UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File Number: 001-34108
DIGIMARC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization) |
26-2828185
(I.R.S. Employer Identification No.) |
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9405 SW Gemini Drive, Beaverton, Oregon 97008 (Address of principal executive offices) (Zip Code) |
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(503) 469-4800 (Registrant's telephone number, including area code) |
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 o No ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer
o
(Do not check if a smaller reporting company) |
Smaller reporting company ý |
Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes o No ý
As of November 20, 2008, there were 7,279,442 shares of the registrant's common stock, par value $0.001 per share, outstanding.
PART I FINANCIAL INFORMATION |
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Item 1. |
Financial Statements: |
3 |
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Balance Sheets as of September 30, 2008, August 1, 2008 and December 31, 2007 (Unaudited) |
3 | ||
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Statements of Operations for the Period August 2, 2008 through September 30, 2008, for the Period July 1, 2008 through August 1, 2008 and for the three-months ended September 30, 2007 (Unaudited) |
4 | ||
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Statements of Operations for the Period August 2, 2008 through September 30, 2008, for the Period January 1, 2008 through August 1, 2008 and for the nine-months ended September 30, 2007 (Unaudited) |
5 | ||
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Statements of Stockholders' Equity as of September 30, 2008, August 1, 2008 and December 31, 2007 (Unaudited) |
6 | ||
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Statements of Cash Flows for the Period August 2, 2008 through September 30, 2008, for the Period January 1, 2008 through August 1, 2008 and for the nine-months ended September 30, 2007 (Unaudited) |
7 | ||
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Notes to Financial Statements (Unaudited) |
8 | ||
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
23 | ||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
49 | ||
Item 4T. |
Controls and Procedures |
49 | ||
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Item 1. |
Legal Proceedings |
50 |
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Item 1A. |
Risk Factors |
50 | ||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
61 | ||
Item 4. |
Submission of Matters to a Vote of Security Holders |
61 | ||
Item 6. |
Exhibits |
62 | ||
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64 |
2
DIGIMARC CORPORATION
BALANCE SHEETS
(In thousands, except share data)
(UNAUDITED)
|
Successor |
|
Predecessor | Predecessor | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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September 30,
2008 |
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August 1,
2008 |
December 31,
2007(1) |
||||||||||
ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | 44,538 | $ | 50,900 | $ | 29,145 | ||||||||
Short-term investments |
4,920 | 3,849 | 3,568 | |||||||||||
Trade accounts receivable, net |
3,579 | 3,077 | 3,752 | |||||||||||
Other current assets |
575 | 4,757 | 387 | |||||||||||
Total current assets |
53,612 | 62,583 | 36,852 | |||||||||||
Property and equipment, net |
1,296 | 1,341 | 1,227 | |||||||||||
Intangibles, net |
187 | | | |||||||||||
Other assets, net |
167 | 187 | 372 | |||||||||||
Total assets |
$ | 55,262 | $ | 64,111 | $ | 38,451 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable and other accrued liabilities |
$ | 825 | $ | 1,208 | $ | 464 | ||||||||
Accrued payroll and related costs |
1,654 | 2,053 | 199 | |||||||||||
Accrued merger related liabilities |
1,906 | 10,766 | | |||||||||||
Deferred revenue |
2,403 | 2,054 | 2,734 | |||||||||||
Total current liabilities |
6,788 | 16,081 | 3,397 | |||||||||||
Long-term liabilities |
281 | 237 | 215 | |||||||||||
Total liabilities |
7,069 | 16,318 | 3,612 | |||||||||||
Commitments and contingencies (Note 9) |
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Stockholders' equity: |
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Net parent's investment |
| 47,793 | 34,839 | |||||||||||
Preferred stock (10,000 shares issued and outstanding at September 30, 2008) |
50 | | | |||||||||||
Common stock (7,143,442 shares issued and outstanding at September 30, 2008) |
7 | | | |||||||||||
Additional paid-in capital |
47,736 | | | |||||||||||
Retained earnings |
400 | | | |||||||||||
Total stockholders' equity |
48,193 | 47,793 | 34,839 | |||||||||||
Total liabilities and stockholders' equity |
$ | 55,262 | $ | 64,111 | $ | 38,451 | ||||||||
See Notes to Unaudited Financial Statements.
3
DIGIMARC CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
|
Successor |
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Predecessor | Predecessor | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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Period
August 2, 2008 through September 30, 2008 |
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Period
July 1, 2008 through August 1, 2008 |
Three Months
Ended September 30, 2007 |
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Revenue: |
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Service |
$ | 1,645 | $ | 921 | $ | 2,063 | ||||||||
Product and subscription |
1,536 | 829 | 1,244 | |||||||||||
Total revenue |
3,181 | 1,750 | 3,307 | |||||||||||
Cost of revenue: |
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Service |
890 | 527 | 926 | |||||||||||
Product and subscription |
44 | 25 | 67 | |||||||||||
Total cost of revenue |
934 | 552 | 993 | |||||||||||
Gross profit |
2,247 | 1,198 | 2,314 | |||||||||||
Operating expenses: |
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Sales and marketing |
390 | 589 | 634 | |||||||||||
Research, development and engineering |
780 | 239 | 656 | |||||||||||
General and administrative |
932 | 442 | 797 | |||||||||||
Intellectual property |
120 | 176 | 373 | |||||||||||
Transitional services |
(196 | ) | | | ||||||||||
Total operating expenses |
2,026 | 1,446 | 2,460 | |||||||||||
Operating income (loss) |
221 | (248 | ) | (146 | ) | |||||||||
Other income (expense), net |
179 | 75 | 321 | |||||||||||
Income (loss) before provision for income taxes |
400 | (173 | ) | 175 | ||||||||||
(Provision) benefit for income taxes |
| | | |||||||||||
Net income (loss) |
$ | 400 | $ | (173 | ) | $ | 175 | |||||||
Earnings (loss) per share: |
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Net income (loss) per sharebasic |
$ | 0.06 | ||||||||||||
Net income (loss) per sharediluted |
$ | 0.06 | ||||||||||||
Weighted average shares outstandingbasic |
7,143 | |||||||||||||
Weighted average shares outstandingdiluted |
7,143 | |||||||||||||
Pro-forma earnings (loss) per share: |
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Net income (loss) per sharebasic |
$ | (0.02 | ) | $ | 0.02 | |||||||||
Net income (loss) per sharediluted |
$ | (0.02 | ) | $ | 0.02 | |||||||||
Weighted average shares outstandingbasic |
7,143 | 7,143 | ||||||||||||
Weighted average shares outstandingdiluted |
7,143 | 7,143 |
See Notes to Unaudited Financial Statements.
4
DIGIMARC CORPORATION
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
|
Successor |
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Predecessor | Predecessor | ||||||||||
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Period
August 2, 2008 through September 30, 2008 |
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Period
January 1, 2008 through August 1, 2008 |
Nine Months
Ended September 30, 2007 |
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Revenue: |
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Service |
$ | 1,645 | $ | 6,456 | $ | 5,691 | ||||||||
Product and subscription |
1,536 | 5,494 | 3,947 | |||||||||||
Total revenue |
3,181 | 11,950 | 9,638 | |||||||||||
Cost of revenue: |
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Service |
890 | 3,519 | 2,728 | |||||||||||
Product and subscription |
44 | 145 | 151 | |||||||||||
Total cost of revenue |
934 | 3,664 | 2,879 | |||||||||||
Gross profit |
2,247 | 8,286 | 6,759 | |||||||||||
Operating expenses: |
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Sales and marketing |
390 | 1,928 | 1,940 | |||||||||||
Research, development and engineering |
780 | 2,071 | 2,214 | |||||||||||
General and administrative |
932 | 2,349 | 2,498 | |||||||||||
Intellectual property |
120 | 1,102 | 1,217 | |||||||||||
Transitional services |
(196 | ) | | | ||||||||||
Total operating expenses |
2,026 | 7,450 | 7,869 | |||||||||||
Operating income (loss) |
221 | 836 | (1,110 | ) | ||||||||||
Other income (expense), net |
179 | 590 | 1,026 | |||||||||||
Income (loss) before provision for income taxes |
400 | 1,426 | (84 | ) | ||||||||||
(Provision) benefit for income taxes |
| (11 | ) | (9 | ) | |||||||||
Net income (loss) |
$ | 400 | $ | 1,415 | $ | (93 | ) | |||||||
Earnings (Loss) Per share: |
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Net income (loss) per sharebasic |
$ | 0.06 | ||||||||||||
Net income (loss) per sharediluted |
$ | 0.06 | ||||||||||||
Weighted average shares outstandingbasic |
7,143 | |||||||||||||
Weighted average shares outstandingdiluted |
7,143 | |||||||||||||
Pro-forma Earnings (loss) per share: |
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Net income (loss) per sharebasic |
$ | 0.20 | $ | (0.01 | ) | |||||||||
Net income (loss) per sharediluted |
$ | 0.20 | $ | (0.01 | ) | |||||||||
Weighted average shares outstandingbasic |
7,143 | 7,143 | ||||||||||||
Weighted average shares outstandingdiluted |
7,143 | 7,143 |
See Notes to Unaudited Financial Statements.
5
DIGIMARC CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(UNAUDITED)
|
Preferred stock | Common stock |
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Additional
paid-in capital |
Retained
Earnings |
Net Parent
Investment |
Total
stockholders' equity |
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Shares | Amount | Shares | Amount | |||||||||||||||||||||
PREDECESSOR |
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BALANCE AT DECEMBER 31, 2007 |
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$ |
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|
$ |
|
$ |
|
$ |
|
$ |
34,839 |
$ |
34,839 |
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Cash from Parent stock activity |
| | | | | | 23,862 | 23,862 | |||||||||||||||||
Stock compensation allocated from Parent |
| | | | | | 914 | 914 | |||||||||||||||||
Net activity with Parent |
| | | | | | (13,237 | ) | (13,237 | ) | |||||||||||||||
Net income (loss) |
| | | | | | 1,415 | 1,415 | |||||||||||||||||
BALANCE AT AUGUST 1, 2008 |
| $ | | | $ | | $ | | $ | | $ | 47,793 | $ | 47,793 | |||||||||||
SUCCESSOR |
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August 2, 2008: Stock issued through spin-off of Digimarc |
10,000 |
$ |
50 |
7,143,442 |
$ |
7 |
$ |
47,736 |
$ |
|
$ |
(47,793 |
) |
$ |
|
||||||||||
Net income (loss) |
| | | | | 400 | | 400 | |||||||||||||||||
BALANCE AT SEPTEMBER 30, 2008 |
10,000 | $ | 50 | 7,143,442 | $ | 7 | $ | 47,736 | $ | 400 | $ | | $ | 48,193 | |||||||||||
See Notes to Unaudited Financial Statements.
6
DIGIMARC CORPORATION
STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
|
Successor |
|
Predecessor | Predecessor | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
January 1, 2008 through August 1, 2008 |
Nine Months
Ended September 30, 2007 |
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Cash flows from operating activities: |
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Net income (loss) |
$ | 400 | $ | 1,415 | $ | (93 | ) | |||||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
69 | 568 | 458 | |||||||||||||
Stock-based compensation expense |
| 914 | 899 | |||||||||||||
Increase (decrease) in allowance for doubtful accounts |
| (43 | ) | | ||||||||||||
Other non-cash charges |
| 405 | | |||||||||||||
Changes in operating assets and liabilities: |
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Trade accounts receivable, net |
(502 | ) | 718 | 607 | ||||||||||||
Other current assets |
4,182 | (4,370 | ) | (59 | ) | |||||||||||
Other assets, net |
20 | (103 | ) | (11 | ) | |||||||||||
Accounts payable and other accrued liabilities |
(383 | ) | 744 | (62 | ) | |||||||||||
Accrued payroll and related costs |
(399 | ) | 1,854 | (579 | ) | |||||||||||
Accrued merger related liabilities |
(8,860 | ) | 10,766 | | ||||||||||||
Deferred revenue |
343 | (677 | ) | (212 | ) | |||||||||||
Other liabilities |
50 | 19 | (41 | ) | ||||||||||||
Net cash provided by (used in) operating activities |
(5,080 | ) | 12,210 | 907 | ||||||||||||
Cash flows from investing activities: |
||||||||||||||||
Purchase of property and equipment |
(24 | ) | (799 | ) | (294 | ) | ||||||||||
Capitalized patent costs |
(187 | ) | | | ||||||||||||
Sale or maturity of short-term investments |
69,674 | 136,767 | 105,284 | |||||||||||||
Purchase of short-term investments |
(70,745 | ) | (137,048 | ) | (109,042 | ) | ||||||||||
Net cash provided by (used in) investing activities |
(1,282 | ) | (1,080 | ) | (4,052 | ) | ||||||||||
Cash flows from financing activities: |
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Cash from Parent stock activity |
| 23,862 | 1,922 | |||||||||||||
Net activity with Parent |
| (13,237 | ) | (3,054 | ) | |||||||||||
Net cash provided by (used in) financing activities |
| 10,625 | (1,132 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
(6,362 | ) | 21,755 | (4,277 | ) | |||||||||||
Cash and cash equivalents at beginning of period |
50,900 | 29,145 | 33,073 | |||||||||||||
Cash and cash equivalents at end of period |
$ | 44,538 | $ | 50,900 | $ | 28,796 | ||||||||||
See Notes to Unaudited Financial Statements.
