Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T during the preceding 12 months
~~(or~~ (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated ~~filer”~~filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ~~(Check one):~~

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~October 23, 2017,~~July 24, 2020, there were ~~11,329,154~~12,657,450 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

	September 30,			December 31,			June 30,			December 31,
	2017			2016			2020			2019
ASSETS
Current assets:
Cash and cash equivalents	$	25,599		$	11,638		$	11,934		$	11,213
Marketable securities		35,288			44,496			18,559			25,604
Trade accounts receivable, net		7,030			5,078			3,576			4,021
Other current assets		2,177			1,695			2,095			2,456
Total current assets		70,094			62,907			36,164			43,294
Marketable securities		—			4,392
Property and equipment, net		4,273			3,570			3,359			3,650
Intangibles, net		6,369			6,422			6,611			6,670
Goodwill		1,114			1,114			1,114			1,114
Other assets		311			331			2,342			2,660
Total assets	$	82,161		$	78,736		$	49,590		$	57,388
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other accrued liabilities	$	2,071		$	1,523		$	2,083		$	2,272
Deferred revenue		1,717			2,923			2,678			3,172
Note payable, current								2,245			—
Total current liabilities		3,788			4,446			7,006			5,444
Deferred rent and other long-term liabilities		989			956
Note payable, long-term								2,795			—
Lease liability and other long-term liabilities								2,512			2,494
Total liabilities		4,777			5,402			12,313			7,938
Commitments and contingencies (Note 13)
Commitments and contingencies (Note 14)
Shareholders’ equity:
Preferred stock (par value $0.001 per share, 2,500 authorized, 10 shares issued and outstanding at September 30, 2017 and December 31, 2016)		50			50
Common stock (par value $0.001 per share, 50,000 authorized, 11,324 and 10,523 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively)		11			11
Preferred stock (par value $0.001 per share, 2,500 authorized, 10 shares issued and outstanding at June 30, 2020 and December 31, 2019)								50			50
Common stock (par value $0.001 per share, 50,000 authorized, 12,659 and 12,446 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively)								13			12
Additional paid-in capital		142,461			120,985			192,298			188,103
Accumulated deficit		(65,138	)		(47,712	)		(155,084	)		(138,715	)
Total shareholders’ equity		77,384			73,334			37,277			49,450
Total liabilities and shareholders’ equity	$	82,161		$	78,736		$	49,590		$	57,388

The accompanying notes are an integral part of these consolidated financial ~~statements.~~statements

	Three			Three			Nine			Nine			Three			Three			Six			Six
	Months			Months			Months			Months			Months			Months			Months			Months
	Ended			Ended			Ended			Ended			Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,			June 30,			June 30,			June 30,			June 30,
	2017			2016			2017			2016			2020			2019			2020			2019
Revenue:
Service	$	2,986		$	3,252		$	9,935		$	9,650		$	3,892		$	3,575		$	7,630		$	7,389
Subscription		1,306			1,417			4,171			4,374			2,605			2,605			5,056			4,451
License		4,385			907			6,249			2,589
Total revenue		8,677			5,576			20,355			16,613			6,497			6,180			12,686			11,840
Cost of revenue:
Service		1,332			1,455			4,431			4,288			1,601			1,676			3,285			3,321
Subscription		611			600			1,701			1,856			512			509			1,026			998
License		129			107			369			302
Total cost of revenue		2,072			2,162			6,501			6,446			2,113			2,185			4,311			4,319
Gross profit		6,605			3,414			13,854			10,167			4,384			3,995			8,375			7,521
Operating expenses:
Sales and marketing		4,075			2,945			12,064			8,756			4,633			5,087			9,879			10,037
Research, development and engineering		4,108			3,291			11,503			9,975			4,208			3,981			8,641			8,019
General and administrative		2,442			2,039			7,066			6,185			3,081			3,079			6,448			6,289
Intellectual property		387			394			1,124			1,290
Total operating expenses		11,012			8,669			31,757			26,206			11,922			12,147			24,968			24,345
Operating loss		(4,407	)		(5,255	)		(17,903	)		(16,039	)		(7,538	)		(8,152	)		(16,593	)		(16,824	)
Other income, net		174			69			408			157			79			231			221			468
Loss before income taxes		(4,233	)		(5,186	)		(17,495	)		(15,882	)		(7,459	)		(7,921	)		(16,372	)		(16,356	)
Benefit (provision) for income taxes		(7	)		(12	)		94			(34	)		(2	)		(12	)		3			(40	)
Net loss	$	(4,240	)	$	(5,198	)	$	(17,401	)	$	(15,916	)	$	(7,461	)	$	(7,933	)	$	(16,369	)	$	(16,396	)
Earnings (loss) per common share:
Loss per common share—basic		(0.39	)	$	(0.55	)		(1.67	)	$	(1.79	)
Loss per common share—diluted		(0.39	)	$	(0.55	)		(1.67	)	$	(1.79	)
Weighted average common shares outstanding—basic		10,797			9,506			10,410			8,878
Weighted average common shares outstanding—diluted		10,797			9,506			10,410			8,878
Loss per common share — basic													$	(0.62	)	$	(0.68	)	$	(1.36	)	$	(1.42	)
Loss per common share — diluted													$	(0.62	)	$	(0.68	)	$	(1.36	)	$	(1.42	)
Weighted average common shares outstanding — basic														12,108			11,665			12,073			11,576
Weighted average common shares outstanding — diluted														12,108			11,665			12,073			11,576

The accompanying notes are an integral part of these consolidated financial ~~statements.~~statements

														Retained
											Additional			Earnings			Total												Additional						Total
	Preferred Stock					Common Stock					Paid-in			(Accumulated			Shareholders'			Preferred Stock				Common Stock					Paid-in			Accumulated			Shareholders'
	Shares			Amount		Shares			Amount		Capital			Deficit)			Equity			Shares		Amount		Shares			Amount		Capital			Deficit			Equity
BALANCE AT DECEMBER 31, 2015		10		$	50		8,919		$	9	$	77,439		$	(26,040	)	$	51,458
Three months ended June 30, 2020:
BALANCE AT MARCH 31, 2020																					10	$	50		12,645		$	13	$	190,303		$	(147,623	)	$	42,743
Issuance of restricted common stock																					—		—		43			—		—			—			—
Forfeiture of restricted common stock																					—		—		(4	)		—		—			—			—
Purchase and retirement of common stock																					—		—		(25	)		—		(382	)		—			(382	)
Stock-based compensation																					—		—		—			—		2,377			—			2,377
Net loss																					—		—		—			—		—			(7,461	)		(7,461	)
BALANCE AT JUNE 30, 2020																					10	$	50		12,659		$	13	$	192,298		$	(155,084	)	$	37,277

Three months ended June 30, 2019:
BALANCE AT MARCH 31, 2019																					10	$	50		12,135		$	12	$	164,119		$	(114,338	)	$	49,843
Issuance of common stock, net of issuance costs		—			—		1,418			2		39,698			—			39,700			—		—		336			—		19,615			—			19,615
Exercise of stock options		—			—		49			—		476			—			476			—		—		13			—		194			—			194
Issuance of restricted common stock		—			—		191			—		—		��	—			—			—		—		18			—		—			—			—
Forfeiture of restricted common stock		—			—		(7	)		—		—			—			—			—		—		(45	)		—		—			—			—
Purchase and retirement of common stock		—			—		(61	)		—		(1,879	)		—			(1,879	)		—		—		(24	)		—		(1,382	)		—			(1,382	)
Stock-based compensation		—			—		—			—		4,283			—			4,283			—		—		—			—		2,065			—			2,065
Net loss		—			—		—			—		—			(15,916	)		(15,916	)		—		—		—			—		—			(7,933	)		(7,933	)
BALANCE AT SEPTEMBER 30, 2016		10		$	50		10,509		$	11	$	120,017		$	(41,956	)	$	78,122
BALANCE AT DECEMBER 31, 2016		10		$	50		10,523		$	11	$	120,985		$	(47,712	)	$	73,334
BALANCE AT JUNE 30, 2019																					10	$	50		12,433		$	12	$	184,611		$	(122,271	)	$	62,402

Six months ended June 30, 2020:
BALANCE AT DECEMBER 31, 2019																					10	$	50		12,446		$	12	$	188,103		$	(138,715	)	$	49,450
Issuance of common stock, net of issuance costs		—			—		500			—		17,698			—			17,698			—		—		28			1		573			—			574
Exercise of stock options		—			—		74			—		793			—			793			—		—		8			—		135			—			135
Issuance of restricted common stock		—			—		308			—		—			—			—			—		—		229			—		—			—			—
Forfeiture of restricted common stock		—			—		(8	)		—		—			—			—			—		—		(4	)		—		—			—			—
Purchase and retirement of common stock		—			—		(73	)		—		(2,063	)		—			(2,063	)		—		—		(48	)		—		(1,120	)		—			(1,120	)
Stock-based compensation		—			—		—			—		5,048			(25	)		5,023			—		—		—			—		4,607			—			4,607
Net loss		—	��		—		—			—		—			(17,401	)		(17,401	)		—		—		—			—		—			(16,369	)		(16,369	)
BALANCE AT SEPTEMBER 30, 2017		10		$	50		11,324		$	11	$	142,461		$	(65,138	)	$	77,384
BALANCE AT JUNE 30, 2020																					10	$	50		12,659		$	13	$	192,298		$	(155,084	)	$	37,277

Six months ended June 30, 2019:
BALANCE AT DECEMBER 31, 2018																					10	$	50		11,891		$	12	$	162,428		$	(105,875	)	$	56,615
Issuance of common stock, net of issuance costs																					—		—		336			—		19,615			—			19,615
Exercise of stock options																					—		—		23			—		293			—			293
Issuance of restricted common stock																					—		—		273			—		—			—			—
Forfeiture of restricted common stock																					—		—		(46	)		—		—			—			—
Purchase and retirement of common stock																					—		—		(44	)		—		(1,868	)		—			(1,868	)
Stock-based compensation																					—		—		—			—		4,143			—			4,143
Net loss																					—		—		—			—		—			(16,396	)		(16,396	)
BALANCE AT JUNE 30, 2019																					10	$	50		12,433		$	12	$	184,611		$	(122,271	)	$	62,402

The accompanying notes are an integral part of these consolidated financial ~~statements.~~statements

	Nine			Nine			Six			Six
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	September 30,			September 30,			June 30,			June 30,
	2017			2016			2020			2019
Cash flows from operating activities:
Net loss	$	(17,401	)	$	(15,916	)	$	(16,369	)	$	(16,396	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and write-off of property and equipment		1,024			1,016			745			747
Amortization and write-off of intangibles		775			876			431			372
Stock-based compensation		4,872			4,162			4,522			4,053
Changes in operating assets and liabilities:
Trade accounts receivable		(1,952	)		2,095			445			(351	)
Other current assets		(482	)		(437	)		361			(40	)
Other assets		20			(56	)		318			77
Accounts payable and other accrued liabilities		373			680			(155	)		1,132
Deferred revenue		(1,247	)		(1,407	)		(500	)		(244	)
Lease liability and other long-term liabilities								24			(325	)
Net cash used in operating activities		(14,018	)		(8,987	)		(10,178	)		(10,975	)
Cash flows from investing activities:
Purchase of property and equipment		(1,424	)		(1,565	)		(456	)		(404	)
Capitalized patent costs		(625	)		(623	)		(311	)		(359	)
Maturity of marketable securities		41,231			35,182			26,535			14,671
Purchase of marketable securities		(27,631	)		(40,817	)		(19,490	)		(15,085	)
Net cash provided by (used in) investing activities		11,551			(7,823	)		6,278			(1,177	)
Cash flows from financing activities:
Proceeds from note payable								5,032			—
Issuance of common stock, net of issuance costs		17,698			39,700			574			19,615
Exercise of stock options		793			476			135			293
Purchase of common stock		(2,063	)		(1,879	)		(1,120	)		(1,868	)
Net cash provided by financing activities		16,428			38,297			4,621			18,040
Net increase in cash and cash equivalents		13,961			21,487			721			5,888
Cash and cash equivalents at beginning of period		11,638			3,160			11,213			27,278
Cash and cash equivalents at end of period	$	25,599		$	24,647		$	11,934		$	33,166
Supplemental disclosure of cash flow information:
Cash paid for income taxes, net	$	29		$	27
Supplemental schedule of non-cash investing activities:
Cash received for income taxes, net							$	12		$	93
Supplemental schedule of non-cash activities:
Property and equipment and patent costs in accounts payable	$	249		$	(137	)	$	(26	)	$	(7	)
Stock-based compensation capitalized to software and patent costs	$	151		$	121		$	85		$	90
Right of use assets obtained in exchange for lease obligations							$	—		$	2,709

The accompanying notes are an integral part of these consolidated financial ~~statements.~~statements

Digimarc Corporation (“Digimarc” or the “Company”), an Oregon corporation, is the inventor of a platform that enables ~~governments~~a more efficient, reliable and ~~enterprises around~~economical means of automatic identification. The Digimarc Platform can apply a unique identifier to virtually all media objects—including product packaging, commercial print, audio and video—that can be automatically identified by an enabled ecosystem of industrial scanners, smartphones and other interfaces. These capabilities allow Digimarc and its partners to supply a wide range of solutions for retail and supply chain operations, consumer engagement, media management and security.

