all to operate with future generations in mind. We partner
with global brand leaders, retailers, packaging and print innovators, and other
technology solution providers who share the same mission of building a
sustainable future.

COVID-19 Pandemic


The COVID-19 pandemic poses significant risks to our business. The ongoing
public health actions attempting to reduce the spread of COVID-19 created and
may continue to create significant disruptions to consumer demand, customer and
supplier relationships, sales and support processes, and general economic
conditions. Accordingly, our management continuously evaluates our business
operations, communicates with and monitors the actions of our customers and
partners, and reviews our near-term financial

                                       21

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performance as we manage the Company through the uncertainty related to the
COVID-19 pandemic. Some of our projects with retail customers and partners have
been delayed as a result of the COVID-19 pandemic. Delays in these projects have
affected the timing of closing new business. To help ensure adequate liquidity
during this period and in light of uncertainties posed by the COVID-19 pandemic,
we received a loan on April 16, 2020 under the Paycheck Protection Program
("PPP"). On September 15, 2020, we filed our application for 100% forgiveness of
the loan. Our application was reviewed by the lender and submitted to the Small
Business Administration ("SBA") for approval on December 17, 2020. We have not
received any notification from the SBA on the status of the SBA's review other
than receiving a request for additional supporting documentation, which we have
submitted.

Critical Accounting Policies and Estimates


Detailed information about our critical accounting policies and estimates is set
forth in   Part III, Item 15 of our 2020 Annual Report ("Exhibits and Financial
Statement Schedules"), in "Note 1: Description of Business and Summary of
Significant Accounting Policies  ," which is incorporated by reference into this
Quarterly Report on Form 10-Q.


                                       22

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Results of Operations

The following table presents 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 month periods ended
June 30, 2021, and all changes discussed with respect to such periods reflect
changes compared to the three and six month periods ended June 30, 2020.



                                             Three           Three            Six             Six
                                             Months          Months          Months          Months
                                             Ended           Ended           Ended           Ended
                                            June 30,        June 30,        June 30,        June 30,
                                              2021            2020            2021            2020
Percentages are percent of total revenue
Revenue:
Service                                            60 %            60 %            58 %            60 %
Subscription                                       40              40              42              40
Total revenue                                     100             100             100             100
Cost of revenue:
Service                                            24              25              24              26
Subscription                                        9               8              10               8
Total cost of revenue                              33              33              34              34
Gross profit                                       67              67              66              66
Operating expenses:
Sales and marketing                               100              71              86              78
Research, development and
  engineering                                      67              65              64              68
General and administrative                        146              47              98              51
Total operating expenses                          313             184             248             197
Operating loss                                   (246 )          (116 )          (182 )          (131 )
Other income, net                                   0               1               0               2
Loss before income taxes                         (246 )          (115 )          (182 )          (129 )
Benefit (provision) for income taxes               (0 )            (0 )            (0 )             0
Net loss                                         (246 %)         (115 %)         (182 %)         (129 %)




Summary

Total revenue for the three month period ended June 30, 2021, decreased 3% to
$6.3 million, compared to the corresponding three month period ended June 30,
2020, primarily as a result of lower revenue from Government services and
Commercial subscriptions, partially offset by higher Commercial services
revenue.

Total revenue for the six month period ended June 30, 2021, increased 2% to
$13.0 million, compared to the corresponding six month period ended June 30,
2020, primarily as a result of higher revenue from Commercial subscription and
services, partially offset by lower revenue from Government services.

Total operating expenses for the three month period ended June 30, 2021,
increased 65% to $19.7 million, compared to the corresponding three month period
ended June 30, 2020, primarily as a result of $7.5 million of non-recurring
costs incurred during the three month period ended June 30, 2021. These costs
were associated with the Separation Agreement and General Release ("Separation
Agreement") we entered into with our former chief executive officer, Bruce
Davis, on April 12, 2021 upon his retirement, and severance
costs incurred for organizational changes we made in June 2021. Excluding these
non-recurring costs, operating expenses increased 2% to $12.2 million,
reflecting higher consulting and legal costs, partially offset by lower
recurring compensation costs.

Total operating expense for the six month period ended June 30, 2021, increased
29% to $32.2 million, compared to the corresponding six month period ended
June 30, 2020, primarily as a result of the $7.5 million of non-recurring
costs noted above for the three month period ended June 30, 2021. Excluding
these non-recurring costs, operating expenses decreased 1% to $24.7 million,
reflecting lower travel and recurring compensation costs, partially offset
by higher consulting, recruiting and legal costs.