7
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data)
(UNAUDITED)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Digimarc Corporation ("Digimarc" or the "Company") enables governments and enterprises around the world to give digital identities to media and objects that computers can sense and recognize and to which they can react. The Company's technology provides the means to infuse persistent digital information, perceptible only to computers and digital devices, into all forms of media content. The unique digital identifier placed in media generally persists with it regardless of the distribution path and whether it is copied, manipulated or converted to a different format, and does not affect the quality of the content or the enjoyment or other traditional uses of it. The Company's technology permits computers and digital devices to quickly identify relevant data from vast amounts of media content.
Acquisition of Old Digimarc and Separation of DMRC Corporation
On June 29, 2008, the former Digimarc Corporation ("Old Digimarc") entered into an amended and restated merger agreement, as amended by Amendment No. 1 dated as of July 17, 2008, which we refer to as the Old Digimarc/L-1 merger agreement, with L-1 Identity Solutions, Inc. and Dolomite Acquisition Co., a wholly owned subsidiary of L-1, pursuant to which Dolomite, in a transaction which we refer to as the offer, purchased more than 90% of the outstanding shares of Old Digimarc common stock, together with the associated preferred stock purchase rights, for $12.25 per share. On August 13, 2008, following the completion of the offer, Dolomite merged with and into Old Digimarc with Old Digimarc continuing as the surviving company and a wholly owned subsidiary of L-1.
On August 1, 2008, prior to the initial expiration of the offer, Old Digimarc contributed all of the assets and liabilities related to its digital watermarking business, which we refer to as the Digital Watermarking Business, together with all of Old Digimarc's cash, to DMRC LLC. Following the restructuring, all of the limited liability company interests of DMRC LLC were transferred to a newly created trust for the benefit of Old Digimarc record holders. DMRC LLC then merged with and into DMRC Corporation, and each limited liability company interest of DMRC LLC was converted into one share of common stock of DMRC Corporation. After completion of the Old Digimarc/L-1 merger, DMRC Corporation changed its name to Digimarc Corporation. The shares of Digimarc common stock were held by the trust until the Form 10, General Form for Registration of Securities , was declared effective by the Securities and Exchange Commission ("SEC") on October 16, 2008, at which time the shares were distributed to Old Digimarc record holders, as beneficiaries of the trust, pro rata in accordance with their ownership of shares of Old Digimarc common stock on August 1, 2008 at 5:30 pm Eastern time, the spin-off record date and time. Each Old Digimarc record holder was entitled to receive one share of Digimarc common stock for every three and one half shares of Old Digimarc common stock held by the stockholder as of the record date and time.
Old Digimarc, L-1, DMRC LLC and DMRC Corporation entered into various agreements in order to accomplish the spin-off transaction.
Interim Financial Statements
The accompanying 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
8
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
adjustments) necessary to fairly reflect the financial condition and the results of operations for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (the "U.S.") have been condensed or omitted in accordance with the rules and regulations of the SEC.
These financial statements should be read in conjunction with the audited financial statements included in the Company's Form 10. The results of operations for the interim periods presented in these financial statements are not necessarily indicative of the results for the full year.
Basis of Accounting; Predecessor Financial Statements
The predecessor financial statements include certain accounts of Old Digimarc and the assets, liabilities and results of operations of Old Digimarc's Digital Watermarking Business that were separated, or "carved-out" from Old Digimarc. The operating expenses included in the predecessor financial statements include proportional allocations of various shared services common costs of Old Digimarc because specific identification of the expenses was not practicable. The common costs include expenses from Old Digimarc related to various operating shared services cost centers, including executive, finance and accounting, human resources, legal, marketing, intellectual property, facilities and information technology.
Management believes that the assumptions underlying the predecessor financial statements are reasonable. The cost allocation methods applied to certain shared services common cost centers include the following:
9
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
determining the relative balances of property, management excluded the central information technology assets because they supported the entire organization.
Other key assumptions differing from the historical accounting of Old Digimarc:
10
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
The financial information in the predecessor financial statements does not include all of the expenses that would have been incurred had the predecessor been a separate, stand-alone public entity. As such, the predecessor financial information does not reflect the financial position, results of operations and cash flows of Digimarc's current business, had the predecessor operated as a separate, stand-alone public entity during the periods presented in the predecessor financial statements. Additionally, the predecessor financial statements include proportional allocations of various shared services common costs of Old Digimarc because specific identification of these expenses was not practicable. It is expected that the initial operating costs of Digimarc on a stand-alone basis will be higher than those allocated to the predecessor operations under the shared services methodology applied in the predecessor financial statements. Consequently, the financial position, results of operations and cash flows reflected in the predecessor financial statements may not be indicative of those that would have been achieved had the predecessor operated as a separate, stand-alone entity for the periods reflected in the predecessor financial statements.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires Digimarc to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Certain of the Company's accounting policies require higher degrees of judgment than others in their application. These include revenue recognition on long-term service contracts, impairments and estimation of useful lives of long-lived assets, reserves for uncollectible accounts receivable, contingencies and litigation and stock-based compensation. Digimarc bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
11
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
Investments
The Company considers all investments with original maturities over 90 days that mature in less than one year to be short-term investments. Short-term investments include federal agency notes, company notes, and commercial paper. The Company's marketable securities are generally classified as held-to-maturity as of the balance sheet date and are reported at amortized cost, which approximates market. The book value of these investments approximates fair market value and, accordingly, no amounts have been recorded to other comprehensive income.
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 of fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether 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 the Company.
Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using a method that approximates the effective-interest method. Under this method, dividend and interest income are recognized when earned.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments, trade accounts receivable, accounts payable and accrued payroll approximate fair value due to the short-term nature of these instruments. The carrying amounts of capital leases approximate fair value because the stated interest rates approximate current market rates. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument when available. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Concentrations of Business and Credit Risk
A significant portion of our business depends on a limited number of large contracts. The loss of any large contract may result in loss of revenue and margin on a prospective basis.
Financial instruments that potentially subject Digimarc to concentrations of credit risk consist primarily of cash and cash equivalents, investments, and trade and unbilled accounts receivable. Digimarc places its cash and cash equivalents with major banks and financial institutions and at times deposits may exceed insured limits. Other than cash used for operating needs, which may include short-term investments with our principal banks, our investment policy limits its credit exposure to any one financial institution or type of financial instrument by limiting the maximum of 5% or $1,000, whichever is greater, to be invested in any one issuer except for the U.S. Government and U. S. federal
12
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
agencies, which have no limits, at the time of purchase. As a result, the credit risk associated with cash and investments is believed to be minimal.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets . This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Software Development Costs
Under SFAS No. 86, Accounting for the Cost of Computer Software to Be Sold, Leased, or Otherwise Marketed, software development costs are to be capitalized beginning when a product's technological feasibility has been established and ending when a product is made available for general release to customers. To date, the establishment of technological feasibility of the Company's products has occurred shortly before general release and, therefore, software development costs qualifying for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs and has charged all such costs to research and development expense.
Research and Development
Research and development costs are expensed as incurred as defined in SFAS No. 2, Accounting for Research and Development Costs . Digimarc accounts for amounts received under its funded research and development arrangements in accordance with the provisions of SFAS No. 68, Research and Development Arrangements . Under the terms of the arrangements, Digimarc is not obligated to repay any of the amounts provided by the funding parties. As a result, Digimarc recognizes revenue as the services are performed.
Patent Costs
Effective August 2, 2008, 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 award date, which varies depending on the pendency period of the application, generally approximating seventeen years. Capitalized patent costs include internal legal labor, professional legal fees, government filing fees and translation fees related to obtaining the Company's patent portfolio. Such costs were expensed in the predecessor financial statements.
13
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
1. Description of Business and Summary of Significant Accounting Policies (Continued)
Effective August 2, 2008, costs associated with the maintenance and annuity fees of patents are accounted for as prepaid assets at the time of payment and amortized over the respective periods, generally from one to four years. These costs were expensed in the predecessor financial statements.
Revenue Recognition
The Company's revenue consists of subscription revenue, which includes hardware and software sales, royalties and revenues from the licensing of digital watermarking products and related authentication services. The Company's revenue recognition policy follows SEC Staff Accounting Bulletin ("SAB") No. 104 Revenue Recognition, SOP No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Modification of SOP No. 97-2, Software Recognition, With Respect to Certain Transactions, SOP 81-1 Accounting for the Performance of Construction Type and Certain Production-Type Contracts, and Emerging Issues Task Force ("EITF") Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.
Other income (expense), net
The Company's other income (expense), net consists primarily of interest income earned on cash and short term investments. Some minor amounts are included in this category that relate to interest expense for capital lease allocations from Old Digimarc and for other non-operating items.
2. Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value. This statement does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective the first fiscal year beginning after November 15, 2007. The Company has applied the provisions of this standard regarding the framework of measuring fair value and noted no material effect on the current financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Option for the Financial Assets and Financial Liabilities, which permits entities to choose to measure certain financial assets and liabilities at fair value. SFAS No. 159 is effective the first fiscal year beginning after November 15, 2007. The Company has elected not to measure certain financial assets and liabilities at fair value as permitted by SFAS No. 159.
In April 2008, FASB issued Staff Position No. FAS 142-3 Determination of the Useful Life of Intangible Assets ("FSP 142-3"). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets . The intent of this Staff Position is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007), Business Combinations , and other U.S. generally accepted accounting principles.
14
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
2. Recent Accounting Pronouncements (Continued)
FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company does not expect the adoption of this Staff Position to have a material effect on its financial position, results of operations or cash flows.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles , which identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the U.S. This statement was approved on September 16, 2008 and became effective 60 days thereafter. The Company is currently evaluating the impact of SFAS 162, but does not expect the adoption of this pronouncement will have a material effect on the Company's financial statements.
3. Revenue Recognition
Some customer arrangements encompass multiple deliverables, such as software, hardware sales, consumables sales, maintenance fees, and software development fees. The Company accounts for these arrangements in accordance with EITF Issue No. 00-21. If the deliverables meet the criteria in EITF Issue No. 00-21, the deliverables are divided into separate units of accounting and revenue is allocated to the deliverables based on their relative fair values. The criteria specified in EITF Issue No. 00-21 are as follows: (i) the delivered item has value to the customer on a stand-alone basis, (ii) there is objective and reliable evidence of the fair value of the undelivered item, and (iii) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor. For the Company's purposes, fair value is generally defined as the price at which a customer could purchase each of the elements independently from other vendors or as the price that the Company has sold the element separately to another customer. Management applies judgment to ensure appropriate application of EITF Issue No. 00-21, including value allocation among multiple deliverables, determination of whether undelivered elements are essential to the functionality of delivered elements and timing of revenue recognition, among others. Revenue is recognized in accordance with SAB 104 when the following four criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collection is probable.
AICPA SOP No. 98-9 requires that revenue be recognized using the "residual method" in circumstances when vendor specific objective evidence ("VSOE") exists only for undelivered elements. Under the residual method, revenue is recognized as follows: (1) the total fair value of undelivered elements, as indicated by VSOE, is deferred and subsequently recognized in accordance with the relevant sections of AICPA SOP No. 97-2, and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements.
15
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
3. Revenue Recognition (Continued)
Applicable revenue recognition criteria is considered separately for each separate unit of accounting as follows:
4. Segment Information
Geographic Information
The Company derives its revenue from a single reporting segment: media management solutions. Revenue is generated in this segment through licensing of intellectual property, subscriptions to various products and services, and the delivery of services pursuant to contracts with various customers. The Company markets its products in the U.S. and in non-U.S. countries through its sales personnel.