The Digimarc Platform features three core capabilities for the ~~world~~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 ~~give digital identities~~people, permitting the carrier to ~~media~~be repeated many times over the surface of the enhanced media. Digimarc Discover represents the discovery function, which is software for computing devices and ~~objects~~network interfaces that ~~computers can sense and~~ recognize and decode indicia of the identity of media. These include, but are not limited to, ~~which they can react. The Company has developed~~ Digimarc ~~Discover~~^®,Barcodes, Quick Response Codes, Universal Product Codes, certain other GS1 approved one-dimensional codes and relevant contextual data. Digimarc ~~Barcode~~Verify incorporates the quality management function, a suite of software tools used to inspect and ~~the Intuitive Computing Platform~~^™verify that ~~are designed to optimize~~ the identification and discovery of ~~all consumer brand impressions, wherever~~media are both accurate and whenever they may appear, facilitating modern mobile-centric shopping. The platform includes means to embed “Digimarc Barcodes,” invisible and inaudible barcode-like information that is recognizable by smartphones, tablets, industrial scanners,effective. Together, these core capabilities enable organizations, application developers, and other computer interfaces into virtually all forms of media content, including consumer product packaging. Digimarc Barcodes have many applications, including facilitating remarkably faster scanning of products at retail checkout as well as improved engagement with smartphone-equipped consumers. The Digimarc Barcode is robust yet imperceptible by people in ordinary use, allowing for reliable, efficient, economical, globally scalable,solution providers to build new and improve existing automatic identification ~~of media without visible computer codes like traditional barcodes.~~solutions.

~~The Company has adhered to the~~Our significant accounting policies ~~set forth~~are detailed in ~~its~~“Note 1: Description of Business and Summary of Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2019. Significant changes to our accounting policies as a result of adopting Accounting Standards Codification (“ASC”) 842, “Leases,” effective January 1, 2019, are discussed in ~~preparing the accompanying interim consolidated financial statements.~~Note 11 below.

The accompanying interim consolidated financial statements have been prepared from the Company’s records without audit and, in management’s opinion, include all adjustments (consisting of only normal recurring adjustments) necessary to fairly reflect the financial condition and the results of operations for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).

These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2019, which was filed with the SEC on February ~~23, 2017.~~27, 2020. The results of operations for the interim periods presented in these consolidated financial statements are not necessarily indicative of the results for the full year.

Certain prior period amounts in the accompanying consolidated financial statements and notes thereto have been reclassified to conform to current period ~~presentation.~~presentation, including the reclassification of revenue and expense accounts to better align with the presentation provided by our peers in the software industry. These reclassifications had no material effect on the results of operations or financial position for any period presented.

The Company evaluates all pending or threatened contingencies or commitments, if any, that are reasonably likely to have a material adverse effect on the Company’s operations or financial position. The Company assesses the probability of an adverse outcome and determines if it is remote, reasonably possible or probable as defined in accordance with the provisions of ASC 450 “~~Contingencies.~~” If information available prior to the issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements, and the amount of the loss, or the range of probable loss can be reasonably estimated, then the loss is accrued and charged to operations. If no accrual is made for a loss contingency because one or both of the conditions pursuant to ASC 450 are not met, but the probability of an adverse outcome is at least reasonably possible, the Company will disclose the nature of the contingency and provide an estimate of the possible loss or range of loss, or state that such an estimate cannot be made.

The Company tests goodwill for impairment annually in June and whenever events or changes in circumstances indicate that the carrying value may exceed the fair value. The Company operates as a single reporting unit. The Company ~~estimated~~estimates the fair value of its single reporting unit using a market approach, which takes into account the Company’s market capitalization plus an estimated control premium.

In connection with the Company’s annual impairment test of goodwill as of June 30, ~~2017~~2020 and ~~2016,~~2019, it was concluded that there was no0 impairment to goodwill as the estimated fair value of the Company’s reporting unit substantially exceeded the carrying value.

In ~~March~~June 2016, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued ~~Accounting Standards Update (“ASU”) No. 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718).~~” ASU No. ~~2016-09 simplifies~~2016-13, “Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments,” which amends the ~~accounting~~guidance on the impairment of financial instruments. The amendments in this update removes the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance recoverables, off-balance-sheet credit exposures, and held-to-maturity securities. Under current U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The guidance removes all current recognition thresholds and introduces the new current expected credit loss (“CECL”) model which will require entities to recognize an allowance for ~~share-based payment transactions, including accounting~~credit losses for ~~income taxes, forfeitures, statutory tax withholding requirements,~~the difference between the amortized cost basis of a financial instrument and ~~classification in~~ the ~~statement~~amount of ~~cash flows.~~amortized cost that an entity expects to collect over the instrument’s contractual life. The new CECL model is based upon expected losses rather than incurred losses. The amendments in this update are effective for fiscal years, ~~beginning after December 31, 2016,~~ and interim periods ~~beginning in the first interim period~~ within the year of adoption. Any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company adopted the provisions of this standard effective January 1, 2017. On adoption, deferred tax assets of $6,219 were recorded for previously unrecognized excess tax benefits as of December 31, 2016, which was offset by $6,219 of valuation allowance. Future excess tax benefits will be recognized in the income tax provision when realized and would be offset by any required valuation allowance. The Company will no longer apply a forfeiture rate to share-based payment awards and instead account for forfeitures when they occur. This policy election resulted in a $25 adjustment to opening retained earnings. The Company also provided employees the option to elect the minimum or the maximum statutory tax-withholding rate to be applied on the exercise or vesting of share-based awards. The adoption of the standard did not have a material impact on the Company’s financial condition, results of operations, cash flows and disclosures.

~~In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350).~~” ASU No. 2017-04 simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual, or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The amendments in this update are effective for annual or any interim goodwill impairment tests inthose fiscal years, beginning after December ~~31, 2019.~~15, 2022. Early adoption is ~~permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.~~permitted. The Company elected to early adopt the amendments of this standard effective January 1, 2017. The early adoption of this standard resulted in no impact on the Company’s financial condition, results of operations, cash flows and disclosures.

~~In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)~~.” ASU No. 2014-09 provides specific guidance to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14 to defer the effective date of the new revenue standard for public entities by one year to annual reporting periods beginning after December 31, 2017, and interim periods beginning in the first interim period within the year of adoption. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company has developed an implementation plan to adopt this new standard. As part of this plan, the Company is currently ~~assessing~~evaluating the ~~potential future~~ impact of adopting this ~~standard~~guidance on ~~the Company’s~~its financial condition, results of operations and disclosures. Based on procedures performed to date, the adoption of this standard on service and license revenues is not expected to have a material impact on the Company aside from expanded disclosures; however, the Company will continue to evaluate this assessment. The Company is nearing completion of its evaluation of the adoption of this standard on subscription revenue but cannot make any conclusions at this time. The guidance permits the use of either the retrospective or cumulative effect transition method. The Company plans to utilize the cumulative effect transition method and will adopt this standard effective January 1, 2018.

In ~~February 2016,~~December 2019, the FASB issued ASU No. ~~2016-02,~~2019-12, “~~Leases (Topic 842)~~Income Taxes (ASC 740) Simplifying the Accounting for Income Taxes,” ~~which supersedes Topic 840, Leases. ASU No. 2016-02 increases~~that removes certain exceptions to the ~~transparency~~general principles and ~~comparability~~also improves consistent application of ~~organizations by recognizing lease assets~~ and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This guidance requires that operating leases recognize a right-of-use asset and a lease liability measured at the present value of the lease payments in the statement of financial position, recognize a single lease cost allocated over the lease term on a straight-line basis, and classify all cash payments within operating activities in the statement of cash flows.simplifies U.S. GAAP. The amendments in this update are effective for fiscal years, ~~beginning after December 31, 2018,~~ and interim periods ~~beginning in the first interim period~~ within the year of adoption. Early adoption is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients that entities may elect to apply. While the Company is currently assessing the potential future impact of adopting this standard, the Company expects the primary impact will be the recognition, on a discounted basis, of its minimum commitments under non-cancelable operating leases on its consolidated balance sheets, resulting in the recording of right of use assets and lease obligations. The Company’s minimum commitments under non-

~~cancelable operating leases are disclosed in Note 7 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.~~

~~In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (Topic 230).~~” ASU No. 2016-15 adds or clarifies guidance on specific cash flow issues to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in this update are effective forthose fiscal years, beginning after December ~~31, 2017, and interim periods beginning in the first interim period within the year of adoption.~~15, 2020. Early adoption is permitted. ~~Any adjustments should be reflected as~~The Company does not expect the impact of the beginning of the fiscal year that includes that interim period. The amendments in this update are to be applied retrospectively to all periods presented but may be applied prospectively from the earliest date practicable if retrospective application would be impracticable. The adoption of this standard ~~is not expected~~ to have a material impact on ~~the Company’s cash flows~~its financial condition, results of operations and disclosures.

The estimated fair values of the Company’s financial instruments, which include cash equivalents, accounts receivable, accounts payable and other accrued liabilities, approximate their carrying values due to the short-term nature of these instruments. The ~~Company records~~Company’s marketable securities are classified as held-to-maturity and are reported at amortized cost, which approximates fair value.

The Company’s fair value hierarchy for its cash equivalents and marketable securities ~~as of September 30, 2017 and December 31, 2016, respectively,~~ was as follows:

September 30, 2017	Level 1		Level 2		Level 3		Total
June 30, 2020									Level 1		Level 2		Level 3		Total
Money market securities	$	1,524	$	—	$	—	$	1,524	$	3,114	$	—	$	—	$	3,114
Commercial paper		—		35,141		—		35,141		—		13,690		—		13,690
Pre-refunded municipals										—		6,456		—		6,456
Federal agency notes		—		11,591		—		11,591		—		3,299		—		3,299
Corporate notes		—		7,501		—		7,501		—		3,012		—		3,012
Pre-refunded municipal bonds (1)		—		2,052		—		2,052
U.S. treasuries		—		1,999		—		1,999
Total	$	1,524	$	58,284	$	—	$	59,808	$	3,114	$	26,457	$	—	$	29,571

December 31, 2016	Level 1		Level 2		Level 3		Total
December 31, 2019									Level 1		Level 2		Level 3		Total
Money market securities	$	1,218	$	—	$	—	$	1,218	$	746	$	—	$	—	$	746
Federal agency notes		—		16,810		—		16,810
Commercial paper		—		16,757		—		16,757		—		25,481		—		25,481
Corporate notes		—		15,753		—		15,753		—		5,773		—		5,773
Pre-refunded municipal bonds (1)		—		6,716		—		6,716
U.S. treasuries		—		2,515		—		2,515		—		4,040		—		4,040
Total	$	1,218	$	58,551	$	—	$	59,769	$	746	$	35,294	$	—	$	36,040

The fair value maturities of the Company’s cash equivalents and marketable securities as of ~~September~~June 30, ~~2017~~2020, are as follows:

The Company considers all highly liquid marketable securities with original maturities of 90 days or less at the date of acquisition to be cash equivalents. Cash equivalents include commercial paper and money market funds totaling $11,012 and ~~commercial paper totaling $24,520 and $10,881~~$10,436 at ~~September~~June 30, ~~2017~~2020, and December 31, ~~2016,~~2019, respectively. Cash equivalents are carried at either cost or amortized cost, depending on the type of security, which approximates fair value.