                                       23

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Revenue



                         Three          Three                                             Six            Six
                         Months         Months                                           Months         Months
                         Ended          Ended          Dollar          Percent           Ended          Ended           Dollar          Percent
                        June 30,       June 30,       Increase         Increase         June 30,       June 30,        Increase         Increase
                          2021           2020        (Decrease)       (Decrease)          2021           2020         (Decrease)       (Decrease)

Revenue:

Service                $    3,791     $    3,892     $      (101 )             (3 )%   $    7,575     $    7,630     $        (55 )             (1 )%
Subscription                2,487          2,605            (118 )             (5 )%        5,403          5,056              347                7 %
Total                  $    6,278     $    6,497     $      (219 )             (3 )%   $   12,978     $   12,686     $        292                2 %
Revenue (as % of
total revenue):
Service                        60 %           60 %                                             58 %           60 %
Subscription                   40 %           40 %                                             42 %           40 %
Total                         100 %          100 %                                            100 %          100 %




Service. Service revenue consists primarily of revenue earned from the
performance of software development services. The majority of service 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 service revenue, has
a contract term through December 31, 2024 with the option to extend the term for
an additional five years by mutual agreement. 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 decreases in service revenue for the three and six month periods ended
June 30, 2021, compared to the corresponding three and six month periods ended
June 30, 2020, were primarily due to decreases in services to the Central Banks
as a result of the timing of program work, partially offset by growth in service
revenue from Commercial customers.

Subscription. Subscription revenue consists primarily of revenue earned from the
sale of software products and, to a lesser extent, the licensing of 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 decrease in subscription revenue for the three month period ended June 30,
2021, compared to the corresponding three month period ended June 30, 2020, was
primarily due to lower revenue from Commercial customers.

The increase in subscription revenue for six month period ended June 30, 2021,
compared to the corresponding six month period ended June 30, 2020, was
primarily due to entering into a contract with a new Commercial customer. Most
of the minimum contract value was recognized as revenue upon delivery of the
software, instead of recognized ratably over the two-year term of the contract,
because we had no continuing performance obligations after delivery.


                                       24

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Revenue by geography



                         Three          Three                                             Six            Six
                         Months         Months                                           Months         Months
                         Ended          Ended          Dollar          Percent           Ended          Ended          Dollar          Percent
                        June 30,       June 30,       Increase         Increase         June 30,       June 30,       Increase         Increase
                          2021           2020        (Decrease)       (Decrease)          2021           2020        (Decrease)       (Decrease)
Revenue by
geography:
Domestic               $    1,640     $    1,856     $      (216 )            (12 )%   $    3,362     $    3,615     $      (253 )             (7 )%
International               4,638          4,641              (3 )             (0 )%        9,616          9,071             545                6 %
Total                  $    6,278     $    6,497     $      (219 )             (3 )%   $   12,978     $   12,686     $       292                2 %
Revenue (as % of
total revenue):
Domestic                       26 %           29 %                                             26 %           28 %
International                  74 %           71 %                                             74 %           72 %
Total                         100 %          100 %                                            100 %          100 %


The decreases in domestic revenue for the three and six month periods ended
June 30, 2021, compared to the corresponding three and six month periods ended
June 30, 2020, were primarily due to lower service and subscription revenue from
our domestic customers.

The decrease in international revenue for the three month period ended June 30,
2021, compared to the corresponding three month period ended June 30, 2020, was
primarily due to a decrease in services to the Central Banks as a result of the
timing of program work, partially offset by higher service and subscription
revenue from our other international customers.

The increase in international revenue for the six month period ended June 30,
2021, compared to the corresponding six month period ended June 30, 2020, was
primarily due to entering into a contract with a new international Commercial
customer. Most of the minimum contract value was recognized as revenue upon
delivery of the software, instead of recognized ratably over the two-year term
of the contract, because we had no continuing performance obligations after
delivery.