16
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
4. Segment Information (Continued)
Revenue by geographic area is as follows:
|
Successor |
|
Predecessor | Predecessor | Predecessor | Predecessor | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
July 1, 2008 through August 1, 2008 |
Three Months
Ended September 30, 2007 |
Period
January 1, 2008 through August 1, 2008 |
Nine Months
Ended September 30, 2007 |
|||||||||||||
Domestic |
$ | 1,541 | $ | 960 | $ | 998 | $ | 6,274 | $ | 2,672 | |||||||||
International |
1,640 | 790 | 2,309 | 5,676 | 6,966 | ||||||||||||||
Total |
$ | 3,181 | $ | 1,750 | $ | 3,307 | $ | 11,950 | $ | 9,638 | |||||||||
Major Customers
Customers who accounted for more than 10% of the Company's revenues:
|
Successor |
|
Predecessor | Predecessor | Predecessor | Predecessor | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
July 1, 2008 through August 1, 2008 |
Three Months
Ended September 30, 2007 |
Period
January 1, 2008 through August 1, 2008 |
Nine Months
Ended September 30, 2007 |
||||||||||||
Customer A |
44 | % | 40 | % | 62 | % | 39 | % | 62 | % | ||||||||
Customer B |
35 | % | 38 | % | * | 38 | % | * | ||||||||||
Customer C |
* | * | * | * | 11 | % |
5. Stock-Based Compensation
Stock-based compensation includes expense charges for all stock-based awards to employees and directors. Such awards include option grants, restricted stock awards, and shares expected to be purchased under an employee stock purchase plan. Stock compensation expense was allocated to the predecessor based on a combination of specific and shared services resource allocations from Old Digimarc. All cash flow related to stock compensation generated by Old Digimarc was retained by Digimarc.
17
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
5. Stock-Based Compensation (Continued)
Stock-based Compensation Allocated from Old Digimarc.
|
Successor |
|
Predecessor | Predecessor | Predecessor | Predecessor | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
July 1, 2008 through August 1, 2008 |
Three Months
Ended September 30, 2007 |
Period
January 1, 2008 through August 1, 2008 |
Nine Months
Ended September 30, 2007 |
|||||||||||||
Stock-based compensation: |
|||||||||||||||||||
Cost of revenue |
$ | | $ | 14 | $ | 28 | $ | 99 | $ | 68 | |||||||||
Sales and marketing |
| 32 | 72 | 208 | 216 | ||||||||||||||
Research, development and engineering |
| 4 | 12 | 34 | 32 | ||||||||||||||
General and administrative |
| 81 | 183 | 537 | 548 | ||||||||||||||
Intellectual property |
| 5 | 13 | 35 | 35 | ||||||||||||||
Total stock-based compensation |
$ | | $ | 136 | $ | 308 | $ | 913 | $ | 899 | |||||||||
For the period August 2, 2008 through September 30, 2008 there were no restricted stock or stock option grants awarded or outstanding. Accordingly, there was no stock compensation expense.
6. Trade Accounts Receivable
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Revenue earned which has not been invoiced as of the balance sheet date, and generally billed the following month, is classified as unbilled trade receivables in the balance sheets.
|
Successor |
|
Predecessor | Predecessor | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2008 |
|
August 1, 2008 | December 31, 2007 | |||||||||
Billed trade receivables, net |
$ | 2,655 | $ | 2,162 | $ | 3,236 | |||||||
Unbilled trade receivables |
924 | 915 | 559 | ||||||||||
Subtotal |
3,579 | 3,077 | 3,795 | ||||||||||
Allowance for doubtful accounts |
| | (43 | ) | |||||||||
Trade accounts receivable, net |
$ | 3,579 | $ | 3,077 | $ | 3,752 | |||||||
Unpaid deferred revenues included in accounts receivable |
$ | 1,830 | $ | 300 | $ | 2,271 | |||||||
18
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
6. Trade Accounts Receivable (Continued)
Allowance for doubtful accounts
The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines the allowance based on historical write-off experience and current information. The Company reviews its allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Unpaid deferred revenues
The unpaid deferred revenues that are included in accounts receivable are billed in accordance with the provisions of the contracts with the Company's customers.
Major customers
Customers who accounted for more than 10% of accounts receivable, net:
|
Successor |
|
Predecessor | Predecessor | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2008 |
|
August 1, 2008 | December 31, 2007 | ||||||||
Customer A |
34 | % | 61 | % | 64 | % | ||||||
Customer B |
49 | % | 24 | % | * | |||||||
Customer C |
* | * | 11 | % |
7. Property and Equipment
Property and equipment are stated at cost. Property and equipment under capital lease obligations are stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value of the leased assets at the inception of the lease. Repairs and maintenance are charged to expense when incurred.
Depreciation on property and equipment is calculated by the straight-line method over the estimated useful lives of the assets, generally two to seven years. Property and equipment held under capital leases are amortized by the straight-line method over the shorter of the lease term or the
19
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
7. Property and Equipment (Continued)
estimated useful life. Amortization of property and equipment under capital lease is included in depreciation expense.
|
Successor |
|
Predecessor | Predecessor | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
September 30, 2008 |
|
August 1, 2008 | December 31, 2007 | ||||||||
|
(unaudited)
|
|
|
|
||||||||
Office furniture fixture |
$ | 291 | $ | 1,090 | $ | 1,086 | ||||||
Equipment |
752 | 2,551 | 3,411 | |||||||||
Leasehold improvements |
320 | 696 | 679 | |||||||||
|
1,363 | 4,337 | 5,176 | |||||||||
Less accumulated depreciation and amortization |
(67 | ) | (2,996 | ) | (3,949 | ) | ||||||
|
$ | 1,296 | $ | 1,341 | $ | 1,227 | ||||||
8. Transitional Services
In connection with the sale of Old Digimarc's Secure ID Business and the spin-off of the Digital Watermarking Business, Old Digimarc and Digimarc entered into a transition services agreement to provide one another with transition services and other assistance substantially consistent with the services provided before the spin-off.
To enable Old Digimarc to continue its operation of the Secure ID Business and facilitate the effective transition of the Digital Watermarking Business to Digimarc, under the transition services agreement Old Digimarc provides the following services or support to Digimarc: information technology services and legal services. Similarly, Digimarc provides the following services or support to Old Digimarc: accounting and tax services, information technology services, legal services, human resource services and facilities.
The fees for the transition services generally are intended to cover each party's reasonable costs incurred in connection with providing the transition services. Hourly rates for personnel performing transition services were determined based on fully loaded costs, taking into account base pay, a bonus based on obtaining target earnings, payroll taxes, benefit costs, a pro rata portion of overhead charges paid by Old Digimarc or Digimarc, as applicable, and the current year stock compensation charge for the individual, divided by the total hours available for the employee for the year, taking into account the need for administrative time.
The net transitional services expenses reimbursed to Digimarc aggregated $196 for the period August 2, 2008 through September 30, 2008 and are expected to decline through mid-2009 as the amount of transition services decline.
9. Income Taxes
Old Digimarc. The provision for income taxes reflects withholding tax expense in various foreign jurisdictions. For all historic periods reported in the financial statements, Old Digimarc maintained valuation allowances against its net deferred tax assets, including net operating loss carryforwards,
20
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
9. Income Taxes (Continued)
because it was more likely than not that the deferred taxes would not be realized. The provision for income taxes included foreign taxes withheld by Old Digimarc's customers and paid to foreign jurisdictions on its behalf. The predecessor financial statements indicate cumulative losses through August 1, 2008. Furthermore, the amounts of cumulative expenses in the financial statements that were not allowed for federal and state income tax purposes were not sufficient to result in positive taxable income which would have required the Company to record income tax expense. As a result, no Federal or state income tax benefit was recognized for the book losses that were incurred in those periods prior to 2007 and no income tax expense was recognized during the 2007 and 2008 periods because any expense was offset by the benefit of net operating loss carry-forwards. Digimarc as a separate legal entity will not benefit from any of the carryforward tax attributes of Old Digimarc, including net operating loss carryforwards.
Digimarc. There was no provision for income taxes of Digimarc for the period from August 2, 2008 through September 30, 2008 because the net differences between book and taxable income for the period are expected to result in no tax liabilities and there was no withholding tax expense in any foreign jurisdictions. Furthermore, a valuation allowance will be maintained against the net deferred tax assets until such time that the Company is reasonably able to predict that the tax assets will be realized.
10. Commitments and Contingencies
Certain of the Company's product license and services agreements include an indemnification provision for claims from third parties relating to the Company's intellectual property. Such indemnification provisions are accounted for in accordance with SFAS No. 5, Accounting for 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. Although the ultimate outcome of these matters cannot be determined, management believes that, as of September 30, 2008, the final disposition of these proceedings will not have a material adverse effect on the financial position, results of operations, or liquidity of the Company. No accrual has been recorded because the amounts are not probable or reasonably estimatable in accordance with SFAS No. 5, Accounting for Contingencies .
21
NOTES TO FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(UNAUDITED)
11. Quarterly Financial Information
|
Predecessor | Predecessor | Predecessor |
|
Successor | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Quarter ended:
|
March 31 | June 30 |
Period
July 1 through August 1 |
|
Period
August 2 through September 30 |
||||||||||
2008 |
|||||||||||||||
Service revenue |
$ | 2,548 | $ | 2,987 | $ | 921 | $ | 1,645 | |||||||
License and subscription revenue |
2,537 | 2,128 | 829 | 1,536 | |||||||||||
Total revenue |
5,085 | 5,115 | 1,750 | 3,181 | |||||||||||
Total cost of revenue |
1,408 | 1,704 | 552 | 934 | |||||||||||
Gross profit |
3,677 | 3,411 | 1,198 | 2,247 | |||||||||||
Gross profit percent, service revenue |
47 | % | 45 | % | 43 | % | 46 | % | |||||||
Gross profit percent, license and subscription
|
98 | % | 97 | % | 97 | % | 97 | % | |||||||
Gross profit percent, total |
72 | % | 67 | % | 69 | % | 71 | % | |||||||
Sales and marketing |
656 | 683 | 589 | 390 | |||||||||||
Research, development and engineering |
922 | 910 | 239 | 780 | |||||||||||
General and administrative |
980 | 927 | 442 | 932 | |||||||||||
Intellectual property |
478 | 448 | 176 | 120 | |||||||||||
Transitional services |
| | | (196 | ) | ||||||||||
Operating income (loss) |
641 | 443 | (248 | ) | 221 | ||||||||||
Net income (loss) |
924 | 664 | (173 | ) | 400 |
|
Predecessor | Predecessor | Predecessor | Predecessor | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Quarter ended:
|
March 31 | June 30 | September 30 | December 31 | |||||||||
2007 |
|||||||||||||
Service revenue |
$ | 1,877 | $ | 1,751 | $ | 2,063 | $ | 2,115 | |||||
License and subscription revenue |
1,608 | 1,095 | 1,244 | 1,272 | |||||||||
Total revenue |
3,485 | 2,846 | 3,307 | 3,387 | |||||||||
Total cost of revenue |
950 | 936 | 993 | 1,153 | |||||||||
Gross profit |
2,535 | 1,910 | 2,314 | 2,234 | |||||||||
Gross profit percent, service revenue |
51 | % | 50 | % | 55 | % | 47 | % | |||||
Gross profit percent, license and subscription
|
98 | % | 95 | % | 95 | % | 95 | % | |||||
Gross profit percent |
73 | % | 67 | % | 70 | % | 66 | % | |||||
Sales and marketing |
639 | 667 | 634 | 513 | |||||||||
Research, development and engineering |
729 | 829 | 656 | 698 | |||||||||
General and administrative |
857 | 844 | 797 | 847 | |||||||||
Intellectual property |
431 | 413 | 373 | 376 | |||||||||
Operating income (loss) |
(121 | ) | (843 | ) | (146 | ) | (200 | ) | |||||
Net income (loss) |
250 | (518 | ) | 175 | 148 |
22
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, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. Please 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 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 financial statements and related notes included in our Form 10, General Form for Registration of Securities, that became effective on October16, 2008, and other reports and filings made with the Securities and Exchange Commission ("SEC").
Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to (i) "Digimarc," "we," "our" and "us" refer to Digimarc Corporation and (ii) "Old Digimarc" refers to the former Digimarc Corporation, which merged with and into a wholly owned subsidiary of L-1 Identity Solutions, Inc. ("L-1") on August 13, 2008, and its consolidated subsidiaries (other than us).
All dollar amounts are in thousands, unless otherwise noted.
The Separation of the Digital Watermarking Business from Old Digimarc
On August 1, 2008, Old Digimarc spun off the common stock of Digimarc, which held all of the assets and liabilities of Old Digimarc's Digital Watermarking Business. Following the spin-off we issued to our executive officers shares of Series A Redeemable Nonvoting Preferred stock in the aggregate amount of $50.