The Company derives its revenue primarily from ~~professional services, subscriptions and licensing of its intellectual property:~~

~~Revenue is recognized in accordance with ASC 605 “Revenue Recognition” and ASC 985 “Software” when the following four criteria are met:~~

~~Some customer arrangements encompass multiple deliverables, such as professional services,~~ software licenses, and maintenance and support fees. For arrangements that include multiple deliverables, the Company identifies separate units of accounting at inception based on the consensus reached under ASC 605-25 “~~Multiple-Element Arrangements,~~” which provides that revenue arrangements with multiple deliverables should be divided into separate units of accounting if certain criteria are met. The Company applies ASC 985 to software deliverables when relevant. The consideration for the arrangements under ASC 605-25 is allocated to the separate units of accounting using the relative selling price method.

The relative selling price method allocates the consideration based on the Company’s specific assumptions rather than assumptions of a marketplace participant, and allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price.

subscriptions. Applicable revenue recognition criteria are considered separately for each ~~separate unit of accounting~~performance obligation as follows:

~~Service revenue is generally determined based on time~~Customer arrangements may contain multiple performance obligations such as software development services, software products, and ~~materials. Revenue~~maintenance and support fees. The Company accounts for ~~development and consulting services is recognized as the services are performed. Billing for services rendered generally occurs within one month after the services are provided.~~

“deferred revenue.” Deferred revenue consists of billings in advance for ~~professional~~ services ~~subscriptions~~ and ~~licenses~~subscriptions for which ~~revenue~~the performance obligation has not been ~~earned.~~satisfied.

The following table provides information about contract liabilities from contracts with customers:

The Company recognized $2,028 of revenue during the six months ended June 30, 2020, that was included in the contract liability balance as of December 31, 2019.

The aggregate amount of transaction prices from contractual obligations that are unsatisfied or partially unsatisfied was $15,986 and $17,759 as of June 30, 2020, and December 31, 2019, respectively.

The Company derives its revenue from a single reporting segment: ~~media management~~automatic identification solutions. Revenue is generated in this segment primarily through software development services ~~subscriptions~~ and ~~licensing of intellectual property.~~software subscriptions. The Company markets its products in the U.S. and in non-U.S. countries through its sales personnel and ~~licensing personnel.~~partners.

Revenue by geographic area, based upon the “bill-to” location, was as follows:

	Three		Three		Nine		Nine		Three		Three		Six		Six
	Months		Months		Months		Months		Months		Months		Months		Months
	Ended		Ended		Ended		Ended		Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,		June 30,		June 30,		June 30,		June 30,
	2017		2016		2017		2016		2020		2019		2020		2019
Domestic	$	1,153	$	1,210	$	3,907	$	3,494	$	1,856	$	1,772	$	3,615	$	3,089
International (1)		7,524		4,366		16,448	$	13,119		4,641		4,408		9,071		8,751
Total	$	8,677	$	5,576	$	20,355	$	16,613	$	6,497	$	6,180	$	12,686	$	11,840

~~Customers who~~The following customers accounted for 10% or more of ~~the Company’s revenue are as follows:~~revenue:

Stock-based compensation includes expense charges for all stock-based awards to employees and directors. These awards include stock option grants and restricted stock awards.

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

Valuation and Amortization Method.The Company estimates the fair value of stock options ~~granted~~on the date of grant (measurement date) using the Black-Scholes option valuation model. The Company amortizes the fair value of ~~all~~stock option awards on a straight-line basis over the ~~requisite service periods, which are generally~~vesting period of the ~~vesting periods.~~award.

Expected Life. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar awards, giving consideration to the contractual terms and vesting schedules of the awards. Stock options granted generally vest over three years and have contractual terms of ten years.

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 expected life 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 expected life of the award.

Expected Dividend Yield. The expected dividend yield is derived by the Company’s expected annual dividend rate over the expected term divided by the fair value of the Company’s common stock at the grant date.

There were no0 stock options granted during the three and ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020 and 2019.

The fair value of restricted stock awarded 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 vesting period of the ~~award using the straight-line method.~~award. Restricted stock awards granted generally vest over three to four years for employee grants and one to three years for director grants.

	Three		Three		Nine		Nine		Three		Three		Six		Six
	Months		Months		Months		Months		Months		Months		Months		Months
	Ended		Ended		Ended		Ended		Ended		Ended		Ended		Ended
	September 30,		September 30,		September 30,		September 30,		June 30,		June 30,		June 30,		June 30,
	2017		2016		2017		2016		2020		2019		2020		2019
Stock-based compensation:
Cost of revenue	$	170	$	196	$	521	$	553	$	196	$	179	$	386	$	361
Sales and marketing		364		265		1,074		715		604		489		1,083		1,008
Research, development and engineering		379		346		1,041		1,050		402		357		801		711
General and administrative		784		568		1,994		1,613		1,125		991		2,252		1,973
Intellectual property		82		80		242		231
Stock-based compensation expense		1,779		1,455		4,872		4,162		2,327		2,016		4,522		4,053
Capitalized to software and patent costs		53		46		151		121		50		49		85		90
Total stock-based compensation	$	1,832	$	1,501	$	5,023	$	4,283	$	2,377	$	2,065	$	4,607	$	4,143

The following table sets forth total unrecognized compensation ~~cost~~costs related to non-vested stock-based awards granted under all equity compensation ~~plans, including stock options and restricted stock:~~plans:

Total unrecognized compensation costs will be adjusted for any future ~~forfeitures.~~forfeitures if and when they occur.

The Company expects to recognize the total unrecognized compensation costs as of ~~September~~June 30, ~~2017~~2020, for stock options and restricted stock over weighted average periods through ~~September 2021~~June 30, 2024, as follows:

As of ~~September~~June 30, ~~2017,~~2020, under all of the Company’s stock-based compensation plans, equity awards to purchase an additional ~~897~~1,071 shares were authorized for future grants under the plans. The Company issues new shares upon option exercises.

				Weighted		Weighted						Weighted		Weighted
				Average		Average		Aggregate				Average		Average		Aggregate
				Exercise		Grant Date		Intrinsic				Exercise		Grant Date		Intrinsic
Three months ended September 30, 2017:	Options			Price		Fair Value		Value
Outstanding at June 30, 2017		362		$	20.60	$	9.45
Three months ended June 30, 2020:										Options		Price		Fair Value		Value
Outstanding at March 31, 2020											550	$	31.40	$	14.10
Granted		200			30.50		14.58				—		—		—
Exercised		(15	)		14.99		8.12				—		—		—
Forfeited or expired		—			—		—				—		—		—
Outstanding at September 30, 2017		547		$	24.37	$	11.36	$	6,683
Outstanding at June 30, 2020											550	$	31.40	$	14.10	$	—

The aggregate intrinsic value is based on the closing price of ~~$36.60~~$15.99 per share of Digimarc common stock on ~~September~~June 30, ~~2017,~~2020, which would have been received by the optionees had all of the options with exercise prices less than ~~$36.60~~$15.99 per share been exercised on that date.

				Weighted					Weighted
				Average					Average
	Number of			Grant Date		Number of			Grant Date
Three months ended September 30, 2017:	Shares			Fair Value
Unvested balance, June 30, 2017		492		$	27.67
Three months ended June 30, 2020:						Shares			Fair Value
Unvested balance, March 31, 2020							566		$	29.31
Granted		72		$	30.22		43		$	16.40
Vested		(58	)	$	26.35		(79	)	$	28.75
Forfeited		(1	)	$	27.43		(4	)	$	29.05
Unvested balance, September 30, 2017		505		$	28.19
Unvested balance, June 30, 2020							526		$	28.34

				Weighted					Weighted
				Average					Average
	Number of			Grant Date		Number of			Grant Date
Nine months ended September 30, 2017:	Shares			Fair Value
Unvested balance, December 31, 2016		385		$	26.28
Six months ended June 30, 2020:						Shares			Fair Value
Unvested balance, December 31, 2019							435		$	27.05
Granted		308		$	27.32		229		$	30.74
Vested		(180	)	$	22.77		(134	)	$	28.23
Forfeited		(8	)	$	24.70		(4	)	$	29.05
Unvested balance, September 30, 2017		505		$	28.19
Unvested balance, June 30, 2020							526		$	28.34

The following table indicates the fair value of all restricted stock awards that ~~vested during~~vested:

In May 2019, the ~~three and nine~~Company entered into an Equity Distribution Agreement, whereby the Company may sell from time to time through Wells Fargo Securities, LLC, as its sales agent, the Company’s common stock having an aggregate offering price of up to $30,000. For the six months ended ~~September~~June 30, ~~2017 and 2016:~~

~~In June 2017,~~2020, the Company sold ~~500~~28 shares ~~of its common stock in a registered direct offering to a certain investor~~ at aan average price of ~~$35.55 per share. The offering was made without an underwriter or placement agent. The Company received $17,775~~$21.92 under this Equity Distribution Agreement totaling $611 of cash proceeds, ~~from the offering,~~less $14 of commissions and ~~paid $77 in~~$23 of stock issuance ~~costs.~~

In July 2016, the Company sold 1,233 shares of its common stock in an underwritten public offering, plus an additional 185 shares in full exercise of the underwriters’ option to purchase additional shares of common stock, at the price to the public of $30.00 share. The Company received $39,953 ofcosts, for net cash proceeds ~~net~~ of ~~discount of $2,447 and underwriter fees of $150, from the offering, and paid $253 in stock issuance costs.~~$574.

The Company calculates basic and diluted earnings per common share in accordance with ASC 260 “Earnings Per Share,” using the two-class method because the Company’s unvested restricted stock is a participating security since these awards contain non-forfeitable rights to receive dividends. Under the two-class method, earnings are allocated to each class of common stock and participating security as if all of the earnings for the period had been distributed.

Basic earnings per common share excludes dilution and is calculated by dividing earnings to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing earnings to common shares by the weighted-average number of common shares, as adjusted for the potentially dilutive effect of stock options. The dilutive effect of stock options is determined using the treasury stock method.

The following table reconciles earnings (loss) per common ~~share for the three and nine months ended September 30, 2017 and 2016:~~share:

Three

Three

Nine

Nine

Months

Months

Months

Months

Ended

Ended

Ended

Ended

September 30,

September 30,

September 30,

September 30,

2017

2016

2017

2016

Basic Earnings (Loss) per Common Share:

Numerator:

Net loss

$
(4,240
)

$
(5,198
)

$
(17,401
)

$
(15,916
)
Distributed earnings to common shares

—

—

—

—

Distributed earnings to participating securities

—

—

—

—

Total distributed earnings

—

—

—

—

Undistributed loss allocable to common shares

(4,240
)

(5,198
)

(17,401
)

(15,916
)
Undistributed earnings allocable to participating
securities

—

—

—

—

Total undistributed loss

(4,240
)

(5,198
)

(17,401
)

(15,916
)
Loss to common shares—basic

$
(4,240
)

$
(5,198
)

$
(17,401
)

$
(15,916
)
Denominator

Weighted average common shares outstanding—
basic

10,797

9,506

10,410

8,878

Basic earnings (loss) per common share

(0.39
)

$
(0.55
)

(1.67
)

$
(1.79
)

	Three			Three			Six			Six
	Months			Months			Months			Months
	Ended			Ended			Ended			Ended
	June 30,			June 30,			June 30,			June 30,
	2020			2019			2020			2019
Basic Earnings (Loss) per Common Share:
Loss to common shares — basic	$	(7,461	)	$	(7,933	)	$	(16,369	)	$	(16,396	)
Weighted average common shares outstanding — basic		12,108			11,665			12,073			11,576
Basic earnings (loss) per common share	$	(0.62	)	$	(0.68	)	$	(1.36	)	$	(1.42	)

Diluted Earnings (Loss) per Common Share:
Loss to common shares — diluted	$	(7,461	)	$	(7,933	)	$	(16,369	)	$	(16,396	)
Weighted average common shares outstanding — diluted		12,108			11,665			12,073			11,576
Diluted earnings (loss) per common share	$	(0.62	)	$	(0.68	)	$	(1.36	)	$	(1.42	)

~~There were 0 and 275~~The following table indicates the common stock equivalents related to stock options that were anti-dilutive and excluded from diluted earnings per common share calculations for the three and nine months ended September 30, 2017, respectively, because their exercise prices were higher than the average market price of the underlying common stock for the periods.