Revenue by market

                         Three          Three                                             Six            Six
                         Months         Months                                           Months         Months
                         Ended          Ended          Dollar          Percent           Ended          Ended          Dollar          Percent
                        June 30,       June 30,       Increase         Increase         June 30,       June 30,       Increase         Increase
                          2021           2020        (Decrease)       (Decrease)          2021           2020        (Decrease)       (Decrease)
Government:
Service                $    3,522     $    3,713     $      (191 )             (5 )%   $    7,107     $    7,365     $      (258 )             (4 )%
Subscription                  300            300               -                - %    $      600     $      600               -                - %
Total Government       $    3,822     $    4,013     $      (191 )             (5 )%   $    7,707     $    7,965     $      (258 )             (3 )%
Commercial:
Service                $      269     $      179     $        90               50 %    $      468     $      265     $       203               77 %
Subscription                2,187          2,305            (118 )             (5 )%   $    4,803     $    4,456             347                8 %
Total Commercial       $    2,456     $    2,484     $       (28 )             (1 )%   $    5,271     $    4,721     $       550               12 %
Total                  $    6,278     $    6,497     $      (219 )             (3 )%   $   12,978     $   12,686     $       292                2 %


The decreases in Government revenue for the three and six month periods ended
June 30, 2021, compared to the corresponding three and six month periods ended
June 30, 2020, were due to timing of program work with the Central Banks.

The decrease in Commercial revenue for the three month period ended June 30,
2021, compared to the corresponding three month period ended June 30, 2020, was
insignificant.



The increase in Commercial revenue for the six month period ended June 30, 2021,
compared to the corresponding six month period ended June 30, 2020, was
primarily due to entering into a contract with a new Commercial customer. Most
of the minimum contract value was recognized as revenue upon delivery of the
software, instead of recognized ratably over the two-year term of the contract,
because we had no continuing performance obligations after delivery.

                                       25

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Cost of revenue

Service. Cost of service revenue primarily includes:

• compensation, benefits, incentive compensation in the form of stock-based

compensation and related costs of our software developers, quality

assurance personnel, design professionals, product managers, business

development managers 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 directly used by customers;

     •  depreciation for machinery, equipment and software directly used by
        customers; and


  • travel costs that are billed to customers.

Subscription. Cost of subscription revenue primarily includes:

     •  cost of outside contractors that provide operational support for our
        subscription products;

• license fees paid to technology solution providers when we sell a combined

solution;

• Internet service provider connectivity charges and image search data fees

        to support our subscription products; and


  • amortization of capitalized patent costs and patent maintenance fees.


Gross profit



                               Three           Three                                               Six            Six
                               Months          Months                                             Months         Months
                               Ended           Ended           Dollar           Percent           Ended          Ended           Dollar          Percent
                              June 30,        June 30,        Increase          Increase         June 30,       June 30,        Increase        Increase
                                2021            2020         (Decrease)        (Decrease)          2021           2020         (Decrease)      (Decrease)
Gross Profit:
Service                      $    2,276      $    2,291      $       (15 )              (1 )%   $    4,490     $    4,345     $        145               3 %
Subscription                      1,953           2,093             (140 )              (7 )%        4,078          4,030               48               1 %
Total                        $    4,229      $    4,384      $      (155 )              (4 )%   $    8,568     $    8,375     $        193               2 %
Gross Profit (as % of
related revenue):
Service                              60 %            59 %                                               59 %           57 %
Subscription                         79 %            80 %                                               75 %           80 %
Total                                67 %            67 %                                               66 %           66 %



The change in total gross profit for the three month period ended June 30, 2021, compared to the corresponding three month period ended June 30, 2020, was primarily due to lower revenue.

The change in total gross profit for the six month period ended June 30, 2021, compared to the corresponding six month period ended June 30, 2020, was primarily due to higher revenue partially offset by higher costs.


The increases in service gross profit as a percentage of service revenue for the
three and six month periods ended June 30, 2021, compared to the corresponding
three and six month periods ended June 30, 2020, were primarily due to lower
costs on Commercial service contracts.

The decrease in subscription gross profit as a percentage of subscription revenue for the three month period ended June 30, 2021, compared to the corresponding three month period ended June 30, 2020, was primarily due to lower subscription revenue.

The decrease in subscription gross profit as a percentage of subscription revenue for the six month period ended June 30, 2021, compared to the corresponding six month period ended June 30, 2020, was primarily due to higher license fees to a technology solution provider, partially offset by higher subscription revenue.