Until August 1, 2008, we were a wholly owned subsidiary of DMRC LLC, which immediately prior to the spin-off was a wholly owned subsidiary of Old Digimarc. DMRC LLC was formed in Delaware on June 18, 2008, in anticipation of the spin-off of the Digital Watermarking Business. Prior to the spin-off, in a transaction which we refer to as the restructuring, Old Digimarc contributed all of the assets and liabilities related to its Digital Watermarking Business, together with all of Old Digimarc's cash, including cash received upon the exercise of stock options, to DMRC LLC. The restructuring did not result in the loss of any significant Digital Watermarking Business customers or contracts.
Following the restructuring, all of the limited liability company interests of DMRC LLC were transferred to a newly created trust for the benefit of Old Digimarc record holders on the basis of one limited liability company interest of DMRC LLC for every three and one-half shares of Old Digimarc common stock held by the stockholder as of the spin-off record date and time. DMRC LLC then merged with and into DMRC Corporation, and each limited liability company interest of DMRC LLC was converted into one share of common stock of DMRC Corporation. After completion of the Old Digimarc/L-1 merger, DMRC Corporation changed its name to Digimarc Corporation. As a result, upon effectiveness of the Form 10 on October 16, 2008, each Old Digimarc record holder received one share of Digimarc common stock for every three and one-half shares of Old Digimarc common stock held by the stockholder as of the spin-off record date and time.
The trust in which all of the shares of Digimarc were held was established under Delaware law for the benefit of Old Digimarc record holders. The trust held all of the shares of Digimarc until the Form 10 was declared effective by the SEC, at which time the shares were distributed to Old Digimarc record holders, as beneficiaries of the trust, pro rata in accordance with their ownership of shares of Old Digimarc common stock on the spin-off record date and time. The Digimarc shares were the sole asset of the trust, and the sole purpose of the trust was to hold and distribute those shares. The
23
trustees of the trust were selected from Digimarc's independent directors, and had exclusive authority to take actions on behalf of the trust within its stated purposes. Beneficial interests in the trust were not issued in certificated form or otherwise evidenced by separate instruments of any kind, and were not permitted to be traded. Following effectiveness of the Form 10, the trust distributed the shares of our common stock to Old Digimarc stockholders as of the spin-off record date and time, the trust was liquidated and we became an independent, publicly-traded company owning and operating the Digital Watermarking Business.
Overview
Digimarc Corporation enables governments and enterprises around the world to give digital identities to media and objects that computers can sense and recognize and to which they can react. Our technology provides the means to infuse persistent digital information, perceptible only to computers and digital devices, into all forms of media content. The unique digital identifier placed in media generally persists with it regardless of the distribution path and whether it is copied, manipulated or converted to a different format, and does not affect the quality of the content or the enjoyment or other traditional uses of it. Our technology permits computers and digital devices to quickly identify relevant data from vast amounts of media content.
Our technologies, and those of our licensees, span the complete range of media content, enabling our customers and those of our partners to:
At the core of our intellectual property is a signal processing technology 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 some physical objects, including photographs, movies, music, television, personal identification documents, financial instruments, industrial parts and product packages. The digital information can be detected and read by a wide range of computers, mobile phones, and other digital devices.
We provide technology-based solutions directly and through our licensees. Our proprietary technologies have proven to be a powerful element of document security, giving rise to our long-term relationship with a consortium of central banks, which we refer to as the Central Banks, and many leading companies in the information technology industry. We and our licensees have successfully propagated digital watermarking in music, movies, television broadcasts, images and printed materials. Digital watermarks have been used in these applications to improve media rights and asset management, reduce piracy and counterfeiting losses, improve marketing programs, permit more
24
efficient and effective distribution of valuable media content and enhance consumer entertainment and commercial experiences.
To protect our significant efforts in creating these technologies, 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. We believe we have one of the world's most extensive patent portfolios in the field of digital watermarking and related media enhancement innovations, with over 370 U.S. and over 85 foreign issued patents and more than 400 U.S. and foreign patent applications on file as of September 30, 2008.
Backlog. Based on projected commitments we have for the periods under contract with our respective customers, we anticipate our current contracts as of September 30, 2008 will generate approximately $59 million in revenue during the contractual terms of such contracts, currently up to seven years. We expect more than $4 million of this amount to be recognized as revenue during the remainder of 2008. Some factors that lead to increased backlog include:
Some factors that lead to decreased backlog are:
The mix of these factors, among others, dictates whether our backlog increases or decreases for any given period. There is no assurance that our backlog will result in actual revenue in any particular period, because the orders, awards and contracts included in our backlog may be subject to modification, cancellation or suspension. We may not realize revenue on certain contracts, orders or awards included in our backlog or the timing of such realization may change.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts fixed assets, intangible assets, income taxes, long-term service contracts, investments, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Certain of our accounting policies require higher degrees of judgment than others in their application. These include revenue recognition on long-term service contracts, revenue recognition on license and subscription arrangements, impairments and estimation of useful lives of long-lived assets, reserves for uncollectible accounts receivable, contingencies and litigation and stock-based
25
compensation. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:
Basis of Accounting; Predecessor Financial Statements The predecessor financial statements include certain accounts of Old Digimarc and the assets, liabilities and results of operations of Old Digimarc's Digital Watermarking Business that were separated, or "carved-out," from Old Digimarc. The operating expenses included in the predecessor financial statements include proportional allocations of various shared services common costs of Old Digimarc because specific identification of the expenses was not practicable. The common costs include expenses from Old Digimarc related to various operating shared services cost centers, including: executive, finance and accounting, human resources, legal, marketing, intellectual property, facilities and information technology. Management believes that the assumptions underlying the predecessor financial statements are reasonable. The cost allocation methods applied to certain shared services common cost centers include the following:
Other key assumptions differing from the historical accounting of Old Digimarc:
26
these incentive compensation costs have been allocated to cost of services to the extent that their pro rata salary allocations were made to the cost of services expense category. The impact for the reported periods ranged from a 1% to 3% reduction in margins compared to the results had the allocations not been made.
The financial information in the predecessor financial statements does not include all of the expenses that would have been incurred had the predecessor been a separate, stand-alone public entity. As such, the predecessor financial information does not reflect the financial position, results of operations and cash flows of Digimarc's current business had the predecessor operated as a separate, stand-alone public entity during the periods presented in the predecessor financial statements. Additionally, the predecessor financial statements include proportional allocations of various shared services common costs of Old Digimarc because specific identification of these expenses was not practicable. It is expected that the initial operating costs of Digimarc on a stand-alone basis will be higher than those allocated to the predecessor operations under the shared services methodology applied in the predecessor financial statements. Consequently, the financial position, results of operations and cash flows reflected in the predecessor financial statements may not be indicative of those that would have been achieved had the predecessor operated as a separate, stand-alone entity for the periods reflected in the predecessor financial statements.
27
Revenue recognition on long-term service contracts: Revenue from professional service arrangements is generally determined based on time and materials or a cost plus a profit margin measure. Revenue for professional services is recognized as the services are performed. Losses on contracts, if any, are provided for in the period in which the loss becomes determinable. Billing for services rendered generally occurs within one month after the services are provided. Revenue earned which has not been invoiced is classified as unbilled trade receivables, which is included in the balance of trade accounts receivable, net in the balance sheets.
Revenue recognition on license and subscription arrangements: Royalty revenue is recognized when the royalty amounts owed to Digimarc have been earned, are determinable, and collection is probable. These revenues are earned through the licensing of digital watermarking products and services for use in:
Subscriptions are paid in advance and revenue is recognized ratably over the term of the subscription.
Impairments and estimation of useful lives of long-lived assets: We periodically assess long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the asset. Also, we periodically review the useful lives of long-lived assets whenever events or changes in circumstances indicate that the useful life may have changed. If the estimated useful lives of such assets do change, we adjust the depreciation or amortization period to a shorter or longer period, based on the circumstances identified.
Reserves for uncollectible accounts receivable: We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We determine the allowance based on historical write-off experience and current information. We review, and adjust when appropriate, our allowance for doubtful accounts on at least a quarterly basis. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Contingencies and litigation: We periodically evaluate all pending or threatened contingencies or commitments, if any, that are reasonably likely to have a material adverse effect on our operations or financial position. We assess the probability of an adverse outcome and determine if it is remote, reasonably possible or probable as defined in accordance with the provisions of SFAS No. 5, Accounting for Contingencies . If information available prior to the issuance of our financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of our
28
financial statements, and the amount of the loss, or the range of probable loss can be reasonably estimated, then such 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 SFAS No. 5 are not met, but the probability of an adverse outcome is at least reasonably possible, we 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.
Stock-based compensation: Old Digimarc accounted for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment (Revised 2004) , which requires the measurement and recognition of compensation for all stock- based awards made to employees and directors, including stock options, employee stock purchases under a stock purchase plan and restricted stock awards based on estimated fair values. Stock compensation expense was allocated for the periods through August 1, 2008 to the predecessor based on a combination of specific and shared services resource allocations from Old Digimarc.
Results of OperationsPeriods July 1, 2008 through August 1, 2008 (predecessor) and August 2, 2008 through September 30, 2008 (successor) compared to the Three Months Ended September 30, 2007 (predecessor)
The following table presents our statements of operations data for the periods indicated as a percentage of total revenue.
|
Successor |
|
Predecessor | Total* | Predecessor | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
July 1, 2008 through August 1, 2008 |
Three Months
Ended September 30, 2008 |
Three Months
Ended September 30, 2007 |
||||||||||||
Revenue: |
|||||||||||||||||
Service |
52 | % | 53 | % | 52 | % | 62 | % | |||||||||
License and subscription |
48 | 47 | 48 | 38 | |||||||||||||
Total revenue |
100 | 100 | 100 | 100 | |||||||||||||
Cost of revenue: |
|||||||||||||||||
Service |
28 | 30 | 29 | 28 | |||||||||||||
License and subscription |
1 | 1 | 1 | 2 | |||||||||||||
Total cost of revenue |
29 | 31 | 30 | 30 | |||||||||||||
Gross profit |
71 | 69 | 70 | 70 | |||||||||||||
Operating expenses: |
|||||||||||||||||
Sales and marketing |
12 | 34 | 20 | 19 | |||||||||||||
Research, development and engineering |
25 | 14 | 20 | 20 | |||||||||||||
General and administrative |
29 | 25 | 28 | 24 | |||||||||||||
Intellectual property |
4 | 10 | 6 | 11 | |||||||||||||
Transitional services |
(6 | ) | | (4 | ) | | |||||||||||
Total operating expenses |
64 | 83 | 70 | 74 | |||||||||||||
Operating income (loss) |
7 | (14 | ) | | (4 | ) | |||||||||||
Other income (expense), net |
6 | 4 | 5 | 9 | |||||||||||||
Income (loss) before provision for income taxes |
7 | (10 | ) | 5 | 5 | ||||||||||||
Provision for income taxes |
| | | | |||||||||||||
Net income (loss) |
13 | % | (10 | )% | 5 | % | 5 | % | |||||||||
29
Revenue
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
July 1, 2008 through August 1, 2008 |
Three Months
Ended September 30, 2008 |
Three Months
Ended September 30, 2007 |
Dollar
Increase |
Percent
Increase |
||||||||||||||||
Revenue: |
|||||||||||||||||||||||
Service |
$ | 1,645 | $ | 921 | $ | 2,566 | $ | 2,063 | $ | 503 | 24 | % | |||||||||||
License and subscription |
1,536 | 829 | 2,365 | 1,244 | 1,121 | 90 | % | ||||||||||||||||
Total |
$ | 3,181 | $ | 1,750 | $ | 4,931 | $ | 3,307 | $ | 1,624 | 49 | % | |||||||||||
Revenue (as % of total revenue): |
|||||||||||||||||||||||
Service |
52 | % | 53 | % | 52 | % | 62 | % | |||||||||||||||
License and subscription |
48 | % | 47 | % | 48 | % | 38 | % | |||||||||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
Service. Service revenue consists primarily of software development and consulting services. The majority of service revenue arrangements are structured as time and materials consulting agreements, or fixed price consulting agreements. The majority of our services revenue is derived from contracts with an international consortium of Central Banks, Nielsen, and other government agencies. The agreements can range from several months to several years in length, and our longer term contracts are subject to work plans that are reviewed and agreed upon at least annually. These contracts generally provide for billing hours worked at predetermined rates and, to a lesser extent, for cost reimbursement for third party costs and services. The increases or decreases in the services are generally subject to both volume and price changes. The volume of work is generally negotiated at least annually and can be modified as the needs of the customers arise. 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 other government agencies are generally shorter term in nature, are less linear in billings and less predictable than our longer terms contracts since they are subject to government budgets and funding.