There were no common stock equivalents related to stock options that were anti-dilutive and excluded from diluted earnings per common share calculations for the three and nine months ended September 30, 2016, respectively, because their exercise prices were higher than the average market price of the underlying common stock for the periods.calculations:

There were 71 and 107 common stock equivalents related to stock options that were anti-dilutive and excluded from diluted earnings per common share for the three and nine months ended September 30, 2017, respectively, as the Company incurred a net loss for the periods.

There were 211 and 195 common stock equivalents related to stock options that were anti-dilutive and excluded from diluted earnings per common share for the three and nine months ended September 30, 2016, respectively, as the Company incurred a net loss for the periods.

	September 30,			December 31,			June 30,			December 31,
	2017			2016			2020			2019
Trade accounts receivable	$	7,045		$	5,093		$	3,601		$	4,036
Allowance for doubtful accounts		(15	)		(15	)		(25	)		(15	)
Trade accounts receivable, net	$	7,030		$	5,078		$	3,576		$	4,021
Unpaid deferred revenue included in trade accounts receivable	$	629		$	2,245		$	856		$	2,015

The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing trade accounts receivable. The Company determines the allowance based on historical write-off experience and current information. The Company reviews its allowance for doubtful accounts each reporting period. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

The unpaid deferred revenue that is included in trade accounts receivable is billed in accordance with the provisions of the contracts with the Company’s customers. ~~Unpaid deferred revenue from the Company’s cash-basis customers is not included in trade accounts receivable nor deferred revenue.~~

~~Customers who~~The following customers accounted for 10% or more of trade accounts receivable, ~~net are as follows:~~net:

Property and equipment are stated at cost. Repairs and maintenance are charged to expense when incurred.

Depreciation on property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, generally two to ten years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life or the lease term.

	September 30,			December 31,			June 30,			December 31,
	2017			2016			2020			2019
Office furniture and fixtures	$	1,549		$	1,168		$	1,650		$	1,650
Software		2,861			2,146			4,703			4,379
Equipment		4,461			4,071			5,150			5,041
Leasehold improvements		1,688			1,617			1,658			1,721
Gross property and equipment		10,559			9,002			13,161			12,791
Less accumulated depreciation and amortization		(6,286	)		(5,432	)		(9,802	)		(9,141	)
Property and equipment, net	$	4,273		$	3,570		$	3,359		$	3,650

Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. NaN impairment charges were recorded for the six months ended June 30, 2020 and 2019.

~~Amortization of capitalized patent~~Patent costs associated with the application and award of patents in the U.S. and various other countries are capitalized and amortized on a straight-line basis over the term of the patents as determined at the award date, which varies depending on the pendency period of the application, generally approximating ~~seventeen~~17 years.

Amortization of intangible assets acquired is calculated using the straight-line method over the estimated useful lives of the assets.

	Estimated Life	September 30,			December 31,			Estimated Life	June 30,			December 31,
	(years)	2017			2016			(years)	2020			2019
Capitalized patent costs	17-20	$	7,794		$	7,281		17-20	$	9,461		$	9,245
Intangible assets acquired:
Purchased patents and intellectual property	3-10		250			250		3-10		250			250
Existing technology	5		1,560			1,560		5		1,560			1,560
Customer relationships	7		290			290		7		290			290
Backlog	2		760			760		2		760			760
Tradenames	3		290			290		3		290			290
Non-solicitation agreements	1		120			120		1		120			120
Gross intangible assets			11,064			10,551				12,731			12,515
Accumulated amortization			(4,695	)		(4,129	)			(6,120	)		(5,845	)
Intangibles, net		$	6,369		$	6,422			$	6,611		$	6,670

The Company adopted ASC 842, “Leases,” as amended, as of January 1, 2019, using the retrospective approach. The retrospective approach provides a method for recording existing leases at adoption and ~~Related Party Transactions~~recording the cumulative effect of initially applying the new standard as an adjustment to the opening balance of retained earnings. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward the historical lease classification, its assessment of whether a contract was or contains a lease, and its initial direct costs for any leases that existed prior to January 1, 2019. In addition, the Company elected the short-term lease exception as a practical expedient and elected to combine lease and non-lease components.

The Company leases its corporate office in Beaverton, Oregon. In July 2015, the Company entered into an amendment with the landlord of its corporate office to extend the lease term through March ~~2012, Digimarc and Nielsen reduced~~2024, with remaining rent payments as of June 30, 2020, totaling $3,291, payable in monthly installments. The Company had leased office space in San Mateo, California, until March 31, 2020, when the investments in their two joint ventures, TVaura LLC (in which Digimarc holds a 51% ownership interest) and TVaura Mobile LLC (in which Digimarc holds a 49% ownership interest), to minimal levels while assessing alternative approaches to achieving eachlease expired.

All of ~~their goals~~the Company’s leases are operating leases. The following table provides additional details of leases presented in the ~~emerging market opportunity~~Consolidated Balance Sheets:

The carrying value of ~~synchronized second screen television.~~the right of use assets is included in “Other assets” and the current and long-term lease liabilities are included in “Accounts payable and other accrued liabilities” and “Lease liability and other long-term liabilities,” respectively, in the Consolidated Balance Sheets.

~~In October 2015, Digimarc~~Operating lease expense is included in cost of revenue and ~~Nielsen reactivated~~operating expenses in the ~~TVaura Mobile LLC joint venture to develop solutions~~Consolidated Statements of Operations and in cash flows from operating activities on the Consolidated Statements of Cash Flows. The operating leases include variable lease costs which are not material and are included in operating lease costs. Additional details of the Company’s operating leases are presented in the following table:

The table below reconciles the cash payment obligations for ~~programmers~~the first five years and ~~advertisers to engage~~total of the remaining years for the operating lease liability recorded in the Consolidated Balance Sheet as of June 30, 2020:

On April 16, 2020, the Company entered into a Promissory Note with ~~consumers on second screens and otherwise provide enhanced flexibility to brand strategies targeting modern consumers. The enhanced cooperation represents another building block~~Stearns Bank, N.A. in ~~developing the market for Digimarc Discover and Digimarc Barcode. Neither Digimarc nor Nielsen has contributed any capital~~an aggregate principal amount of $5,032 (the “Note”), pursuant to the ~~joint venture upon reactivation.~~Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

AsThe Note matures two years from the disbursement date and bears interest at a rate of ~~September 30, 2017, both Digimarc~~1.000% per annum, with the first six months of interest deferred. Principal and ~~Nielsen continued~~interest are payable monthly commencing six months after the disbursement date and may be prepaid by the Company at any time prior to ~~assess~~maturity with no prepayment penalties.

~~Summarized financial information~~CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the ~~joint ventures has not been provided because the disclosures are immaterial~~PPP. The Note is subject to forgiveness to the ~~Company’s filing. TVaura LLC~~extent proceeds are used for payroll costs, including payments required to continue group health care benefits, and ~~TVaura Mobile LLC had~~certain rent, utility, and mortgage interest expenses (collectively, “Qualifying Expenses”), pursuant to the terms and limitations of the PPP. The Company believes that it used all of the proceeds from the Note for Qualifying Expenses. However, no ~~revenue~~assurance is provided that the Company will obtain forgiveness of the Note in whole or ~~expenses~~in part.

On June 29, 2020, the Company was notified by Stearns Bank, N.A. that the Note was transferred to The Loan Source, Inc., who will be responsible for servicing the ~~nine months ended September 30, 2017 and 2016.~~Note going forward, including administering loan forgiveness.

The ~~Company’s investment in each joint venture was $0 as of September 30, 2017 and December 31, 2016.~~following table provides information about the note payable:

The ~~benefit (provision)~~provision for income taxes for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 reflects current taxes, deferred taxes, and withholding taxes. The effective tax rate for each of the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 was ~~1% and~~ 0%~~, respectively.~~. The valuation allowance against net deferred tax assets as of ~~September~~June 30, ~~2017~~2020, was ~~$39,806,~~$51,842, an increase of ~~$14,918~~$4,033 from ~~$24,888~~$47,809 as of December 31, ~~2016.~~2019.

The Company adopted the provisions of ASU No. 2016-09 effective January 1, 2017. Deferred tax assets of $6,219 were recorded for previously unrecognized excess tax benefits as of December 31, 2016, which were offset by $6,219 of valuation allowance. Excess tax ~~benefits~~deficiencies of ~~$296~~$1,003 and ~~$1,397~~$748 were recognized in the provision for income taxes for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, respectively, which were offset by ~~$296~~$1,003 and ~~$1,397~~$748 of valuation allowance, respectively. Excess tax benefits of $2,236 and $2,044 were recognized in the provision for income taxes for the three and six months ended June 30, 2019, respectively, which were offset by $2,236 and $2,044 of valuation allowance, respectively.

Certain of the Company’s ~~product license and services agreements~~contracts include an indemnification provision for claims from third parties relating to the Company’s intellectual property. ~~These~~Such indemnification provisions are accounted for in accordance with ASC 450 “~~Contingencies.~~Contingencies.” To date, there have been no claims made under such indemnification provisions.

The Company is subject from time to time to other legal proceedings and claims arising in the ordinary course of business. At this time, the Company does not believe that the resolution of any such matters will have a material adverse effect on its financial position, results of operations or cash flows.

In July 2020, the Company announced a plan to restructure certain areas of operations to improve productivity, communication, time to market, and support. The changes will reduce the number of employees within the organization by approximately 7%. As a result, the Company expects to incur severance costs of $0.9 million during the quarter ending September 30, 2020, consisting of $0.4 million of cash-based severance and $0.5 million of stock-based severance. Annual operating costs are expected to decrease by $2.3 million as a result of these reductions, consisting of $2.1 million of cash-based compensation and $0.2 million of stock-based compensation.

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. ~~Please see~~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, ~~2016~~2019 filed on February ~~23, 2017~~27, 2020 (our ~~“2016~~“2019 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. ~~Percentages~~The percentages within the ~~following~~ tables may not ~~foot~~sum to 100% due to rounding.

Digimarc, Digimarc ~~Discover~~Barcode and ~~Guardian~~Digimarc Discover are registered trademarks of Digimarc Corporation. This Quarterly Report on Form 10-Q also includes trademarks and trade names owned by other parties, and all other such trademarks and trade names mentioned in this Quarterly Report on Form 10-Q are the property of their respective owners.