                                       26

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Operating expenses

Sales and marketing



                               Three           Three                                              Six           Six
                               Months          Months                                           Months         Months
                               Ended           Ended           Dollar           Percent          Ended         Ended          Dollar          Percent
                              June 30,        June 30,        Increase          Increase       June 30,       June 30,       Increase         Increase
                                2021            2020         (Decrease)        (Decrease)        2021           2020        (Decrease)       (Decrease)

Sales and marketing $ 6,277 $ 4,633 $ 1,644

             35 %   $  11,218     $    9,879     $     1,339               14 %
Sales and marketing
  (as % of total revenue)           100 %            71 %                                             86 %           78 %



Sales and marketing expenses consist primarily of:

• compensation, benefits, incentive compensation in the form of stock-based

        compensation and related costs of sales and marketing employees and
        product managers;

• travel and market research costs, and costs associated with marketing

programs, such as trade shows, public relations and new product launches;

• professional services, consulting and outside contractor costs for product

and marketing initiatives; and

• charges for infrastructure and centralized costs of facilities and

information technology.



The increase in sales and marketing expenses for the three month period ended
June 30, 2021, compared to the corresponding three month period ended June 30,
2020, was primarily due to:

• non-recurring severance costs of $1.3 million related to organizational

        changes we made in June 2021;


  • increased consulting costs of $0.3 million.

The increase in sales and marketing expenses for the six month period ended June 30, 2021, compared to the corresponding six month period ended June 30, 2020, was primarily due to:

• non-recurring severance costs of $1.3 million related to organizational

        changes we made in June 2021;


  • increased consulting costs of $0.3 million;


  • increased recruiting costs of $0.1 million; partially offset by

• decreased travel costs of $0.2 million due to travel restrictions related

        to the COVID-19 pandemic; and


  • decreased marketing costs of $0.1 million.

Research, development and engineering



                               Three           Three                                             Six            Six
                               Months          Months                                           Months         Months
                               Ended           Ended           Dollar           Percent         Ended          Ended          Dollar          Percent
                              June 30,        June 30,        Increase         Increase        June 30,       June 30,       Increase         Increase
                                2021            2020         (Decrease)       (Decrease)         2021           2020        (Decrease)       (Decrease)

Research, development and

  engineering                $    4,213      $    4,208      $         5                0 %   $    8,344     $    8,641     $      (297 )             (3 )%
Research, development and
  engineering (as % of
total revenue)                       67 %            65 %                                             64 %           68 %




                                       27
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Research, development and engineering expenses consist primarily of:

• compensation, benefits, incentive compensation in the form of stock-based

        compensation and related costs of software and hardware developers and
        quality assurance personnel;


  • payments to outside contractors;


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

• charges for infrastructure and centralized costs of facilities and

information technology.

The increase in research, development and engineering expenses for the three month period ended June 30, 2021, compared to the corresponding three month period ended June 30, 2020, was insignificant.


The decrease in research, development and engineering expenses for the six month
period ended June 30, 2021, compared to the corresponding six month period ended
June 30, 2020, was primarily due to decreased compensation costs of $0.3 million
reflecting lower headcount.

General and administrative



                                Three           Three                                              Six           Six
                                Months          Months                                           Months         Months
                                Ended           Ended           Dollar           Percent          Ended         Ended          Dollar          Percent
                               June 30,        June 30,        Increase          Increase       June 30,       June 30,       Increase         Increase
                                 2021            2020         (Decrease)        (Decrease)        2021           2020        (Decrease)       (Decrease)

General and administrative $ 9,175 $ 3,081 $ 6,094

             198 %   $  12,668     $    6,448     $     6,220               96 %
General and administrative
  (as % of total revenue)            146 %            47 %                                             98 %           51 %




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 and are allocated to this area as well as
each of the areas in cost of revenue, sales and marketing and research,
development and engineering.

General and administrative expenses consist primarily of:

• compensation, benefits and incentive compensation in the form of

stock-based compensation and related costs of 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;

• charges to write off previously capitalized patent costs for patent assets

we abandon; and

• charges for infrastructure and centralized costs of facilities and

information technology.

The increase in general and administrative expenses for the three month period ended June 30, 2021, compared to the corresponding three month period ended June 30, 2020, was primarily due to:

• non-recurring costs of $6.2 million associated with the Separation

Agreement we entered into with our former chief executive officer in April

        2021 upon his retirement;


  • increased legal costs of $0.2 million, and


  • increased consulting costs of $0.2 million; partially offset by


     •  decreased compensation costs of $0.5 million, reflecting lower

compensation for our current chief executive officer partially offset by

        higher headcount; and


  • decreased write-off of patent costs of $0.1 million.