The increase in service revenue for the combined periods July 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding three-month period ended September 30, 2007 was due primarily to increased consulting revenues, almost all of which related to our new contract with Nielsen.
License and subscription. License revenue originates primarily from licensing our technology and patents where we receive royalties as our income stream. Subscription revenue consists primarily of royalty revenue from the sale of our web-based subscriptions related to various software products, which are more recurring in nature. Revenues from our licensed products have minimal associated direct costs, and thus are highly profitable.
The increase in license and subscription revenue for the combined periods July 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding three-month period ended September 30, 2007 was due primarily to increased license revenues, almost all as a result of the contract with Nielsen.
30
Revenue by Geography
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
July 1, 2008 through August 1, 2008 |
Three Months
Ended September 30, 2008 |
Three Months
Ended September 30, 2007 |
Dollar
Increase |
Percent
Increase |
||||||||||||||||
Revenue by geography: |
|||||||||||||||||||||||
Domestic |
$ | 1,541 | $ | 960 | $ | 2,501 | $ | 998 | $ | 1,503 | 150 | % | |||||||||||
International |
1,640 | 790 | 2,430 | 2,309 | 121 | 5 | % | ||||||||||||||||
Total |
$ | 3,181 | $ | 1,750 | $ | 4,931 | $ | 3,307 | $ | 1,624 | 49 | % | |||||||||||
Revenue (as % of total revenue): |
|||||||||||||||||||||||
Domestic |
48 | % | 55 | % | 51 | % | 30 | % | |||||||||||||||
International |
52 | % | 45 | % | 49 | % | 70 | % | |||||||||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
Domestic revenue increased for the combined periods July 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding three-month period ended September 30, 2007 due primarily to additional service and license revenues associated with the Nielsen contract.
International revenue slightly increased for the combined periods July 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding three-month period ended September 30, 2007 due primarily to increased service revenue from our agreement with the consortium of Central Banks.
Cost of Revenue
Service. Cost of service revenue primarily includes costs that are allocated from research, development, engineering and sales and marketing that relate directly to producing revenue under our customer contracts, and to a lesser extent direct costs of program delivery for both personnel and operating expenses. Allocated costs include:
License and subscription. Cost of license and subscription revenue primarily includes:
31
Gross Profit
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
July 1, 2008 through August 1, 2008 |
Three Months
Ended September 30, 2008 |
Three Months
Ended September 30, 2007 |
Dollar
Increase |
Percent
Increase |
||||||||||||||||
Gross Profit: |
|||||||||||||||||||||||
Service |
$ | 755 | $ | 394 | $ | 1,149 | $ | 1,137 | $ | 12 | 1 | % | |||||||||||
License and subscription |
1,492 | 804 | 2,296 | 1,177 | 1,119 | 95 | % | ||||||||||||||||
Total |
$ | 2,247 | $ | 1,198 | $ | 3,445 | $ | 2,314 | $ | 1,131 | 49 | % | |||||||||||
Gross Profit (as % of related revenue components): |
|||||||||||||||||||||||
Service |
46 | % | 43 | % | 45 | % | 55 | % | |||||||||||||||
License and subscription |
97 | % | 97 | % | 97 | % | 95 | % | |||||||||||||||
Total |
71 | % | 69 | % | 70 | % | 70 | % |
Though the overall gross profit as a percentage of revenue for the combined periods July 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding three-month period ended September 30, 2007 remained relatively consistent, the gross profit percentage of the revenue components reflect the following primary changes:
The impact of these items was offset to some extent by a change in revenue mix where higher margin license revenues, the majority of which are attributable to the Nielsen contract, comprised a greater percentage of total revenues.
Operating Expenses
The financial information in the predecessor financial statements does not include all of the expenses that would have been incurred had the predecessor operated as a separate, stand-alone public entity. As such, the predecessor financial information does not reflect the operating expenses of Digimarc's current business had the predecessor been a separate, stand-alone public entity during the periods presented in the predecessor's financial statements. Additionally, the predecessor financial statements include proportional allocations of various shared services common costs of Old Digimarc because specific identification of these expenses was not practicable. It is expected that the initial operating costs of Digimarc on a stand-alone basis will be higher than those allocated to the predecessor operations under the shared services methodology applied in the predecessor financial statements. Consequently, the operating expenses reflected in the predecessor financial statements may not be indicative of those that would have been achieved had the predecessor operated as a separate, stand-alone entity for the periods reflected in the predecessor financial statements.
32
Sales and marketing
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
July 1, 2008 through August 1, 2008 |
Three Months
Ended September 30, 2008 |
Three Months
Ended September 30, 2007 |
Dollar
Increase |
Percent
Increase |
||||||||||||||
Sales and marketing |
$ | 390 | $ | 589 | $ | 979 | $ | 634 | $ | 345 | 54 | % | |||||||||
Sales and marketing (as % of total revenue) |
12 | % | 34 | % | 20 | % | 19 | % |
Sales and marketing expenses consist primarily of:
We allocate certain costs of sales and marketing to cost of service revenue when they relate directly to our service contracts. For direct billable labor hours, we allocate to cost of service revenue:
We record all remaining, or "residual," costs as sales and marketing costs.
The increase in sales and marketing expense for the combined periods July 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding three-month period ended September 30, 2007 resulted primarily from:
Sales and marketing expenses reflected in the predecessor financial statements may not be indicative of Digimarc's sales and marketing expenses on a stand-alone basis,
We anticipate that we will continue to incur sales and marketing costs at existing or higher levels for the remainder of 2008.
33
Research, development and engineering
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
July 1, 2008 through August 1, 2008 |
Three Months
Ended September 30, 2008 |
Three Months
Ended September 30, 2007 |
Dollar
Increase |
Percent
Increase |
||||||||||||||
Research, development and engineering |
$ | 780 | $ | 239 | $ | 1,019 | $ | 656 | $ | 363 | 55 | % | |||||||||
Research, development and engineering (as % of total revenue) |
25 | % | 14 | % | 20 | % | 20 | % |
Research, development and engineering expenses arise primarily from three areas that support our business model:
34
Research, development and engineering expenses consist primarily of:
We allocate certain costs of research, development and engineering to cost of service revenue when they relate directly to our service contracts. For direct billable labor hours, we allocate to cost of service revenue:
We record all remaining, or "residual," costs as research, development and engineering costs.
The increase in research, development and engineering expense for the combined periods July 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding three-month period ended September 30, 2007 resulted primarily from the shared services allocation methodology applied in the predecessor financial statements. Consequently, research, development and engineering expenses reflected in the predecessor financial statements may not be indicative of Digimarc's research, development and engineering expenses on a stand-alone basis.
We anticipate that we will continue to invest in research, development and engineering expenses at existing or higher levels for the remainder of 2008.
General and administrative
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
July 1, 2008 through August 1, 2008 |
Three Months
Ended September 30, 2008 |
Three Months
Ended September 30, 2007 |
Dollar
Increase |
Percent
Increase |
||||||||||||||
General and administrative |
$ | 932 | $ | 442 | $ | 1,374 | $ | 797 | $ | 577 | 72 | % | |||||||||
General and administrative (as % of total revenue) |
29 | % | 25 | % | 28 | % | 24 | % |
We incur general and administrative costs in the functional areas of finance, legal, human resources, 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 costs of services, sales and marketing, and research development and engineering. General and administrative expenses consist primarily of:
35
The increase in general and administrative expenses for the combined periods July 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding three-month period ended September 30, 2007 resulted primarily from the shared services allocation methodology applied in the predecessor financial statements. General and administrative expenses reflected in the predecessor financial statements may not be indicative of Digimarc's general and administrative expenses on a stand-alone basis.
We anticipate that we will continue to incur general and administrative expenses at least at existing levels for the remainder of 2008, while continuing to examine means to reduce general and administrative expenses as a percentage of revenue in the longer term.
Intellectual property
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
July 1, 2008 through August 1, 2008 |
Three Months
Ended September 30, 2008 |
Three Months
Ended September 30, 2007 |
Dollar
Decrease |
Percent
Decrease |
||||||||||||||
Intellectual property |
$ | 120 | $ | 176 | $ | 296 | $ | 373 | $ | (77 | ) | (21 | )% | ||||||||
Intellectual property (as % of total revenue) |
4 | % | 10 | % | 6 | % | 11 | % |
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:
Prior to August 2, 2008, the predecessor accounted for gross expenditures for intellectual property costs as expenses. On August 2, 2008 we began capitalizing patent application and award costs.
The decrease in intellectual property expenses for the combined periods July 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding three-month period ended September 30, 2007 resulted primarily from:
36
Transitional services
In connection with the sale of Old Digimarc's Secure ID Business and the spin-off of the Digital Watermarking Business, Old Digimarc and Digimarc entered into a transition services agreement to provide one another with transition services and other assistance substantially consistent with the services provided before the spin-off.
To enable Old Digimarc to continue its operation of the Secure ID Business and facilitate the effective transition of the Digital Watermarking Business to Digimarc, under the transition services agreement Old Digimarc provides the following services or support to Digimarc: information technology services and legal services. Similarly, Digimarc provides the following services or support to Old Digimarc: accounting and tax services, information technology services, legal services, human resource services and facilities.
The fees for the transition services generally are intended to cover each party's reasonable costs incurred in connection with providing the transition services. Hourly rates for personnel performing transition services were determined based on fully loaded costs, taking into account base pay, a bonus based on obtaining target earnings, payroll taxes, benefit costs, a pro rata portion of overhead charges paid by Old Digimarc or Digimarc, as applicable, and the current year stock compensation charge for the individual, divided by the total hours available for the employee for the year, taking into account the need for administrative time.
The net transitional services expenses reimbursed to Digimarc aggregated $0.2 million during the period August 2, 2008 through September 30, 2008 and are expected to decline through mid-2009 as the amount of transition services decline.
Stock-based compensation.
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
July 1, 2008 through August 1, 2008 |
Three Months
Ended September 30, 2008 |
Three Months
Ended September 30, 2007 |
Dollar
Decrease |
Percent
Decrease |
|||||||||||||||
Cost of revenue |
$ | | $ | 14 | $ | 14 | $ | 28 | $ | (14 | ) | (50 | )% | |||||||||
Sales and marketing |
| 32 | 32 | 72 | (40 | ) | (56 | )% | ||||||||||||||
Research, development and engineering |
| 4 | 4 | 12 | (8 | ) | (67 | )% | ||||||||||||||
General and administrative |
| 81 | 81 | 183 | (102 | ) | (56 | )% | ||||||||||||||
Intellectual property |
| 5 | 5 | 13 | (8 | ) | (62 | )% | ||||||||||||||
Total |
$ | | $ | 136 | $ | 136 | $ | 308 | $ | (172 | ) | (56 | )% | |||||||||
Old Digimarc accounted for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment (Revised 2004) , which requires the measurement and recognition of compensation for all stock- based awards made to employees and directors, including stock options, employee stock purchases under a stock purchase plan and restricted stock awards based on estimated fair values. Stock compensation expense was allocated to the predecessor based on a combination of specific and shared services resource allocations from Old Digimarc.
The decrease in stock-based compensation expense for the combined periods July 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding
37
three-month period ended September 30, 2007 resulted primarily from only one month of an additional layer of stock-based awards being expensed for the period July 1, 2008 through August 1, 2008. For the period August 2, 2008 through September 30, 2008 there were no restricted stock or stock option grants awarded or outstanding and accordingly there was no stock compensation expense.
The predecessor incurred additional stock-based compensation expense from Old Digimarc through August 1, 2008, pursuant to the described allocation process. We will incur our own stock-based compensation expense under SFAS 123(R), which we have adopted, when additional stock options and restricted stock are issued in future periods. The effect of the adoption of this statement on our financial position and results of operations will be determined by stock-based awards granted in future periods and the assumptions on which the value of those stock-based awards are based.
Other income (expense), net
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
July 1, 2008 through August 1, 2007 |
Three Months
Ended September 30, 2008 |
Three Months
Ended September 30, 2007 |
Dollar
Decrease |
Percent
Decrease |
||||||||||||||
Other income, net |
$ | 179 | $ | 75 | $ | 254 | $ | 321 | $ | (67 | ) | (21 | )% |
Other income, net consists primarily of interest income from our cash and short term investments.
The decrease in other income, net for the combined periods July 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding three-month period ended September 30, 2007 resulted primarily from lower interest earned on cash and investment balances, reflecting lower interest rates available on our investments.