Digimarc Corporation, an Oregon corporation ~~founded~~incorporated in 2008, is the inventor of a platform that enables ~~governments~~a more efficient, reliable and ~~enterprises around the world~~economical means of automatic identification. The Digimarc Platform can apply a unique identifier to ~~give digital identities to~~virtually all media objects—including product packaging, commercial print, audio and ~~objects~~ video—that ~~computers~~ can ~~sense and recognize and to which they can react. We have developed Digimarc Discover~~^®~~, Digimarc Barcode and the Intuitive Computing Platform~~^™ ~~that are designed to optimize the identification~~be automatically identified by an enabled ecosystem of all consumer brand impressions, wherever and whenever they may appear, facilitating modern mobile-centric shopping. The platform includes means to embed “Digimarc Barcodes,” invisible and inaudible barcode-like information that is recognizable by smartphones, tablets, industrial scanners, smartphones and other ~~computer interfaces into virtually all forms of media content, including consumer product packaging.~~interfaces. These capabilities allow Digimarc Barcodes have many applications, including facilitating remarkably faster scanning of products at retail checkout as well as improved engagement with smartphone-equipped consumers. The Digimarc Barcode is robust yet imperceptible by people in ordinary use, allowing for reliable, efficient, economical, globally scalable, automatic identification of media without visible computer codes like traditional barcodes.

~~Our media identification~~ and ~~discovery innovations enable our business~~its partners to ~~create numerous applications across~~supply a wide range of solutions for retail and supply chain operations, consumer engagement, media ~~content, including solutions that:~~management and security.

~~Quickly~~network interfaces that recognize and ~~reliably identify~~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 ~~effectively manage music, movies, television programming, digital images, e-publications, documents~~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 ~~printed materials, especially in light of non-linear distribution over the Internet;~~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 objects, 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, on paper or cardboard or etched within material substrates such as plastic and other materials. Among other things, this identification supports strong authentication.

~~Deter counterfeiting of money, media and goods, and piracy of e-publications, movies and music;~~

•

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 copyright detection of digital images and e-publications.

~~Support new digital media distribution models and methods to monetize media content;~~

•

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.

~~Leverage the power of ubiquitous computing to instantly link consumers to a wealth of information and/or interactive experiences related to the media and objects they encounter each day;~~

~~Provide consumers with more choice and access to media content when, where and how they want it;~~

~~Enhance imagery and video by associating metadata or authenticating media content for government and commercial uses; and~~

~~Better secure identity documents to enhance national security and combat identity theft and fraud.~~

•

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 as an aid for sorting and recapture. Similarly, enhanced labels for fresh foods can be used to adjust pricing and thus reduce food waste proactively.

Our Intuitive Computing Platform has a proprietary foundation in signal processing innovation known as “digital watermarking,” which allows imperceptible digital information to be embedded in all forms of digitally designed, produced or distributed media content and many physical objects, including photographs, movies, music, television, personal identification documents, financial instruments, industrial parts and product packages. We refer to the embedded information as the Digimarc Barcode. This digital information can be detected and read by a wide range of computers, smartphones, tablets and other digital devices.

•

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

•

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 quicker and easier front-of-store checkout experiences.

Our inventions allow our business partners and customers to provide persistent digital identities for virtually any media content that is digitally processed at some point during its lifecycle. Our technology can be applied to ~~printed materials,~~images, video, ~~audio,~~ and ~~images~~audio to supply a wide range of consumer engagement, media management and security solutions across multiple consumer and government industry sectors. Over the years, our enabling software and business processes, and associated intellectual property portfolio, have grown to encompass many related technologies.

We provide our ~~solutions~~offerings directly and through our business partners. Our inventions provide a powerful element of document security, 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. WeOur business partners and ~~our business partners~~we have successfully propagated the use of our technology in music, movies, television broadcasts, digital images, e-publications and printed materials. Digimarc Barcodes ~~have~~has been 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 ~~Barcodes~~Barcode can be used to enhance all forms of media and are 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 ~~publishers~~content owners to give up valuable visual space ~~in magazines and newspapers;~~on their media content, nor does it ~~impact~~affect the overall layout or aesthetics of ~~the publication for readers.~~their media content. Digimarc ~~Barcodes are~~Barcode is generally imperceptible in ~~normal~~regular use and do all that visible barcodes do, but ~~perform~~performs better. Our Digimarc Discover ~~platform~~software delivers a range of rich media experiences to its readers on their smartphones or tablets across multiple media formats, including print, audio ~~video~~ and ~~packaging.~~video. Unique to ~~the~~ Digimarc Discover ~~platform~~ is its seamless multi-modal use of various content identification technologies as needed, including Digimarc Barcode, when present.

Banknote counterfeit deterrence was the first commercially successful large-scale use of our technologies. Innovations based on our existing technology and experience have been leveraged to create new products to deter counterfeiting and tampering of driver licenses and other government-issued secure credentials. In ~~January 2014, we introduced~~parallel, our business partners, under patent or technology licenses from us, are delivering solutions to track and monitor the distribution of music, images, television and movies to consumers.

In April 2019, Digimarc ~~Barcodes~~pledged a commitment to improving the reliability and efficiency of plastic waste sorting. Most notably, Digimarc signed the Ellen MacArthur Foundation’s New Plastics Economy Global Commitment, which focuses on building a Circular Economy for ~~use~~plastics. Digimarc participated in ~~consumer product packaging. These~~the Ellen MacArthur Foundation’s Pioneer Project HolyGrail, where Digimarc ~~Barcodes can contain the same information found~~Barcode was shown in ~~traditional universal product codes (“UPC”). The UPC information is invisibly repeated multiple times over the entire package surface. We partnered with Datalogic, a global leader~~testing to overcome many current limitations in ~~automatic data capture and industrial automation markets and producer~~plastic sorting technology. Digimarc Barcode proved useful in technical trials at more accurately identifying recyclable plastics, which could prevent their unnecessary disposal into landfills or incinerators.

In September 2019, Digimarc announced expanded capabilities of ~~barcode readers, in introducing~~ the Digimarc Platform with several leading brands employing Digimarc Barcode for packaging and Digimarc Discover software in high-speed inspection systems to ~~the consumer~~catch mislabeling problems before products ship to consumers. Digimarc Barcode provides data redundancy on product packaging ~~market. The first retail scanner enabled was Datalogic’s Magellan~~^TM ~~9800i multi-plane imaging scanner. Since then additional scanner vendors~~without marring the appearance of the design. Consumer brands that use Digimarc Barcode for packaging, combined with high-speed inspection system scanning equipment from Cognex or Datalogic, can improve the matching of front and back labels, cartons and lids, and other ~~channel partners have announced support~~multi-component packages.

In November 2019, Digimarc delivered identification and discovery capabilities to Walmart’s toy catalog, making it easier than ever for customers to buy gifts or create wish lists for family and friends using the Walmart app. The Scan & Shop feature, powered by Digimarc ~~Barcode platform. Digimarc Barcodes can also connect mobile-enabled consumers directly from packaging to engaging mobile experiences such~~was prominently promoted in 35 million printed catalogs that were direct mailed as ~~additional product information, special offers, recommendations, reviews, social networks and more.~~well as available in Walmart’s nearly 4,800 U.S. stores.

Our intellectual property contains many innovations in digital watermarking, content recognition (sometimes referred to as “fingerprinting”), 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 over ~~1,100~~1,000 U.S. and foreign patents granted and applications pending as of ~~September~~June 30, ~~2017.~~ 2020.

We continue to develop and broaden our portfolio in the fields of ~~media~~automatic identification and management technology and related applications and systems. We devote significant resources to developing and protecting our inventions and continuously seek to identify and evaluate potential licensees for our patents. The patents in our portfolio each have a life of approximately 20 years from the effective filing date of the patent, and up to 17 years after the patent has been granted.

The market for patent licensing has become more challenging in recent years. As a result, we have shifted our focus from direct monetization through enforcement and licensing to facilitating progress toward the realization of our vision to enrich everyday living ~~through~~via pervasive, intuitive computing by:

~~encouraging large scale adoption of our technologies by industry leaders;~~

•

encouraging large scale adoption of our technologies by industry leaders;

~~improving our financial performance by enhancing our competitive differentiation;~~

•

increasing the scale and rate of growth of our products and services business; and

~~increasing the scale and rate of growth of our products and services business; and~~

~~laying a foundation for continuing innovation.~~

•

laying a foundation for continuous innovation.

For a discussion of activities and costs related to our research and development, see “Results of Operations ~~–Summary~~– Summary – Research, development and engineering.”

COVID-19 Pandemic

The coronavirus disease 2019 (“COVID-19”) pandemic posed 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, Company management continuously evaluates the Company’s business operations, communicates with and monitors the actions of our customers and partners, and reviews our near-term financial 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 and could affect over time our ability to fund our business through near-term revenue growth. To help ensure adequate liquidity during this period and in light of uncertainties posed by the COVID-19 pandemic, the Company received a loan under the U.S. government Paycheck Protection Program in April 2020.

Critical Accounting Policies and Estimates

Detailed information about our critical accounting policies and estimates is set forth in Part ~~II,~~III, Item 715 of our ~~2016~~2019 Annual Report (“~~Management’s Discussion~~Exhibits and ~~Analysis~~Financial Statement Schedules”), in “Note 1: Description of ~~Financial Condition~~Business and ~~Results~~Summary of ~~Operations”), under the caption “Critical~~Significant Accounting Policies ~~and Estimates,~~,” which is incorporated by reference into this Quarterly Report on Form 10-Q.

Results of Operations

The following table presents statements of operations data for the periods indicated as a percentage of total revenue. Unless stated otherwise, ~~indicated,~~ all references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations ~~to the three and nine month periods~~ relate to the three and ~~nine months~~six month periods ended ~~September~~June 30, ~~2017~~2020, and all changes discussed with respect to such periods reflect changes compared to the three and ~~nine months~~six month periods ended ~~September~~June 30, ~~2016.~~2019.

	Three			Three			Nine			Nine			Three			Three			Six			Six
	Months			Months			Months			Months			Months			Months			Months			Months
	Ended			Ended			Ended			Ended			Ended			Ended			Ended			Ended
	September 30,			September 30,			September 30,			September 30,			June 30,			June 30,			June 30,			June 30,
	2017			2016			2017			2016			2020			2019			2020			2019
	Percentages are percent of total revenue						Percentages are percent of total revenue						Percentages are percent of total revenue						Percentages are percent of total revenue
Revenue:
Service		34	%		58	%		49	%		58	%		60	%		58	%		60	%		62	%
Subscription		15			25			20			26			40			42			40			38
License		51			16			31			16
Total revenue		100			100			100			100			100			100			100			100
Cost of revenue:
Service		15			26			22			26			25			27			26			28
Subscription		7			11			8			11			8			8			8			8
License		1			2			2			2
Total cost of revenue		24			39			32			39			33			35			34			36
Gross profit		76			61			68			61			67			65			66			64
Operating expenses:
Sales and marketing		47			53			59			53			71			82			78			85
Research, development and engineering		47			59			57			60			65			64			68			68
General and administrative		28			37			35			37			47			50			51			53
Intellectual property		4			7			6			8
Total operating expenses		127			155			156			158			184			197			197			206
Operating loss		(51	)		(94	)		(88	)		(97	)		(116	)		(132	)		(131	)		(142	)
Other income, net		2			1			2			1			1			4			2			4
Loss before income taxes		(49	)		(93	)		(86	)		(96	)		(115	)		(128	)		(129	)		(138	)
Benefit (provision) for income taxes		—			—			—			—			(0	)		(0	)		0			(0	)
Net loss		(49	%)		(93	%)		(85	%)		(96	%)		(115	%)		(128	%)		(129	%)		(138	%)

Total revenue for the three ~~and nine~~ month ~~periods~~period ended ~~September~~June 30, ~~2017~~2020, increased ~~56%~~5% to ~~$8.7~~$6.5 million, ~~and 23% to $20.4 million, respectively,~~ compared to the corresponding three ~~and nine~~ month ~~periods~~period ended ~~September~~June 30, ~~2016,~~2019, primarily as a result of ~~higher license~~growth in service revenue ~~driven by~~from Government and Retail customers.

Total revenue for the six month period ended June 30, 2020, increased 7% to $12.7 million, compared to the corresponding six month period ended June 30, 2019, primarily as a ~~$3.5 million license fee~~result of growth in subscription revenue from ~~an existing licensee.~~Retail customers and service revenue from Government customers.