                                       28
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The increase in general and administrative expenses for the six month period ended June 30, 2021, compared to the corresponding six month period ended June 30, 2020, was primarily due to:

• non-recurring costs of $6.2 million associated with the Separation

Agreement we entered into with our former chief executive officer in April

        2021 upon his retirement;


  • increased legal costs of $0.3 million, and


  • increased consulting costs of $0.2 million; partially offset by


     •  decreased compensation costs of $0.4 million, reflecting lower

compensation for our current chief executive officer partially offset by

        higher headcount; and


  • decreased write-off of patent costs of $0.1 million.

Stock-based compensation



                                Three           Three                                               Six            Six
                                Months          Months                                             Months         Months
                                Ended           Ended           Dollar           Percent           Ended          Ended          Dollar          Percent
                               June 30,        June 30,        Increase          Increase         June 30,       June 30,       Increase         Increase
                                 2021            2020         (Decrease)        (Decrease)          2021           2020        (Decrease)       (Decrease)
Cost of revenue               $      178      $      196      $       (18 )              (9 )%   $      351     $      386     $       (35 )             (9 )%
Sales and marketing                1,550             604              946               157 %         1,990          1,083             907               84 %
Research, development and
engineering                          405             402                3                 1 %           801            801               -                - %
General and administrative         4,604           1,125            3,479               309 %         5,605          2,252           3,353              149 %
Total                         $    6,737      $    2,327      $     4,410               190 %    $    8,747     $    4,522     $     4,225               93 %




The increase in stock-based compensation expense for the three and six month
periods ended June 30, 2021, compared to the corresponding three and six month
periods ended June 30, 2020, was primarily due to the acceleration of stock
awards associated with the Separation Agreement we entered into with our former
chief executive officer in April 2021 upon his retirement, and with
the organizational changes we made in June 2021, partially offset by the lower
value of stock awards granted to our current chief executive officer.

We anticipate incurring an additional $13,411 in stock-based compensation expense through June 30, 2025, for awards outstanding as of June 30, 2021.

Other income, net

                                Three           Three                                                Six            Six
                                Months          Months                                              Months        Months
                                Ended           Ended            Dollar           Percent           Ended          Ended         Dollar          Percent
                               June 30,        June 30,         Increase          Increase         June 30,      June 30,       Increase         Increase
                                 2021            2020          (Decrease)        (Decrease)          2021          2020        (Decrease)       (Decrease)
Other income, net             $       18      $       79      $        (61 )             (77 )%   $       28     $     221     $      (193 )            (87 )%
Other income, net (as % of
  total revenue)                       0 %             1 %                                                 0 %           2 %


The decreases in other income, net for the three and six month periods ended
June 30, 2021, compared to the corresponding three and six month periods ended
June 30, 2020, were primarily due to lower interest rates earned on investments,
partially offset by higher average investment balances.

Income Taxes

The provision for income taxes reflects current taxes, deferred taxes, and withholding taxes. The effective tax rate for each of the six month periods ended June 30, 2021 and 2020 was 0% because we have a full valuation allowance recorded against our deferred tax assets.

The valuation allowance against deferred tax assets as of June 30, 2021, was $61,152, an increase of $5,513 from $55,639 as of December 31, 2020.

                                       29

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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, 2021, 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 full 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. All future reversals of the valuation allowance would result
in a tax benefit in the period recognized.

Liquidity and Capital Resources



                                        June 30,       December 31,
                                          2021             2020
Working capital                         $  55,167     $       74,056
Current ratio (1)                           5.5:1              8.6:1

Cash, cash equivalents and short-term

  marketable securities                 $  60,950     $       77,728
Long-term marketable securities         $     157     $            -

Total cash, cash equivalents and

  marketable securities                 $  61,107     $       77,728



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

by total current liabilities.

The $16,621 decrease in cash, cash equivalents and marketable securities at June 30, 2021, from December 31, 2020, resulted primarily from:

• cash used in operations;

• purchases of common stock related to tax withholding in connection with

the vesting of restricted stock, restricted stock units, performance

        restricted stock units and exercise of stock options; and


  • purchases of property and equipment and capitalized patent costs.