Provision for Income Taxes.
Old Digimarc. The provision for income taxes reflects expected tax expense from profitability in certain foreign jurisdictions. The predecessor recorded a full valuation allowance against net deferred tax assets at August 1, 2008 due to the uncertainty of realization of net operating losses. As a separate legal entity, we will not benefit from any of the carryforward tax attributes of Old Digimarc, including net operating loss carryforwards.
Digimarc. There was no provision for income taxes of Digimarc for the period from August 2, 2008 through September 30, 2008 since the estimated effective tax rate for the period ending December 31, 2008 is expected to be zero.
38
Results of OperationsPeriods January 1, 2008 through August 1, 2008 (predecessor) and August 2, 2008 through September 30, 2008 (successor) compared to the Nine Months Ended September 30, 2007 (predecessor)
The following table presents our statements of operations data for the periods indicated as a percentage of total revenue.
|
Successor |
|
Predecessor | Total* | Predecessor | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
January 1, 2008 through August 1, 2008 |
Nine Months
Ended September 30, 2008 |
Nine Months
Ended September 30, 2007 |
||||||||||||
Revenue: |
|||||||||||||||||
Service |
52 | % | 54 | % | 54 | % | 59 | % | |||||||||
Product and subscription |
48 | 46 | 46 | 41 | |||||||||||||
Total revenue |
100 | 100 | 100 | 100 | |||||||||||||
Cost of revenue: |
|||||||||||||||||
Service |
28 | 30 | 29 | 28 | |||||||||||||
Product and subscription |
1 | 1 | 1 | 2 | |||||||||||||
Total cost of revenue |
29 | 31 | 30 | 30 | |||||||||||||
Gross profit |
71 | 69 | 70 | 70 | |||||||||||||
Operating expenses: |
|||||||||||||||||
Sales and marketing |
12 | 16 | 15 | 20 | |||||||||||||
Research, development and engineering |
25 | 17 | 19 | 23 | |||||||||||||
General and administrative |
29 | 20 | 22 | 26 | |||||||||||||
Intellectual property |
4 | 9 | 8 | 13 | |||||||||||||
Transitional services |
(6 | ) | | (1 | ) | | |||||||||||
Total operating expenses |
64 | 62 | 63 | 82 | |||||||||||||
Operating income (loss) |
7 | 7 | 7 | (12 | ) | ||||||||||||
Other income (expense), net |
6 | 5 | 5 | 11 | |||||||||||||
Income (loss) before provision for income taxes |
13 | 12 | 12 | (1 | ) | ||||||||||||
Provision for income taxes |
0 | 0 | 0 | 0 | |||||||||||||
Net income (loss) |
13 | % | 12 | % | 12 | % | (1 | )% | |||||||||
39
Revenue
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
January 1, 2008 through August 1, 2008 |
Nine Months
Ended September 30, 2008 |
Nine Months
Ended September 30, 2007 |
Dollar
Increase |
Percent
Increase |
||||||||||||||||
Revenue: |
|||||||||||||||||||||||
Service |
$ | 1,645 | $ | 6,456 | $ | 8,101 | $ | 5,691 | $ | 2,410 | 42 | % | |||||||||||
License and subscription |
1,536 | 5,494 | 7,030 | 3,947 | 3,083 | 78 | % | ||||||||||||||||
Total |
$ | 3,181 | $ | 11,950 | $ | 15,131 | $ | 9,638 | $ | 5,493 | 57 | % | |||||||||||
Revenue (as % of total revenue): |
|||||||||||||||||||||||
Service |
52 | % | 54 | % | 54 | % | 59 | % | |||||||||||||||
License and subscription |
48 | % | 46 | % | 46 | % | 41 | % | |||||||||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
The increase in service revenue for the combined periods January 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding nine-month period ended September 30, 2007 was due primarily to increased consulting revenues, almost all of which related to our new contract with Nielsen.
The increase in license and subscription revenue for the combined periods January 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding nine-month period ended September 30, 2007 was due primarily to increased license revenues, almost all resulting from the contract with Nielsen.
Revenue by Geography
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
January 1, 2008 through August 1, 2008 |
Nine Months
Ended September 30, 2008 |
Nine Months
Ended September 30, 2007 |
Dollar
Increase |
Percent
Increase |
||||||||||||||||
Revenue by geography: |
|||||||||||||||||||||||
Domestic |
$ | 1,541 | $ | 6,274 | $ | 7,815 | $ | 2,672 | $ | 5,143 | 192 | % | |||||||||||
International |
1,640 | 5,676 | 7,316 | 6,966 | 350 | 5 | % | ||||||||||||||||
Total |
$ | 3,181 | $ | 11,950 | $ | 15,131 | $ | 9,638 | $ | 5,493 | 57 | % | |||||||||||
Revenue (as % of total revenue): |
|||||||||||||||||||||||
Domestic |
48 | % | 53 | % | 52 | % | 28 | % | |||||||||||||||
International |
52 | % | 47 | % | 48 | % | 72 | % | |||||||||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||
40
Domestic revenue increased for the combined periods January 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding nine-month period ended September 30, 2007 due primarily to additional service and license revenues associated with the Nielsen contract.
International revenue slightly increased for the periods January 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding nine-month period ended September 30, 2007 due primarily to increased service revenue from the Central Bank contract.
Gross Profit
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
January 1, 2008 through August 1, 2008 |
Nine Months
Ended September 30, 2008 |
Nine Months
Ended September 30, 2007 |
Dollar
Increase |
Percent
Increase |
||||||||||||||||
Gross Profit: |
|||||||||||||||||||||||
Service |
$ | 755 | $ | 2,937 | $ | 3,692 | $ | 2,963 | $ | 729 | 25 | % | |||||||||||
License and subscription |
1,492 | 5,349 | 6,841 | 3,796 | 3,045 | 80 | % | ||||||||||||||||
Total |
$ | 2,247 | $ | 8,286 | $ | 10,533 | $ | 6,759 | $ | 3,774 | 56 | % | |||||||||||
Gross Profit (as % of related revenue components): |
|||||||||||||||||||||||
Service |
46 | % | 46 | % | 46 | % | 52 | % | |||||||||||||||
License and subscription |
97 | % | 97 | % | 97 | % | 96 | % | |||||||||||||||
Total |
71 | % | 69 | % | 70 | % | 70 | % |
Though the overall gross profit as a percentage of revenue for the combined periods January 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding nine-month period ended September 30, 2007 remained relatively consistent, the gross profit percentage of the revenue components reflect the following primary changes:
The impact of these items were offset to some extent by a change in revenue mix where higher margin license revenues, the majority of which are attributable to the Nielsen contract, comprised a greater percentage of total revenues.
41
Operating Expenses
Sales and marketing
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
January 1, 2008 through August 1, 2008 |
Nine Months
Ended September 30, 2008 |
Nine Months
Ended September 30, 2007 |
Dollar
Increase |
Percent
Increase |
||||||||||||||
Sales and marketing |
$ | 390 | $ | 1,928 | $ | 2,318 | $ | 1,940 | $ | 378 | 19 | % | |||||||||
Sales and marketing (as % of total revenue) |
12 | % | 16 | % | 15 | % | 20 | % |
The increase in sales and marketing expense for the combined periods January 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding nine-month period ended September 30, 2007 resulted primarily from:
Sales and marketing expenses reflected in the predecessor financial statements may not be indicative of Digimarc's sales and marketing expenses on a stand-alone basis. We anticipate that we will continue to incur sales and marketing costs at existing or higher levels for the remainder of 2008.
Research, development and engineering
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
January 1, 2008 through August 1, 2007 |
Nine Months
Ended September 30, 2008 |
Nine Months
Ended September 30, 2007 |
Dollar
Increase |
Percent
Increase |
||||||||||||||
Research, development and engineering |
$ | 780 | $ | 2,071 | $ | 2,851 | $ | 2,214 | $ | 637 | 29 | % | |||||||||
Research, development and engineering (as % of total revenue) |
25 | % | 17 | % | 19 | % | 23 | % |
The increase in research, development and engineering expense for the combined periods January 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding nine-month period ended September 30, 2007 resulted primarily from the shared services allocation methodology applied in the predecessor financial statements. Research, development and engineering expenses reflected in the predecessor financial statements may not be indicative of Digimarc's research, development and engineering expenses on a stand-alone basis. We anticipate that we will continue to invest in research, development and engineering expenses at existing or higher levels for the remainder of 2008.
42
General and administrative
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
January 1, 2008 through August 1, 2008 |
Nine Months
Ended September 30, 2008 |
Nine Months
Ended September 30, 2007 |
Dollar
Increase |
Percent
Increase |
||||||||||||||
General and administrative |
$ | 932 | $ | 2,349 | $ | 3,281 | $ | 2,498 | $ | 783 | 31 | % | |||||||||
General and administrative (as % of total revenue) |
29 | % | 20 | % | 22 | % | 26 | % |
The increase in general and administrative expenses for the combined periods January 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding nine-month period ended September 30, 2007 resulted primarily from the shared services allocation methodology applied in the predecessor financial statements. General and administrative expenses reflected in the predecessor financial statements may not be indicative of Digimarc's general and administrative expenses on a stand-alone basis. We anticipate that we will continue to incur general and administrative expenses at least at existing levels for the remainder of 2008, while continuing to examine means to reduce general and administrative expenses as a percentage of revenue in the longer term.
Intellectual property
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
January 1, 2008 through August 1, 2008 |
Nine Months
Ended September 30, 2008 |
Nine Months
Ended September 30, 2007 |
Dollar
Increase |
Percent
Increase |
||||||||||||||
Intellectual property |
$ | 120 | $ | 1,102 | $ | 1,222 | $ | 1,217 | $ | 5 | <1 | % | |||||||||
Intellectual property (as % of total revenue) |
4 | % | 9 | % | 8 | % | 13 | % |
Intellectual property expense remained relatively consistent for the combined periods January 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding nine-month period ended September 30, 2007. These results reflect:
Transitional services
The net transitional services expenses reimbursed to Digimarc aggregated $0.2 million for the period August 2, 2008 through September 30, 2008 and are expected to decline in future periods through mid-2009 as the amount of transition services decline.
.
43
Stock-based compensation.
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
January 1, 2008 through August 1, 2007 |
Nine Months
Ended September 30, 2008 |
Nine Months
Ended September 30, 2007 |
Dollar
Increase (Decrease) |
Percent
Increase (Decrease) |
|||||||||||||||
Cost of revenue |
$ | | $ | 99 | $ | 99 | $ | 68 | $ | 31 | 46 | % | ||||||||||
Sales and marketing |
| 208 | 208 | 216 | (8 | ) | (4 | )% | ||||||||||||||
Research, development and engineering |
| 34 | 34 | 32 | 2 | (6 | )% | |||||||||||||||
General and administrative |
| 537 | 537 | 548 | (11 | ) | (2 | )% | ||||||||||||||
Intellectual property |
| 35 | 35 | 35 | | | ||||||||||||||||
Total |
$ | | $ | 913 | $ | 913 | $ | 899 | $ | 14 | 2 | % | ||||||||||
Stock-based compensation expense for the combined periods January 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 was relatively flat compared to the corresponding nine-month period ended September 30, 2007, reflecting no stock compensation expense for the period August 2, 2008 through September 30, 2008, when no restricted stock or stock option grants were awarded or outstanding.
Other income (expense), net
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
January 1, 2008 through August 1, 2007 |
Nine Months
Ended September 30, 2008 |
Nine Months
Ended September 30, 2007 |
Dollar
Decrease |
Percent
Decrease |
||||||||||||||
Other income, net |
$ | 179 | $ | 590 | $ | 769 | $ | 1,026 | $ | (257 | ) | (25 | )% |
Other income, net consists primarily of interest income from our cash and short term investments.
The decrease in other income, net for the combined periods January 1, 2008 through August 1, 2008 and August 2, 2008 through September 30, 2008 compared to the corresponding three-month period ended September 30, 2007 resulted primarily from lower interest earned on cash and investment balances, reflecting lower interest rates available on our investments.
Provision for Income Taxes.
Old Digimarc. The provision for income taxes reflects expected tax expense from profitability in certain foreign jurisdictions. The predecessor recorded a full valuation allowance against net deferred tax assets at August 1, 2008 due to the uncertainty of realization of net operating losses. Digimarc as a separate legal entity will not benefit from any of the carryforward tax attributes of Old Digimarc.
Digimarc. There was no provision for income taxes of Digimarc for the period from August 2, 2008 through September 30, 2008 since the estimated effective tax rate for the period ending December 31, 2008 is expected to be zero.