Total operating expenses for the three ~~and nine~~ month ~~periods~~period ended ~~September~~June 30, ~~2017 increased 27%~~2020, decreased 2% to ~~$11.0~~$11.9 million, ~~and 21% to $31.8 million, respectively,~~ compared to the corresponding three month period ended June 30, 2019, primarily as a result of lower travel, consulting and ~~nine~~marketing costs; partially offset by the impact of higher headcount and routine annual compensation adjustments for our employees.

Total operating expenses for the six month ~~periods~~period ended ~~September~~June 30, ~~2016,~~2020, increased 3% to $25.0 million, compared to the corresponding six month period ended June 30, 2019, primarily ~~reflecting~~as a result of the impact of higher ~~investment in sales,~~headcount and routine annual compensation adjustments for our employees; partially offset by lower travel, consulting and marketing ~~and engineering as we continue to address important opportunities in market development and delivery of Digimarc Discover and Digimarc Barcode.~~costs.

	Three			Three									Nine			Nine									Three			Three								Six			Six
	Months			Months									Months			Months									Months			Months								Months			Months
	Ended			Ended			Dollar			Percent			Ended			Ended			Dollar			Percent			Ended			Ended			Dollar		Percent			Ended			Ended			Dollar		Percent
	September 30,			September 30,			Increase			Increase			September 30,			September 30,			Increase			Increase			June 30,			June 30,			Increase		Increase			June 30,			June 30,			Increase		Increase
	2017			2016			(Decrease)			(Decrease)			2017			2016			(Decrease)			(Decrease)			2020			2019			(Decrease)		(Decrease)			2020			2019			(Decrease)		(Decrease)
Revenue:
Service	$	2,986		$	3,252		$	(266	)		(8	)%	$	9,935		$	9,650		$	285			3	%	$	3,892		$	3,575		$	317		9	%	$	7,630		$	7,389		$	241		3	%
Subscription		1,306			1,417			(111	)		(8	)%		4,171			4,374			(203	)		(5	)%		2,605			2,605			—		—	%		5,056			4,451			605		14	%
License		4,385			907			3,478			383	%		6,249			2,589			3,660			141	%
Total	$	8,677		$	5,576		$	3,101			56	%	$	20,355		$	16,613		$	3,742			23	%	$	6,497		$	6,180		$	317		5	%	$	12,686		$	11,840		$	846		7	%
Revenue (as % of total revenue):
Service		34	%		58	%								49	%		58	%								60	%		58	%							60	%		62	%
Subscription		15	%		25	%								20	%		26	%								40	%		42	%							40	%		38	%
License		51	%		16	%								31	%		16	%
Total		100	%		100	%								100	%		100	%								100	%		100	%							100	%		100	%

Service. Service revenue consists primarily of revenue earned from the performance of software development ~~and consulting~~ services. The majority of service ~~revenue arrangements~~contracts are structured as time and materials ~~consulting~~ agreements. ~~Most of our service revenue~~Revenue for services is ~~derived~~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 ~~contracts~~days to several years in length. Our contract with the Central Banks, ~~and government agency contractors.~~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 ~~agreements range from several months to several years in length, and our longer term contracts are~~contract is subject to work plans that are reviewed and agreed upon ~~at least annually. These contracts generally provide~~quarterly. The contract provides for predetermined billing ~~hours worked at predetermined~~ rates, ~~and, to a lesser extent, reimbursement for third party costs and services. Increases or decreases in the services provided under these contracts~~which are ~~generally subject to both volume and price changes. The volume of work is generally negotiated at least~~adjusted annually ~~and can be modified as the customer’s needs change. We also have provisions in our longer term contracts that allow for specific hourly rate price increases on an annual basis~~ to account for cost of living ~~variables. Contracts with government agency contractors are generally shorter term in nature, less linear in billings~~variables, and ~~less predictable than our longer term contracts because~~provides for the ~~contracts with government agency contractors are subject~~reimbursement of third party costs incurred to ~~government budgets and funding.~~support the work plans.

The ~~decrease~~increases in service revenue for the three and six month ~~period~~periods ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding three and six month ~~period~~periods ended ~~September~~June 30, ~~2016, was~~2019, were primarily due to ~~the timing of program work with the Central Banks.~~growth in services to Government and Retail customers.

The increase in service revenue for the nine month period ended September 30, 2017, compared to the corresponding nine month period ended September 30, 2016, was primarily due to more program work with a government agency contractor and with the Central Banks.

~~Subscription~~.Subscription. Subscription revenue ~~includes Digimarc Discover, Digimarc Barcode and Guardian~~consists primarily of revenue earned from the sale of software products and ~~services, and is generally~~to a lesser extent the licensing of intellectual property. The majority of subscription contracts are recurring, ~~in nature,~~ paid in advance and recognized over the term of the ~~subscription.~~subscription, which is typically one to three years.

~~The decreases~~There was no change in subscription revenue for the three ~~and nine~~ month ~~periods~~period ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding three ~~and nine~~ month ~~periods~~period ended ~~September~~June 30, ~~2016, were primarily due to lower Guardian revenue, partially offset by higher Digimarc Barcode revenue.~~

~~License. License revenue originates primarily from licensing our intellectual property, where we receive license fees and/or royalties as our income stream.~~2019.

The ~~increases~~increase in ~~license~~subscription revenue for the ~~three and nine~~six month ~~periods~~period ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding ~~three and nine~~six month ~~periods~~period ended ~~September~~June 30, ~~2016, were primarily~~2019, was due to ~~a $3.5 million license fee from an existing licensee. In exchange for the upfront license fee, we waived any future royalty obligations from this licensee~~growth in ~~one of the licensed fields of use. The license fee is due in two equal installments of $1.75 million in October 2017 and January 2018.~~software subscriptions to Retail customers.

	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
	2020			2019			(Decrease)		(Decrease)			2020			2019			(Decrease)		(Decrease)
Revenue by geography:
Domestic	$	1,856		$	1,772		$	84		5	%	$	3,615		$	3,089		$	526		17	%
International		4,641			4,408			233		5	%		9,071			8,751			320		4	%
Total	$	6,497		$	6,180		$	317		5	%	$	12,686		$	11,840		$	846		7	%
Revenue (as % of total revenue):
Domestic		29	%		29	%							28	%		26	%
International		71	%		71	%							72	%		74	%
Total		100	%		100	%							100	%		100	%

Three

Three

Nine

Nine

Months

Months

Months

Months

Ended

Ended

Dollar

Percent

Ended

Ended

Dollar

Percent

September 30,

September 30,

Increase

Increase

September 30,

September 30,

Increase

Increase

2017

2016

(Decrease)

(Decrease)

2017

2016

(Decrease)

(Decrease)

Revenue by geography:

Domestic

$
1,153

$
1,210

$
(57
)

(5
)%

$
3,907

$
3,494

$
413

12
%
International

7,524

4,366

3,158

72
%

16,448

13,119

3,329

25
%
Total

$
8,677

$
5,576

$
3,101

56
%

$
20,355

$
16,613

$
3,742

23
%
Revenue (as % of total revenue):

Domestic

13
%

22
%

19
%

21
%

International

87
%

78
%

81
%

79
%

Total

100
%

100
%

100
%

100
%

The ~~decrease~~increase in domestic revenue for the three month period ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding three month period ended ~~September~~June 30, ~~2016,~~2019, was primarily due to ~~lower Guardian~~growth in service revenue from our domestic Retail customers.

The increase in domestic revenue for the ~~nine~~six month period ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding ~~nine~~six month period ended ~~September~~June 30, ~~2016,~~2019, was primarily ~~the result of higher service~~due to growth in subscription revenue from ~~a government agency contractor and higher royalty revenue from a~~our domestic ~~licensee.~~Retail customers.

The increases in international revenue for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding three and ~~nine~~six month periods ended ~~September~~June 30, ~~2016, was~~2019, were primarily due to ~~a $3.5 million license fee~~growth in service revenue from ~~an existing~~our international ~~licensee and timing of program work with the Central Banks.~~Government customers.

~~Service~~.Service. Cost of service revenue primarily includes costs that are allocated from research, development and engineering, sales and marketing and intellectual property that relate directly to performing services under our customer contracts and direct costs of program delivery. Costs include:includes:

	Three			Three									Nine			Nine									Three			Three									Six			Six
	Months			Months									Months			Months									Months			Months									Months			Months
	Ended			Ended			Dollar			Percent			Ended			Ended			Dollar			Percent			Ended			Ended			Dollar			Percent			Ended			Ended			Dollar		Percent
	September 30,			September 30,			Increase			Increase			September 30,			September 30,			Increase			Increase			June 30,			June 30,			Increase			Increase			June 30,			June 30,			Increase		Increase
	2017			2016			(Decrease)			(Decrease)			2017			2016			(Decrease)			(Decrease)			2020			2019			(Decrease)			(Decrease)			2020			2019			(Decrease)		(Decrease)
Gross Profit:
Service	$	1,654		$	1,797		$	(143	)		(8	)%	$	5,504		$	5,362		$	142			3	%	$	2,291		$	1,899		$	392			21	%	$	4,345		$	4,068		$	277		7	%
Subscription		695			817			(122	)		(15	)%		2,470			2,518			(48	)		(2	)%		2,093			2,096			(3	)		(0	)%		4,030			3,453			577		17	%
License		4,256			800			3,456			432	%		5,880			2,287			3,593			157	%
Total	$	6,605		$	3,414		$	3,191			93	%	$	13,854		$	10,167		$	3,687			36	%	$	4,384		$	3,995		$	389			10	%	$	8,375		$	7,521		$	854		11	%
Gross Profit (as % of related revenue components):
Service		55	%		55	%								55	%		56	%								59	%		53	%								57	%		55	%
Subscription		53	%		58	%								59	%		58	%								80	%		80	%								80	%		78	%
License		97	%		88	%								94	%		88	%
Total		76	%		61	%								68	%		61	%								67	%		65	%								66	%		64	%

The ~~increases~~increase in total gross profit for the three ~~and nine~~ month ~~periods~~period ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding three ~~and nine~~ month ~~periods~~period ended ~~September~~June 30, ~~2016, were~~2019, was primarily due to ~~a $3.5 million license fee from an existing licensee.~~higher service revenue.

The ~~changes~~increase in total gross profit for the six month period ended June 30, 2020, compared to the corresponding six month period ended June 30, 2019, was primarily due to higher subscription and service revenue.

The increases in service gross profit as a percentage of service revenue for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding three and ~~nine~~six month periods ended ~~September~~June 30, ~~2016,~~2019, were ~~insignificant.~~primarily due to a favorable mix of billable expenses, with higher labor and lower non-labor expenses.

~~The decrease~~There was no change in subscription gross profit as a percentage of subscription revenue for the three month period ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding three month period ended ~~September~~June 30, ~~2016, was due primarily to lower subscription revenue.~~2019.

The increase in subscription gross profit as a percentage of subscription revenue for the ~~nine~~six month period ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding ~~nine~~six month period ended ~~September~~June 30, ~~2016~~2019, was ~~insignificant.~~

The increases in license gross profit as a percentage of license revenue for the three and nine month periods ended September 30, 2017, compared to the corresponding three and nine month periods ended September 30, 2016 wereprimarily due to ~~a $3.5 million license fee from an existing licensee.~~higher subscription revenue.

We allocate certain costs of research, development and engineering, sales and marketing, and intellectual property to cost of revenue when they relate directly to our customer contracts. We record all remaining, or “residual,” costs as sales and marketing, research, development and engineering, general and administrative, and intellectual property expenses.