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 primarily include commercial paper, pre-refunded
municipals, and corporate notes. Our investment policy requires our portfolio to
be invested to ensure that the greater of $3,000 or 7% 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
$1,000, 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 40% of our cash and cash equivalents and
marketable securities, or $15,000, whichever is greater, to be invested in any
one industry category (e.g., financial or energy industries) 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 below
cost that is deemed to be other-than-temporary results in a reduction in
carrying amount to fair value. 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 in
the six month periods ended June 30, 2021 and 2020.

                                       30

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Operating Cash Flow

The components of cash flows used in operating activities were:



                                      Six             Six
                                     Months          Months
                                     Ended           Ended            Dollar           Percent
                                    June 30,        June 30,         Increase          Increase
                                      2021            2020          (Decrease)        (Decrease)
Net loss                           $  (23,644 )    $  (16,369 )    $      7,275                44 %
Non-cash items                          9,551           6,027            (3,524 )             (58 )%
Changes in operating assets and
liabilities                             1,607             260            (1,347 )            (518 )%
Net cash used in operating
activities                         $  (12,486 )    $  (10,082 )    $      2,404                24 %




Cash flows used in operating activities for the six month period ended June 30,
2021, increased by $2,404, compared to the corresponding six month period ended
June 30, 2020, primarily as a result of a higher net loss partially offset by an
increase in non-cash items and changes in operating assets and liabilities. The
increase in non-cash items was primarily due to higher stock-based compensation
related to the acceleration of stock awards associated with the Separation
Agreement we entered into with our former chief executive officer in April 2021,
and with the organizational changes we made in June 2021, partially offset by
higher amortization of net discounts on marketable securities. The changes in
operating assets and liabilities was largely due to timing of receipts from
customers and payments to vendors.

Cash flows provided by investing activities for the six month period ended
June 30, 2021, compared to the corresponding six month period ended June 30,
2020, increased by $11,740, from $6,182 to $17,922, primarily as a result of
higher net maturities of marketable securities.

Cash flows from financing activities for the six month period ended June 30,
2021, compared to the corresponding six month period ended June 30, 2020,
decreased by $8,395, from $4,621 provided to $3,774 used, primarily as a result
of proceeds from the note payable issued under the Paycheck Protection Program
in 2020, higher purchases of common stock in satisfaction of required
withholding tax lability, and no issuances of common stock.

Future Cash Expectations


We believe that our current cash, cash equivalents, and short-term marketable
securities balances will satisfy our projected working capital and capital
expenditure requirements for at least the next 12 months. We continuously review
our liquidity and anticipated capital requirements in light of the uncertainty
created by the COVID-19 pandemic.

TCM Strategic Partners Transaction


On September 29, 2020, we entered into a Subscription Agreement with TCM
Strategic Partners L.P. in a private placement to issue and sell 2,542 shares of
our common stock and 17 shares of our newly designated Series B Convertible
Preferred Stock (which subsequently converted into 1,198 shares of our common
stock) for an aggregate purchase price of $53,500. We paid a total of $272 in
stock issuance costs.

Paycheck Protection Program Loan


On April 16, 2020, we entered into a Promissory Note with an aggregate principal
amount of $5,032 (the "Note") with Steans Bank, N.A. pursuant to the Paycheck
Protection Program (the "PPP") under the Coronavirus Aid, Relief, and Economic
Security Act (the "CARES Act"). The proceeds gave us more time to observe
financial market trends and assess the effects of the COVID-19 pandemic on the
Company to determine the best course of action concerning financing the
business. The Note matures two years from the disbursement date and bears
interest at a rate of 1.000% per annum, with the first six months of interest
deferred. Principal and interest are payable monthly commencing six months after
the disbursement date and may be prepaid by the Company at any time prior to
maturity with no prepayment penalties. Subject to the terms and limitations of
the PPP, the Note may be forgiven in whole or in part.

On June 29, 2020, we were notified by Stearns Bank, N.A. that the Note was
transferred to The Loan Source Inc. ("the Lender"), who will be responsible for
servicing the Note going forward, including administering loan forgiveness. We
believe that we have used the entire amount of the Note to fund expenses
eligible for forgiveness under the PPP, and on September 15, 2020, we filed our
application for 100% forgiveness of the Note. Our application was reviewed by
the Lender and submitted to the Small Business Administration ("SBA") for
approval on December 17, 2020. We have not received any notification from the
SBA on the status of the SBA's review other than receiving a request for
additional supporting documentation, which we have submitted. Principal and
interest payments can be deferred until the forgiveness process is completed as
no payments would be required if the Note is forgiven.