44
Liquidity and Capital Resources
As of September 30, 2008, we had cash and cash equivalents, and short-term investments of $49.5 million, representing a decrease of $5.2 million from $54.7 million at August 1, 2008, and an increase of approximately $16.8 million from $32.7 million at December 31, 2007. Working capital at September 30, 2008 was $46.9 million, compared to working capital of $46.6 million at August 1, 2008 and $33.5 million at December 31, 2007. Cash flow generated by Old Digimarc, which flowed to Digimarc, and improved operating results contributed to our improved cash and working capital positions.
Operating Cash Flow. The components of operating cash flows were:
|
Successor |
|
Predecessor | Total* | Predecessor |
|
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Period
August 2, 2008 through September 30, 2008 |
|
Period
January 1, 2008 through August 1, 2008 |
Nine Months
Ended September 30, 2008 |
Nine Months
Ended September 30, 2007 |
Dollar
Increase (Decrease) |
Percent
Increase (Decrease) |
||||||||||||||
Net income (loss) |
$ | 400 | $ | 1,415 | $ | 1,815 | $ | (93 | ) | $ | 1,908 | | |||||||||
Non-cash items |
69 | 1,844 | 1,913 | 1,357 | 556 | | |||||||||||||||
Changes in operating assets and liabilities |
(5,549 | ) | 8,951 | 3,402 | (357 | ) | 3,759 | | |||||||||||||
Net cash provided by (used in) operating activities |
$ | (5,080 | ) | $ | 12,210 | $ | 7,130 | $ | 907 | $ | 6,223 | 686 | % | ||||||||
Net income (loss). The improved operating results reflect:
Non-cash charges. The increase in non-cash charges in each of the comparable periods is primarily the result of:
Operating assets and liabilities. The major changes in the operating assets and liabilities for the comparable periods primarily reflect timing differences for:
45
revenues that are made in advance, as provided in our contracts, and the related collections of receivables, result in deferred revenues. The timing of these billings and collections fluctuates and can change from period to period based on individual customer requirements; and
Cash flows from investing activities. The major changes in our investing activities are the result of:
Cash flows from financing activities. The major changes in our financing activities are the result of cash transactions associated with Old Digimarc in accordance with the basis of accounting used in our financial statements. Specifically,
In 2007, the cash used in financing activities related primarily to funding capital needs of Old Digimarc's Secure ID Business. In 2008, the capital needs of that business unit were lower.
Commitments and Contingencies.
Our significant commitments consist of obligations under non-cancelable operating leases for our facilities, rent and various equipment leases, which totaled $2.6 million as of September 30, 2008 and are payable in monthly installments through July 2011. Our significant commitments and payment obligations under non-cancelable operating leases at September 30, 2008 are as follows:
Contractual Obligations
|
Payment Due by Period | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Total |
Less than
1 year |
1-3 years | 3-5 years |
More than
5 years |
|||||||||||
Total contractual obligations |
$ | 2,600 | $ | 870 | $ | 1,730 | $ | | $ | | ||||||
Future Cash Expectations.
We believe that our current cash, cash equivalents, and short-term investment balances will satisfy our projected working capital and capital expenditure requirements for at least the next 12 months. Thereafter, we anticipate continuing to use cash, cash equivalents and short-term investment balances to satisfy our projected working capital and capital expenditure requirements.
We may utilize cash resources to fund acquisitions or investments in complementary businesses, technologies or product lines. In order to take advantage of opportunities, we may find it necessary to obtain additional equity financing, debt financing, or credit facilities. We do not believe at this time, however, that our long-term working capital and capital expenditures would require us to take steps to
46
remedy any such potential deficiencies. If it were necessary to obtain additional financings or credit facilities, we may not be able to do so, or if these funds are available, they may not be available on satisfactory terms.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our business.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value. This statement does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective the first fiscal year beginning after November 15, 2007. The Company has applied the provisions of this standard regarding the framework of measuring fair value and noted no material effect on the current financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Option for the Financial Assets and Financial Liabilities, which permits entities to choose to measure certain financial assets and liabilities at fair value. SFAS No. 159 is effective for first fiscal year beginning after November 15, 2007. The Company has elected not to measure certain financial assets and liabilities at fair value as permitted by SFAS No. 159.
In April 2008, FASB issued Staff Position No. FAS 142-3 Determination of the Useful Life of Intangible Assets ("FSP 142-3"). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets . The intent of this Staff Position is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007), Business Combinations , and other U.S. generally accepted accounting principles. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company does not expect the adoption of this Staff Position to have a material effect on its financial position, results of operations or cash flows.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles , which identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the U.S. This statement was approved on September 16, 2008 and became effective 60 days thereafter. The Company is currently evaluating the impact of SFAS 162, but does not expect the adoption of this pronouncement will have a material effect on the Company's financial statements.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Because this Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, any of the risk factors set forth in Part II, Item 1A or elsewhere in this Report on Form 10-Q or incorporated herein by reference could cause our actual results to differ materially from results projected or suggested in any forward-looking statements.
47
Statements that are not historical facts are "forward-looking statements" for the purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Forward-looking statements include but are not limited to statements relating to:
Forward-looking statements also include other statements containing words such as "anticipate," "estimate," "expect," "management believes," "we believe," "we intend," "should" and similar words or phrases, which are intended to identify forward-looking statements. Actual results may vary materially as a result of, among other things, our failure to become profitable, the failure of the potential markets for our digital watermarking technology to develop as anticipated, or the adoption of alternative technologies within these markets, as well as changes in economic, business, competitive, technology and/or regulatory factors and trends, and the other factors described in this Form 10-Q or in our other documents filed with the SEC. All forward- looking statements are necessarily only estimates of future results and we do not assure you that actual results will not differ materially from expectations. Investors, therefore, are cautioned not to place undue reliance on these statements. Investors should understand that it is not possible to predict or identify all risk factors and that the risks discussed below should not be considered a complete statement of all potential risks and uncertainties. We do not intend to update any forward-looking statements as a result of future events or developments.
48
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio and on the increase or decrease in the amount of any interest expense we must pay with respect to outstanding debt instruments. The risk associated with fluctuating interest expense is limited, however, to the exposure related to those debt instruments and credit facilities that are tied to market rates. We do not plan to use derivative financial instruments in our investment portfolio. We plan to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk and investment risk. We plan to mitigate default risk by investing in low-risk securities. At September 30, 2008, we had an investment portfolio of money market funds, commercial securities and U.S. Government securities, including those classified as cash and cash equivalents, restricted cash, and short-term investments, of $49.4 million. The original maturities of our investment portfolio range from 14 to 469 days with an average interest rate of 2.3%. If market interest rates were to increase immediately and uniformly by 10% from levels as of September 30, 2008, the decline of the fair market value of the fixed income portfolio and loans outstanding would not be material.
Item 4T. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this Form 10-Q, were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Controls
There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) that occurred during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
49
From time to time in our normal course of business we are a party to various legal claims, actions and complaints. Currently, we do not have any pending litigation that we consider material.
The following risks relate principally to our business and our status as a separate publicly-traded company. The risks and uncertainties described below are those risks of which we are aware, that we consider to be material to our business. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected. In that case, the trading price of our common stock could decline. Our business, financial condition, results of operations and cash flows may be affected by a number of factors, including the factors set forth below.
(1) We have no recent operating history as a separate company. Our historical financial information are not necessarily representative of the results we would have achieved as a separate publicly-traded company, and they may not be a reliable indicator of our future results.
The predecessor financial statements have been "carved out" from Old Digimarc's consolidated financial statements and reflect assumptions and allocations made by Old Digimarc. The predecessor financial statements do not fully represent what the predecessor's financial position, results of operations and cash flow would have been had it operated as a stand-alone public company for the periods presented. Significant changes may occur in our cost structure, tax structure, management, financing and business operations as a result of our operating as a public company separate from Old Digimarc. These changes may result in increased costs associated with reduced economies of scale, marketing expenses, the incurrence of debt and interest expense, stand-alone costs for services formerly provided by Old Digimarc, the need for additional personnel to perform services formerly provided by Old Digimarc, and the legal, accounting, compliance and other costs associated with being a public company with equity securities listed on a national exchange. As a result, the historical information included in this Quarterly Report on Form 10-Q is not necessarily indicative of what our future financial position, results of operations and cash flow will be. For more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.
(2) We have a history of losses and we may not achieve or sustain profitability, particularly if we were to lose large contracts.
Old Digimarc's Digital Watermarking Business had incurred significant net losses from inception. Old Digimarc's accumulated deficit was $100 million as of December 31, 2007. Although we anticipate that we will achieve profitability for 2009, in order to achieve sustained profitability we will need to generate higher revenue than Old Digimarc's Digital Watermarking Business had in prior years and control expenditures. Achieving sustained profitability will depend upon a variety of factors, including the extent to which we may be required to increase the size of our workforce in order to execute our business strategy and capitalize on new opportunities. In addition, we will evaluate our strategy and market opportunities on an ongoing basis and will adjust our approach to market conditions from time to time. Finally, various adverse developments, including the loss of large contracts or cost overruns on our existing contracts, could have a negative effect on our revenue or our margins. Accordingly, increases in our expenses may not be offset by revenue increases and as a result we may not be able to achieve or sustain profitability.
50
(3) The current capital and credit market conditions may adversely affect our access to capital, cost of capital and business operations.
Recently, the general economic and capital market conditions in the U.S. and other parts of the world have deteriorated significantly and have adversely affected access to capital and increased the cost of capital. If these conditions continue or become worse, our future cost of debt and equity capital and our access to capital markets could be adversely affected. Any inability to obtain adequate financing from debt or equity capital sources could force us to self-fund strategic initiatives or even forgo some opportunities, potentially harming our business operations and results.
In addition, our ability to find investments that are both safe and liquid and that provide a reasonable return may be impaired. This could result in lower interest income, longer investment tenors or higher other-than-temporary impairments.
(4) The current economic downturn may impair the financial soundness of our customers, which could adversely affect our business operations.
As a result of the current economic downturn and macro-economic challenges currently affecting the economy of the U.S. and other parts of the world, our customers may not be successful in generating sufficient revenue or may be precluded from securing financing. As a result, they may choose to delay or postpone development projects until the economy strengthens. They also may not be able to pay, or may delay payment of, accounts receivable that are owed to us. This could result in greater expense associated with our collection efforts and increased bad debt expense. Any decision by current or future customers to defer development projects or their inability to pay us for our products or services may adversely affect our earnings and cash flow.
(5) A small number of customers account for a substantial portion of our revenues and the loss of any large contract may result in loss of revenue.
Historically, we have derived a significant portion of our revenues from a limited number of customers. Two customers, the Bank for International Settlements, acting on behalf of a consortium of Central Banks, and The Nielsen Company, which we refer to as Nielsen, represented approximately 78% of our revenue for the nine months ended September 30, 2008. Contracts between our large central banking, federal and commercial customers generally have terms of three to five or more years in length and sometimes for the life of the patents under license, which could be up to 20 years. Some contracts we enter into contain termination for convenience provisions. If we were to lose a contract due to termination for convenience or in a competitive situation, our financial results could be adversely affected.
We expect to continue to depend upon a small number of customers for a significant portion of our revenues for the foreseeable future. The loss of, or decline in, orders or backlog from one or more major customers could reduce our revenues and have a material adverse effect on our financial results.
(6) The majority of our revenue is subject to commercial contracts and development of new markets that may involve unpredictable delays and other unexpected changes, which might limit our actual revenue in any given quarter or year.
We derive substantial portions of our revenue from commercial contracts tied to development schedules or development of new markets, which could shift for months, quarters or years as the needs of our customers and the markets in which they participate change. Government agencies and commercial customers also face budget pressures that introduce added uncertainty. Any shift in development schedules, the markets in which we or our licensees participate, or customer procurement processes, which are outside our control and may not be predictable, could result in delays in bookings forecasted for any particular period, could affect the predictability of our quarterly and annual results,
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and might limit our actual revenue in any given quarter or year, resulting in reduced and less predictable revenue and adversely affecting profitability.
(7) The market for our products is highly competitive and alternative technologies or larger companies may undermine, limit or eliminate the market for our products' technologies, which would decrease our revenue and profits.
The markets in which we compete for business are intensely competitive and rapidly evolving. We expect competition to continue from both existing competitors and new market entrants. We face competition from other companies and from alternative technologies. Because the market solutions based on our technologies are still in an early stage of development, we also may face competition from unexpected sources.
