Note 5 - Stock-based Compensation

6 Months Ended

Jun. 30, 2025

Share-Based Payment Arrangement [Text Block]

5. Stock-Based Compensation

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

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

Determining Fair Value

Restricted Stock Awards

The fair value of restricted stock awards (“RSA”) that vest upon meeting a service condition is based on the fair market value of the Company’s common stock on the date of the grant (measurement date) and is recognized on a straight-line basis over the service period of the award, which is generally three to four years for employee grants and one to three years for director grants.

Restricted Stock Units

The fair value of restricted stock unit (“RSU”) awards that vest upon meeting a service condition is based on the fair market value of the Company’s common stock on the date of the grant (measurement date) and is recognized on a straight-line basis over the service period of the award, which is generally three to four years for employee grants.

Performance Restricted Stock Units

The fair value of performance restricted stock unit (“PRSU”) awards that vest upon meeting a service condition and a performance condition, such as the Company exceeding a future annual recurring revenue target, is determined based on the fair market value of the Company’s common stock on the date of the grant (measurement date), adjusted for probability of achievement of the performance criteria as of each reporting date, and is recognized on a straight-line basis over the service period of the award, which is generally three years for employee grants. The probability of achievement is subject to judgment, and could change from period to period, impacting the amount of expense to be recognized.

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

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

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

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

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

Monte Carlo valuation inputs:

	*Three Months Ended June 30,*						*Six Months Ended June 30,*
	*2025*			*2024*			*2025*			*2024*
Stock price	$	13.16		$	25.39		$	13.16		$	36.64
Expected volatility		70.9	%		66.3	%		70.9	%		66.3	%
Risk-free interest rate		3.8	%		4.3	%		3.8	%		4.3	%

Stock-Based Compensation

	*Three Months Ended June 30,*				*Six Months Ended June 30,*
	*2025*		*2024*		*2025*		*2024*
Stock-based compensation:
Cost of revenue	$	253	$	156	$	390	$	409
Sales and marketing		795		798		1,150		1,510
Research, development and engineering		1,221		645		1,628		1,263
General and administrative		1,502		807		1,863		2,055
Stock-based compensation expense		3,771		2,406		5,031		5,237
Capitalized to software and patent costs		49		3		54		20
Total stock-based compensation	$	3,820	$	2,409	$	5,085	$	5,257

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

	*June 30,*		*December 31,*
	*2025*		*2024*
Total unrecognized compensation costs	$	18,892	$	16,226

Total unrecognized compensation costs will be adjusted based on updates to the estimated future achievement of performance conditions on PRSU awards as well as for any future forfeitures if and when they occur.

The Company expects to recognize the total unrecognized compensation costs as of June 30, 2025, for all non-vested stock-based awards over weighted average periods through June 30, 2029, as follows:

		*RSAs*				*RSUs*				*PRSUs*
Weighted average period (in years)			1.05				1.60				1.70

As of June 30, 2025, under the Company’s stock incentive plan, an additional 2,345 shares remained available for future grants. The Company issues new shares upon the grants of RSAs and vesting of RSU and PRSU awards.

Restricted Stock Awards Activity

The following table presents the unvested RSA activity:

				*Weighted*
				*Average*
	*Number of*			*Grant Date*
Three Months Ended June 30, 2025:	*Shares*			*Fair Value*
Unvested balance at March 31, 2025		50		$	27.85
Granted		47		$	12.89
Vested		(23	)	$	28.91
Forfeited		—		$	—
Unvested balance at June 30, 2025		74		$	18.15

				*Weighted*
				*Average*
	*Number of*			*Grant Date*
Six Months Ended June 30, 2025:	*Shares*			*Fair Value*
Unvested balance at December 31, 2024		59		$	29.98
Granted		47		$	12.89
Vested		(32	)	$	32.62
Forfeited		—		$	—
Unvested balance at June 30, 2025		74		$	18.15

The fair value of RSAs vested is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2025		2024		2025		2024
Fair value of RSAs vested	$	295	$	1,211	$	596	$	1,761

Restricted Stock Units Activity

The following table presents the unvested RSU award activity:

				*Weighted*
				*Average*
	*Number of*			*Grant Date*
Three Months Ended June 30, 2025:	*Shares*			*Fair Value*
Unvested balance at March 31, 2025		251		$	25.76
Granted		565		$	13.38
Vested		(98	)	$	17.36
Forfeited		(39	)	$	27.64
Unvested balance at June 30, 2025		679		$	16.25

				*Weighted*
				*Average*
	*Number of*			*Grant Date*
Six Months Ended June 30, 2025:	*Shares*			*Fair Value*
Unvested balance at December 31, 2024		406		$	28.27
Granted		575		$	13.79
Vested		(147	)	$	20.75
Forfeited		(155	)	$	28.02
Unvested balance at June 30, 2025		679		$	16.25

The fair value of RSU awards vested is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2025		2024		2025		2024
Fair value of RSU awards vested	$	1,311	$	1,318	$	3,037	$	3,047

Performance Restricted Stock Units Activity

The following table presents the unvested PRSU award activity:

				*Weighted*
				*Average*
	*Number of*			*Grant Date*
Three Months Ended June 30, 2025:	*Shares*			*Fair Value*
Unvested balance at March 31, 2025		161		$	28.60
Change in units based on performance expectations		—		$	—
Granted		417		$	15.25
Vested		—		$	—
Forfeited		(18	)	$	33.12
Unvested balance at June 30, 2025		560		$	18.49

				*Weighted*
				*Average*
	*Number of*			*Grant Date*
Six Months Ended June 30, 2025:	*Shares*			*Fair Value*
Unvested balance at December 31, 2024		215		$	32.08
Change in units based on performance expectations		(5	)	$	42.43
Granted		417		$	15.25
Vested		(49	)	$	42.43
Forfeited		(18	)	$	33.12
Unvested balance at June 30, 2025		560		$	18.49

The fair value of PRSU awards vested is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2025		2024		2025		2024
Fair value of PRSU awards vested	$	—	$	—	$	1,707	$	2,370

Digimarc CORP 10-Q