	Three			Three								Nine			Nine								Three			Three									Six			Six
	Months			Months								Months			Months								Months			Months									Months			Months
	Ended			Ended			Dollar		Percent			Ended			Ended			Dollar		Percent			Ended			Ended			Dollar			Percent			Ended			Ended			Dollar			Percent
	September 30,			September 30,			Increase		Increase			September 30,			September 30,			Increase		Increase			June 30,			June 30,			Increase			Increase			June 30,			June 30,			Increase			Increase
	2017			2016			(Decrease)		(Decrease)			2017			2016			(Decrease)		(Decrease)			2020			2019			(Decrease)			(Decrease)			2020			2019			(Decrease)			(Decrease)
Sales and marketing	$	4,075		$	2,945		$	1,130		38	%	$	12,064		$	8,756		$	3,308		38	%	$	4,633		$	5,087		$	(454	)		(9	)%	$	9,879		$	10,037		$	(158	)		(2	)%
Sales and marketing (as % of total revenue)		47	%		53	%							59	%		53	%							71	%		82	%								78	%		85	%

The ~~increase~~decrease in sales and marketing expenses for the three month period ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding three month period ended ~~September~~June 30, ~~2016,~~2019, was primarily due to:

The ~~increase~~decrease in sales and marketing expenses for the ~~nine~~six month period ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding ~~nine~~six month period ended ~~September~~June 30, ~~2016,~~2019, was primarily due to:

	Three			Three								Nine			Nine								Three			Three								Six			Six
	Months			Months								Months			Months								Months			Months								Months			Months
	Ended			Ended			Dollar		Percent			Ended			Ended			Dollar		Percent			Ended			Ended			Dollar		Percent			Ended			Ended			Dollar		Percent
	September 30,			September 30,			Increase		Increase			September 30,			September 30,			Increase		Increase			June 30,			June 30,			Increase		Increase			June 30,			June 30,			Increase		Increase
	2017			2016			(Decrease)		(Decrease)			2017			2016			(Decrease)		(Decrease)			2020			2019			(Decrease)		(Decrease)			2020			2019			(Decrease)		(Decrease)
Research, development and engineering	$	4,108		$	3,291		$	817		25	%	$	11,503		$	9,975		$	1,528		15	%	$	4,208		$	3,981		$	227		6	%	$	8,641		$	8,019		$	622		8	%
Research, development and engineering (as % of total revenue)		47	%		59	%							57	%		60	%							65	%		64	%							68	%		68	%

The increases in research, development and engineering expenses for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding three and ~~nine~~six month periods ended ~~September~~June 30, ~~2016, was~~2019, were primarily due to increased headcount and ~~compensation-related expenses of $0.7 million and $1.2 million, respectively.~~routine annual compensation adjustments for our employees.

	Three			Three								Nine			Nine								Three			Three								Six			Six
	Months			Months								Months			Months								Months			Months								Months			Months
	Ended			Ended			Dollar		Percent			Ended			Ended			Dollar		Percent			Ended			Ended			Dollar		Percent			Ended			Ended			Dollar		Percent
	September 30,			September 30,			Increase		Increase			September 30,			September 30,			Increase		Increase			June 30,			June 30,			Increase		Increase			June 30,			June 30,			Increase		Increase
	2017			2016			(Decrease)		(Decrease)			2017			2016			(Decrease)		(Decrease)			2020			2019			(Decrease)		(Decrease)			2020			2019			(Decrease)		(Decrease)
General and administrative	$	2,442		$	2,039		$	403		20	%	$	7,066		$	6,185		$	881		14	%	$	3,081		$	3,079		$	2		0	%	$	6,448		$	6,289		$	159		3	%
General and administrative (as % of total revenue)		28	%		37	%							35	%		37	%							47	%		50	%							51	%		53	%

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 and intellectual property.~~engineering.

The increase in general and administrative expenses for the three month period ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding three month period ended ~~September~~June 30, ~~2016,~~2019, was primarily due to:

The increase in general and administrative expenses for the ~~nine~~six month period ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding ~~nine~~six month period ended ~~September~~June 30, ~~2016,~~2019, was primarily due to:

~~We incur intellectual property expenses that arise primarily from costs associated with documenting, applying for, and maintaining domestic and international patents and trademarks.~~

~~Gross expenditures for intellectual property costs, before reflecting the effect of capitalized patent costs, primarily consist of:~~

~~Intellectual property expenses can vary from period to period based on the level of capitalized patent activity.~~

~~Intellectual property expenses were relatively flat for the three month period ended September 30, 2017, compared to the corresponding three month period ended September 30, 2016.~~

The decrease in intellectual property expenses for the nine month period ended September 30, 2017, compared to the corresponding nine month period ended September 30, 2016, was primarily due to lower write-offs of abandoned patent costs.

	Three		Three								Nine		Nine								Three		Three							Six		Six
	Months		Months								Months		Months								Months		Months							Months		Months
	Ended		Ended		Dollar			Percent			Ended		Ended		Dollar			Percent			Ended		Ended		Dollar		Percent			Ended		Ended		Dollar		Percent
	September 30,		September 30,		Increase			Increase			September 30,		September 30,		Increase			Increase			June 30,		June 30,		Increase		Increase			June 30,		June 30,		Increase		Increase
	2017		2016		(Decrease)			(Decrease)			2017		2016		(Decrease)			(Decrease)			2020		2019		(Decrease)		(Decrease)			2020		2019		(Decrease)		(Decrease)
Cost of revenue	$	170	$	196	$	(26	)		(13	)%	$	521	$	553	$	(32	)		(6	)%	$	196	$	179	$	17		9	%	$	386	$	361	$	25		7	%
Sales and marketing		364		265		99			37	%		1,074		715		359			50	%		604		489		115		24	%		1,083		1,008		75		7	%
Research, development and engineering		379		346		33			10	%		1,041		1,050		(9	)		(1	)%		402		357		45		13	%		801		711		90		13	%
General and administrative		784		568		216			38	%		1,994		1,613		381			24	%		1,125		991		134		14	%		2,252		1,973		279		14	%
Intellectual property		82		80		2			3	%		242		231		11			5	%
Total	$	1,779	$	1,455	$	324			22	%	$	4,872	$	4,162	$	710			17	%	$	2,327	$	2,016	$	311		15	%	$	4,522	$	4,053	$	469		12	%

The increases in stock-based compensation expense for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding three and ~~nine~~six month periods ended ~~September~~June 30, ~~2016,~~2019, were primarily due to ~~timing of~~more stock ~~grants and increased headcount.~~awards granted in the current year than prior years.

We anticipate incurring an additional ~~$15,812~~$15,836 in stock-based compensation expense through ~~September 2021~~June 30, 2024, for awards outstanding as of ~~September~~June 30, ~~2017.~~2020.

	Three			Three								Nine			Nine								Three			Three									Six			Six
	Months			Months								Months			Months								Months			Months									Months			Months
	Ended			Ended			Dollar		Percent			Ended			Ended			Dollar		Percent			Ended			Ended			Dollar			Percent			Ended			Ended			Dollar			Percent
	September 30,			September 30,			Increase		Increase			September 30,			September 30,			Increase		Increase			June 30,			June 30,			Increase			Increase			June 30,			June 30,			Increase			Increase
	2017			2016			(Decrease)		(Decrease)			2017			2016			(Decrease)		(Decrease)			2020			2019			(Decrease)			(Decrease)			2020			2019			(Decrease)			(Decrease)
Other income, net	$	174		$	69			105		152	%	$	408		$	157			251		160	%	$	79		$	231		$	(152	)		(66	)%	$	221		$	468		$	(247	)		(53	)%
Other income, net (as % of total revenue)		2	%		1	%							2	%		1	%							1	%		4	%								2	%		4	%

The ~~increases~~decreases in other income, net for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding three and ~~nine~~six month periods ended ~~September~~June 30, ~~2016,~~2019, were primarily due to ~~higher~~ lower interest income as a result of ~~higher cash~~lower interest rates and lower investment balances ~~higher~~as well as interest ~~rates on cash and investments, and changes~~expense accrued from the note payable issued under the Paycheck Protection Program in ~~foreign currency.~~April 2020.

The ~~benefit (provision)~~provision for income taxes ~~for the nine month periods ended September 30, 2017 and 2016~~ reflects current taxes, deferred taxes, and withholding taxes. The effective tax rate for each of the ~~nine~~six month periods ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019 was ~~1% and~~ 0%~~, respectively,~~ because we have a full valuation allowance recorded against our deferred tax assets. The current year effective tax rate was not affected by our adoption of ASU No. 2016-09, because the excess tax benefit from stock-based compensation for the three and nine months ended September 30, 2017 of $296 and $1,397, respectively, were offset by $296 and $1,397 of valuation allowance, respectively.

The valuation allowance against deferred tax assets as of ~~September~~June 30, ~~2017~~2020, was ~~$39,806,~~$51,842, an increase of ~~$14,918~~$4,033 from ~~$24,888~~$47,809 as of December 31, 2016. The adoption of ASU No. 2016-09 resulted in the recognition of deferred tax assets of $6,219 for previously unrecognized excess tax benefits as of December 31, 2016, which was offset by $6,219 of valuation allowance.2019.

We continually assess the applicability of a valuation allowance against our deferred tax assets. Based upon the positive and negative evidence available as of ~~September~~June 30, ~~2017,~~2020, 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.

	September 30,		December 31,		June 30,		December 31,
	2017		2016		2020		2019
Working capital	$	66,306	$	58,461	$	29,158	$	37,850
Current ratio (1)	18.5:1		14.1:1		5.2:1		8.0:1
Cash, cash equivalents and short-term marketable securities	$	60,887	$	56,134	$	30,493	$	36,817
Long-term marketable securities	$	—	$	4,392	$	—	$	—
Total cash, cash equivalents and marketable securities	$	60,887	$	60,526	$	30,493	$	36,817

The ~~$0.4 million increase~~$6,324 decrease in cash, cash equivalents and marketable securities at June 30, 2020, from December 31, 2019, resulted primarily from:

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, federal agency notes and corporate ~~notes, pre-refunded municipal bonds and U.S. treasuries.~~notes. Our investment policy requires our portfolio to be invested to ensure that the greater of ~~$3 million~~$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 million,~~$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 million,~~$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 ~~three~~six month periods ended June 30, 2020 and ~~nine months ended September 30, 2017 and 2016.~~2019.

	Nine			Nine									Six			Six
	Months			Months									Months			Months
	Ended			Ended			Dollar			Percent			Ended			Ended			Dollar		Percent
	September 30,			September 30,			Increase			Increase			June 30,			June 30,			Increase		Increase
	2017			2016			(Decrease)			(Decrease)			2020			2019			(Decrease)		(Decrease)
Net loss	$	(17,401	)	$	(15,916	)	$	(1,485	)		(9	)%	$	(16,369	)	$	(16,396	)	$	27		0	%
Non-cash items		6,671			6,054			617			10	%		5,698			5,172			526		10	%
Changes in operating assets and liabilities		(3,288	)		875			(4,163	)		(476	)%		493			249			244		98	%
Net cash used in operating activities	$	(14,018	)	$	(8,987	)	$	(5,031	)		(56	)%	$	(10,178	)	$	(10,975	)	$	797		7	%

Cash flows used in operating activities for the ~~nine~~six month period ended ~~September~~June 30, ~~2017,~~2020, decreased by $797, compared to the corresponding ~~nine~~six month period ended ~~September~~June 30, ~~2016, increased by $5.0 million,~~2019, primarily as ~~the~~a result of higher non-cash items and changes in operating assets and ~~liabilities and a~~liabilities. The increase in non-cash items was primarily due to higher ~~net loss, partially offset by higher non-cash items.~~stock-based compensation. The changes in operating assets and liabilities ~~were primarily~~was largely due to ~~higher~~timing of accounts receivable reflecting the $3.5 million license fee recorded during the nine month period ended September 30, 2017. The higher net loss was primarily the result of higher operating expenses reflecting higher investment in sales, marketing, and engineering, partially offset by higher license revenue. The higher non-cash items were primarily the result of higher stock-based compensation due to the timing of stock grants and increased headcount.accounts payable.

Cash flows from investing activities for the ~~nine~~six month period ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding ~~nine~~six month period ended ~~September~~June 30, ~~2016,~~2019, increased by ~~$19.4 million~~$7,455 from ~~$7.8 million~~$1,177 used to ~~$11.6 million~~$6,278 provided, primarily as a result of higher net maturities of marketable securities.