                                       31

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Equity Distribution Agreement


On May 16, 2019, we entered into an Equity Distribution Agreement, whereby we
may sell from time to time through Wells Fargo Securities, LLC, as our sales
agent, our common stock having an aggregate offering price of up to $30,000.
Wells Fargo Securities, LLC will receive from us a commission equal to 2.50% of
the gross sales price per share of common stock for shares having an aggregate
offering price of up to $10,000, and a commission of 2.25% of the gross sales
price per share of common stock thereafter, for shares sold under the Equity
Distribution Agreement. As of June 30, 2021, we had sold 498 shares at an
average price of $46.36 under this Equity Distribution Agreement, totaling
$23,067 of cash proceeds, less $544 of commissions and $645 of stock issuance
costs. As of June 30, 2021, there is $6,932 available for future issuance under
the Equity Distribution Agreement.

Shelf Registration


On June 5, 2020, we filed a new shelf registration statement on Form S-3 that
included $49,265 of unsold securities from our prior shelf registration
statement filed on May 26, 2017 that expired in June 2020. Under the new shelf
registration statement, we may sell securities in one or more offerings up to
$100,000. As of June 30, 2021, there is $97,892 available under the shelf
registration. The new shelf registration statement will expire in July 2023.

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. The COVID-19 pandemic has created
substantial uncertainty and volatility in the stock market, particularly in the
small cap sector in which our stock is traded, and has negatively impacted our
share price. These factors may inhibit our near-term ability to obtain
financing.

Off-Balance Sheet Arrangements


We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.

We are party to an operating lease for our facility in Beaverton, Oregon. The
term of the lease runs through March 2024, with remaining rent payments as of
June 30, 2021, totaling $2,305, payable in monthly installments.

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. 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 2020 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:

• our beliefs regarding the possible effects of the COVID-19 pandemic on

general economic conditions, public health, and consumer demand, and the

Company's results of operations, liquidity, capital resources, and general

performance in the future;

• the possible impact of COVID-19 on our ability to obtain financing through

our Equity Distribution Agreement and the availability of any alternative

sources of financing;

• the timing and potential for forgiveness of the Note under the terms of

the PPP and the possible impact of any audit or review related to the

Note;

• the potential impact of COVID-19 on projects with our Commercial customers

        and partners;


  • the concentration of most of our revenue among few customers;


  • and the trends and sources of future revenue;


                                       32
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  • anticipated successful advocacy of our technology by our partners;


  • our belief regarding the global deployment of our products;

• our beliefs regarding potential outcomes of participating in the AIM

HolyGrail 2.0 initiative;

• our future level of investment in our business, including investment in

        research, development and engineering of products and technology,
        development of our intellectual property, sales growth initiatives and
        development of new market opportunities;

• anticipated expenses, costs, margins, provision for income taxes and

        investment activities in the foreseeable future;


  • our assumptions and expectations related to stock awards;


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


  • anticipated effect of our adoption of accounting pronouncements;


  • our beliefs regarding our critical accounting policies;

• our expectations regarding the impact of accounting pronouncements issued

but not yet adopted;

• anticipated revenue to be generated from current contracts, renewals, and

as a result of new programs;

• our estimates, judgments and assumptions related to impairment testing;


    •   variability of contracted arrangements in response to changes in
        circumstances underlying the original contractual arrangements;


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

• the size and growth of our markets and our assumptions and beliefs related

to those markets;

• the existence of international growth opportunities and our future

        investment in such opportunities;


  • 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;


  • the effect of computerized trading on our stock price;


    •   capital market conditions, our expectations regarding credit risk
        exposure, interest rate volatility and other limitations on the

availability of capital, which could have an impact on our cost of capital

and our ability to access the capital markets;

• 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;

• the strength of our competitive position and our ability to innovate and

        enhance our competitive differentiation;


  • our beliefs related to our existing facilities;

• protection, development and monetization of our intellectual property

portfolio;

• our beliefs related to our relationship with our employees and the effect

        of increasing diversity within our workforce;


  • our beliefs regarding cybersecurity incidents;

• our beliefs related to certain provisions in our bylaws and articles of

incorporation; 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 2020 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.

                                       33

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