Cash flows provided by financing activities for the ~~nine~~six month period ended ~~September~~June 30, ~~2017,~~2020, compared to the corresponding ~~nine~~six month period ended ~~September~~June 30, ~~2016,~~2019, decreased by ~~$21.9 million~~$13,419 from ~~$38.3 million~~$18,040 to ~~$16.4 million,~~$4,621, primarily as a result of ~~lower sales~~reduced issuance of common ~~stock.~~stock, partially offset by proceeds from the note payable issued under the Paycheck Protection Program.

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 have~~

In May 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 million. Wells Fargo Securities, LLC will receive from us a ~~$100~~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 million, 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, 2020, we had sold 364 thousand shares at an average price of $57.64 under this Equity Distribution Agreement, totaling $21.0 million of cash proceeds, less $0.5 million of commissions and $0.3 million of stock issuance costs, for net cash proceeds of $20.2 million.

In April 2020, we entered into a promissory note in the amount of $5.0 million pursuant to the Paycheck Protection Program. The proceeds give us more time to observe financial market trends and assess the effects of the pandemic on our prospects to determine the best course of action concerning financing the business.

In June 2020, we filed a new shelf registration statement ~~in place,~~on Form S-3, that included $49.2 million of ~~which $17,775 was allocated for the sale of~~unsold securities from our ~~common stock in a registered direct offering in June 2017. This~~prior shelf registration statement ~~has $82,225 remaining for future issuance and expires~~filed in ~~June 2020.~~May 2017 that recently expired. Under the new shelf registration statement, we may sell securities in one or more offerings up to $100 million. 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 through the sale of shares under the Equity Distribution Agreement.

In July 2020, we announced a plan to restructure certain areas of operations to improve productivity, communication, time to market, and support. The changes will reduce the number of employees within the organization by approximately 7%. As a result, we expect to incur severance costs of $0.9 million during the quarter ending September 30, 2020, consisting of $0.4 million of cash-based severance and $0.5 million of stock-based severance. Annual operating costs are expected to decrease by $2.3 million, consisting of $2.1 million of cash-based compensation and $0.2 million of stock-based compensation.

We continuously review our liquidity and anticipated capital requirements in light of the uncertainty created by the COVID-19 pandemic. As described in Part I, Item 1, Note 12 “Note Payable,” to help ensure adequate liquidity during this period of uncertainty created by the COVID-19 pandemic, the Company entered into a promissory note with Stearns Bank, N.A. on April 16, 2020 (the “Note”), pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act. The Note has an aggregate principal amount of $5.0 million. Subject to the terms and limitations of the PPP, the Note may be forgiven in whole or in part. We believe that we have used the entire amount of the Note to fund expenses eligible for forgiveness under the PPP.

~~Other than the contractual obligations disclosed in our 2016 Annual Report, we~~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 ~~are~~is material to investors.

We are party to an operating lease for our corporate office in Beaverton, Oregon. In July 2015, we entered into an amendment with the landlord of our corporate office in Beaverton, Oregon, to extend the lease term through March 2024, with remaining rent payments totaling $3.1 million, 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 ~~Part II,~~ Item 1A. “Risk Factors” of ~~this Quarterly~~our 2019 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:

We believe that the risk factors specified above and the risk factors contained in Part ~~II,~~I, Item 1A. “Risk Factors” of our ~~Quarterly~~2019 Annual Report ~~on Form 10-Q for the quarter ended June 30, 2017,~~, 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.

~~There have been no material changes in market risk from the disclosures provided in Part II, Item 7A of our 2016 Annual Report.~~

We conducted an evaluation (pursuant to Rule 13a-15(b) of the ~~Securities~~ Exchange ~~Act of 1934 (the “Exchange Act”))~~Act), under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of ~~the Company’s~~our disclosure controls and procedures (as defined in Rule 13a-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. These disclosure controls and procedures are designed to ensure that information required to be disclosed by us in ~~our~~ reports that ~~are filed~~we file or ~~submitted~~submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that this information is accumulated and communicated to our management, including ~~the~~our principal executive officer and principal financial officer, ~~or persons performing similar functions,~~ as appropriate, to allow timely decisions regarding required disclosure.

Based on the evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that ~~these~~our disclosure controls and procedures, ~~were effective~~ as of the end of the period covered by this Quarterly Report on Form ~~10-Q.~~10-Q, were effective.

There ~~was~~were no ~~change~~changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the three month period ended ~~September~~June 30, ~~2017~~2020, that ~~has~~have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

We are subject from time to time to legal proceedings and claims arising in the ordinary course of business. At this time, we do not believe that the resolution of any such matters will have a material adverse effect on our financial position, results of operations or cash flows.

Our business, financial condition, results of operations and cash flows may be affected by a number of factors. Detailed information about risk factors that may affect Digimarc’s actual results are set forth in Part ~~II,~~I, Item ~~1A.~~1A: “Risk Factors” of our ~~Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.~~2019 Annual Report. The risks and uncertainties described in our ~~Quarterly~~2019 Annual Report ~~on Form 10-Q for the quarter ended June 30, 2017~~ are those risks of which we are aware and that we consider to be material to our business. If any of ~~these~~those risks and uncertainties ~~develops~~develop into actual events, our business, financial condition, results of operations or cash flows could be materially adversely affected. In that case, the trading price of our common stock could decline. ~~As of September 30, 2017,~~Except as set forth below, there have been no material changes to the risk factors ~~set forth~~previously disclosed in our 2019 Annual Report.

On April 16, 2020, we entered into a promissory note with Stearns Bank, N.A. in an aggregate principal amount of $5.0 million pursuant to the Paycheck Protection Program, or the PPP, under the CARES Act. On April 23, 2020, the Small Business Administration issued new guidance that questioned whether a public company with substantial market value and access to capital markets would qualify to participate in the PPP. Subsequently, on April 28, 2020 the Secretary of the Treasury and Small Business Administrator announced that the government will review all PPP loans of more than $2 million for which the borrower applies for forgiveness. Should we be audited or reviewed by the U.S. Department of the Treasury or Small Business Administration as a result of filing an application for forgiveness or otherwise, such audit or review could result in the diversion of management’s time and attention and legal and reputational costs. If we were to be audited and receive an adverse finding in such audit, we could be required to return the full amount of the PPP Note, which could reduce our liquidity, and potentially subject us to fines and penalties.

The emergence of the COVID-19 pandemic around the world, and particularly in the United States, presents significant risks to the Company, not all of which we are able to fully evaluate or foresee. Some of the effects that could directly or indirectly result from the COVID-19 pandemic include, without limitation, possible impacts on the health of the Company’s management and employees, impairment of the Company’s administrative, research, and development operations, disruption in supplier and customer relationships, changes in demand for our services and subscriptions, and the collectability of accounts receivables. Some of our projects with retail customers and partners have been delayed as a result of the COVID-19 pandemic, thereby potentially affecting our ability to fund our business through near-term revenue growth. The scope and nature of these impacts, most of which are beyond our control, continue to evolve and the outcomes remain uncertain.

These short-term effects may change over the long term depending on the duration and severity of the COVID-19 pandemic, the length of time before normal economic and operating conditions resume, the additional governmental actions that may be taken, the extensions of social restrictions that have been imposed to date, and many other factors that can vary materially by geography. Due to the above circumstances and as described generally in this Quarterly Report, ~~on Form 10-Q~~the Company’s results of operations for the ~~quarter~~three and six months ended June 30, ~~2017.~~2020 are not necessarily indicative of the results to be expected for the remainder of the fiscal year.

We ~~withhold (repurchase)~~repurchase shares of common stock in satisfaction of required withholding tax liability in connection with the vesting of restricted shares.

The following table sets forth information regarding purchases of our equity securities during the three month period ended ~~September~~June 30, ~~2017:~~2020:

							(d)								(d)
					(c)		Approximate						(c)		Approximate
					Total number		dollar value						Total number		dollar value
					of shares		of shares that						of shares		of shares that
	(a)		(b)		purchased as		may yet be		(a)		(b)		purchased as		may yet be
	Total number		Average price		part of publicly		purchased		Total number		Average price		part of publicly		purchased
	of shares		paid per		announced plans		under the plans		of shares		paid per		announced plans		under the plans
Period	purchased (1)		share (1)		or programs		or programs		purchased (1)		share (1)		or programs		or programs
Month 1
July 1, 2017 to July 31, 2017		—	$	—		—	$	—
April 1, 2020 to April 30, 2020										391	$	15.76		—	$	—
Month 2
August 1, 2017 to August 31, 2017		24,773	$	28.85		—	$	—
May 1, 2020 to May 31, 2020										21,397	$	15.61		—	$	—
Month 3
September 1, 2017 to September 30, 2017		—	$	—		—	$	—
June 1, 2020 to June 30, 2020										2,373	$	17.95		—	$	—
Total		24,773	$	28.85		—	$	—		24,161	$	15.84		—	$	—

On July 27, 2020, the Company adopted a plan to restructure certain areas of operations to improve productivity, communication, time to market, and support. The changes will reduce the number of employees within the organization by approximately 7%. As a result, the Company expects to incur severance costs of $0.9 million during the quarter ending September 30, 2020 consisting of $0.4 million of cash-based severance and $0.5 million of stock-based severance. Annual operating costs are expected to decrease by $2.3 million as a result of these reductions, consisting of $2.1 million of cash-based compensation and $0.2 million of stock-based compensation.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Title of Each Class		Trading Symbol		Name of Each Exchange on Which Registered
Common Stock, $0.001 Par Value Per Share		DMRC		The NASDAQ Stock Market LLC

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐ ~~(Do not check if a smaller reporting company)~~	Smaller reporting company	☐☒

Emerging growth company	☐

PART I FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):	3
	Consolidated Balance Sheets as of ~~September~~June 30, ~~2017~~2020 and December 31, ~~2016~~2019	3
	Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019	4
	Consolidated Statements of Shareholders’ Equity for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019	5
	Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
~~Item 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~	3118
Item 4.	Controls and Procedures	3130

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	3231
Item 1A.	Risk Factors	3231
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 5.	Other Information	33
Item 6.	Exhibits	3334
SIGNATURES		3435

	June 30,			December 31,
	2020			2019
Right of use assets	$	2,030		$	2,263
Lease liabilities, current	$	636		$	663
Lease liabilities, long-term	$	2,114		$	2,435

Weighted-average remaining life	3.7 years			4.1 years
Weighted-average discount rate		8.20	%		8.20	%

	Cash
	Payment
Year ending December 31:	Obligations
Remaining in 2020	$	421
2021		838
2022		862
2023		867
2024		218
Thereafter		—
Total lease payments		3,206
Imputed interest		(456	)
Total minimum lease payments	$	2,750

	As of		As of
	September 30,		December 31,
	2017		2016
Total unrecognized compensation costs	$	15,812	$	9,728

	Stock	Restricted
	Options	Stock
Weighted average period	~~1.63~~0.97 years	~~1.48~~1.50 years

	June 30,
	2020
Note payable	$	5,032
Accrued interest		8
Total	$	5,040

Note payable, current	$	2,245
Note payable, long-term		2,795
Total	$	5,040

Exhibit Number		Exhibit Description

10.1		~~Employment Agreement, effective as of September 1, 2017,~~Promissory Note between ~~Digimarc Corporation~~the Company and ~~Bruce Davis~~Stearns Bank, N.A., dated April 16, 2020 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on ~~September 6, 2017~~April 20, 2020 (File No. 001-34108))

31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1		Section 1350 Certification of Chief Executive Officer

32.2		Section 1350 Certification of Chief Financial Officer

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

Date: ~~October 27, 2017~~July 30, 2020	DIGIMARC CORPORATION

	By:	/s/ CHARLES BECK
		CHARLES BECK
		Chief Financial Officer
		(Duly Authorized Officer and Principal Financial and Accounting Officer)