Alternative technologies that may directly or indirectly compete with particular applications of our watermarking technologies include:
In the competitive environment in which we operate, product generation, development and marketing processes relating to technology are uncertain and complex, requiring accurate prediction of demand as well as successful management of various development risks inherent in technology development. In light of these dependencies, it is possible that failure to successfully accommodate future changes in technologies related to our technologies could have a long-term effect on our growth and results of operations.
New developments are expected to continue, and we do not assure you that discoveries by others, including current and potential competitors, will not render our services and products noncompetitive.
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Moreover, because of rapid technological changes, we may be required to expend greater amounts of time and money than anticipated to develop new products and services, which in turn may require greater revenue streams from these products and services to cover developmental costs. Many of the companies that compete with us for some of our business, as well as other companies with whom we may compete in the future, are larger and may have greater technical, financial, marketing, and political resources than we do. These resources could enable these companies to initiate severe price cuts or take other measures in an effort to gain market share or otherwise impede our progress. We do not assure you that we will be able to compete successfully against current or future participants in our market or against alternative technologies, or that the competitive pressures we face will not decrease our revenue and profits in the future.
(8) We depend on our management and key employees for our future success. If we are not able to retain, hire or integrate these employees, we may not be able to meet our commitments.
Our success depends to a significant extent on the performance and continued service of our management and our intellectual property team. The loss of the services of any of these employees could limit our growth or undermine customer relationships.
Due to the high level of technical expertise that our industry requires, our ability to successfully develop, market, sell, license and support our products, services, and intellectual property depends to a significant degree upon the continued contributions of our key personnel in engineering, sales, marketing, operations, legal and licensing, many of whom would be difficult to replace. We believe our future success will depend in large part upon our ability to retain our current key employees and our ability to attract, integrate and retain these personnel in the future. It may not be practical for us to match the compensation some of our employees could garner at other employment. In addition, we may encounter difficulties in hiring and retaining employees because of concerns related to our financial performance. These circumstances may have a negative effect on the market price of our common stock, and employees and prospective employees may factor in the uncertainties relating to our stability and the value of any equity-based incentives in their decisions regarding employment opportunities and decide to leave our employ. Moreover, our business is based in large part on patented technology, which is unique and not generally known. New employees require substantial training, involving significant resources and management attention. Competition for experienced personnel in our business can be intense. If we do not succeed in attracting new, qualified personnel or in integrating, retaining and motivating our current personnel, our growth and ability to deliver products and services that our customers require may be hampered. Although our employees generally have executed agreements containing non-competition clauses, we do not assure you that a court would enforce all of the terms of these clauses or the clauses generally. If these clauses were not fully enforced, our employees could be able to freely join our competitors. Although we generally attempt to control access to and distribution of our proprietary information by our employees, we do not assure you that the confidential nature of our proprietary information will be maintained in the course of such future employment. Any of these events could have a material adverse effect on our financial and business prospects.
(9) If leading companies in our industry or standard-setting bodies or institutions downplay, minimize, or reject the use of our technologies, deployment may be slowed and we may be unable to achieve revenue growth, particularly in the media and entertainment sectors.
Many of our business endeavors, such as our licensing of intellectual property in support of audio and video copy-control applications, can be impeded or frustrated by larger, more influential companies or by standard-setting bodies or institutions downplaying, minimizing or rejecting the value or use of our other technologies. A negative position by these companies, bodies or institutions, if taken, may result in obstacles for us that we would be incapable of overcoming and may block or impede the
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adoption of digital watermarking, particularly in the media and entertainment market. In addition, potential customers in the media and entertainment industry may delay or reject initiatives that relate to deployment of our technologies. Such a development would make the achievement of our business objectives in this market difficult or impossible.
(10) If we are unable to respond to regulatory or industry standards effectively, or if we are unable to develop and integrate new technologies effectively, our growth and the development of our products and services could be delayed or limited.
Our future success will depend in part on our ability to enhance and improve the responsiveness, functionality and features of our products and services, and those of our business partners, in accordance with regulatory or industry standards. Our ability to remain competitive will depend in part on our ability to influence and respond to emerging industry and governmental standards in a timely and cost-effective manner. If we are unable to influence these or other standards or respond to these standards effectively, our growth and the development of various products and services could be delayed or limited.
Our market is characterized by new and evolving technologies. The success of our business will depend on our ability to develop and integrate new technologies effectively and address the increasingly sophisticated technological needs of our customers in a timely and cost-effective manner. Our ability to remain competitive will depend in part on our ability to:
We do not assure you that we will be successful in responding to these technological and industry challenges in a timely and cost-effective manner. If we are unable to develop or integrate new technologies effectively or respond to these changing needs, our margins could decrease, and our release of new products and services and the deployment of our watermarking technology could be adversely affected.
(11) We may need to retain additional employees or contract labor in the future in order to take advantage of new business opportunities arising from increased demand, which could impede our ability to achieve or sustain profitability.
We have staffed our company with the intent of achieving and sustaining profitability. Our current staffing levels could affect our ability to respond to increased demand for our services. In addition, to meet any increased demand and take advantage of new business opportunities in the future, we may need to increase our workforce through additional employees or contract labor, which would increase our costs. If we experience such an increase in costs, we may not succeed in achieving or sustaining profitability.
(12) Our future growth will depend to some extent on our successful implementation of our technology in solutions provided by third parties, including partners and suppliers.
Our business and strategy rely substantially on deployment of our technologies by third-party software developers and original equipment manufacturers. For example, one of our technologies is commonly deployed in image editing applications to permit users of these products to read data embedded in imagery, and thereby identify ownership and discern the identities of image owners. Another of our technologies is used in our anti-counterfeiting products. If third parties who include our
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technologies in their products cease to do so, or we fail to obtain other partners who will incorporate, embed, integrate or bundle our technologies, or these partners are unsuccessful in their efforts, our efforts to expand deployment of our technologies would be adversely affected and, consequently, our ability to increase revenues would be adversely affected and we may suffer other adverse effects to our business. In addition, if our technologies do not perform according to market expectations, our future sales would suffer as customers seek other providers.
(13) Our growth of IP licensing revenues depends on successful implementation of solutions by our licensees and third parties and successful development of new markets for our technologies.
Our IP licensing business and strategy rely, in part, on successful deployment of our technologies by our licensees and other third-party software developers and original equipment manufacturers. For example, our technology is being deployed as part of Digital Cinema systems to theatres around the world by companies that integrate technologies and subsystems. If third parties who license our intellectual property for their products cease to do so, or we fail to obtain other partners who will incorporate, embed, integrate or bundle our technologies and intellectual property, or these partners are unsuccessful in their efforts, our ability to increase licensing revenues would be adversely affected. In addition, if our technologies do not perform according to market expectations, our future sales would suffer as customers seek other providers.
(14) An increase in our operations outside of the U.S. subjects us to risks additional to those to which we are exposed in our domestic operations.
We believe that revenue from sales of products and services to commercial, governmental and other customers outside the U.S. could represent a growing percentage of our total revenue in the future. International sales and services are subject to a number of risks that can adversely affect our sales of products and services to customers outside of the U.S., including the following:
We do not have an extensive operational infrastructure for international business. We generally depend on local or international business partners and subcontractors for performance of substantial portions of our business. These factors may result in greater risk of performance problems or of reduced profitability with respect to our international programs in these markets. In addition, if foreign customers, in particular foreign government authorities, terminate or delay the implementation of our products and services, it may be difficult for us to recover our potential losses.
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(15) The terms and conditions of our contracts could subject us to damages, losses and other expenses if we fail to meet delivery and other performance requirements.
Our service contracts typically include provisions imposing:
To the extent these provisions involve performance over extended periods of time, risks of noncompliance may increase. From time to time we have experienced delays in system implementation, timely acceptance of programs, concerns regarding program performance and other contractual disputes. If we fail to meet contractual milestones or other performance requirements as promised, or to successfully resolve customer disputes, we could incur liability for damages, as well as increased costs, lower margins, or compensatory obligations in addition to other losses, such as harm to our reputation. Any unexpected increases in costs to meet our contractual obligations or any other requirements necessary to address claims and damages with regard to our customer contracts could have a material adverse effect on our business and financial results.
(16) Our products could have unknown defects or errors, which may give rise to claims against us, divert application of our resources from other purposes or increase our project implementation and support costs.
Products and services as complex as those we offer or develop may contain undetected defects or errors. Furthermore, we often provide complex implementation, integration, customization, consulting and other technical services in connection with the implementation and ongoing maintenance of our products. Despite testing, defects or errors in our products and services may occur, which could result in delays in the development and implementation of products and systems, inability to meet customer requirements or expectations in a timely manner, loss of revenue or market share, increased implementation and support costs, failure to achieve market acceptance, diversion of development resources, injury to our reputation, increased insurance costs, increased service and warranty costs and warranty or breach of contract claims. Although we attempt to reduce the risk of losses resulting from warranty or breach of contract claims through warranty disclaimers and liability limitation clauses in our sales agreements when we can, these contractual provisions are sometimes not included and may not be enforceable in every instance. If a court refuses to enforce the liability-limiting provisions of our contracts for any reason, or if liabilities arose that were not contractually limited or adequately covered by insurance, the expense associated with defending these actions or paying the resultant claims could be significant.
(17) The security systems used in our product and service offerings may be circumvented or sabotaged by third parties, which could result in the disclosure of sensitive information or private personal information or cause other business interruptions that could damage our reputation and disrupt our business.
Our business relies on computers and other information technologies, both internal and at customer locations. The protective measures that we use may not prevent security breaches, and failure to prevent security breaches may disrupt our business, damage our reputation, and expose us to litigation and liability. A party who is able to circumvent security measures could misappropriate sensitive or proprietary information or materials or cause interruptions or otherwise damage our products, services and reputation, and the property of our customers. If unintended parties obtain sensitive data and information, or create bugs or viruses or otherwise sabotage the functionality of our systems, we may receive negative publicity, incur liability to our customers or lose the confidence of our customers, any of which may cause the termination or modification of our contracts. Further, our insurance coverage may be insufficient to cover losses and liabilities that may result from these events.
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In addition, we may be required to expend significant capital and other resources to protect ourselves against the threat of security breaches or to alleviate problems caused by these breaches. Any protection or remedial measures may not be available at a reasonable price or at all, or may not be entirely effective if commenced.
(18) We are subject to risks encountered by companies developing and relying upon new technologies, products and services for substantial amounts of their growth or revenue.
Our business and prospects must be considered in light of the risks and uncertainties to which companies with new and rapidly evolving technologies, products and services are exposed. These risks include the following:
Some of our key technologies and solutions from our patent or technology licensees are in the development stage. Consequently, products incorporating these technologies and solutions are undergoing technological change and are in the early stage of introduction in the marketplace. Delays in the adoption of these products or adverse competitive developments may result in delays in the development of new revenue sources or the growth in our revenue. In addition, we may be required to incur unanticipated expenditures if product changes or improvements are required. Additionally, new industry standards might redefine the products that we or our licensees are able to sell, especially if these products are only in the prototype stage of development. If product changes or improvements are required, success in marketing these products by us or our licensees and achieving profitability from these products could be delayed or halted. We also may be required to fund any changes or improvements out of operating income, which could adversely affect our profitability.
(19) We may not be able to protect adequately our intellectual property, and we may be subject to infringement claims and other litigation, which could adversely affect our business.
Our success depends in part on licensing our proprietary technologies. To protect our intellectual property portfolio, we rely on a combination of patent, copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements. Unlicensed copying and use of our intellectual property or infringement of our intellectual property rights result in the loss of revenue to us.
We face risks associated with our patent position, including the potential need from time to time to engage in significant legal proceedings to enforce our patents, the possibility that the validity or enforceability of our patents may be denied, and the possibility that third parties will be able to compete against us without infringing our patents. Budgetary concerns may cause us not to file, or continue, litigation against known infringers of our patent rights, or may cause us not to file for, or pursue, patent protection for all of our inventive technologies in jurisdictions where they may have value. Some governmental entities that might infringe our intellectual property rights may enjoy sovereign immunity from such claims. Failure to reliably enforce our patent rights against infringers may make licensing more difficult. If we fail to protect our intellectual property rights and proprietary
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technologies adequately, if there are changes in applicable laws that are adverse to our interests, or if we become involved in litigation relating to our intellectual property rights and proprietary technologies or relating to the intellectual property rights of others, our business could be seriously harmed because the value ascribed to our intellectual property could diminish and result in a lower stock price or we may incur significant costs in bringing legal proceedings against third parties who are infringing our patents.
Effective protection of intellectual property rights may be unavailable or limited. Patent protection throughout the world is generally established on a country-by-country basis. We have applied for patent protection in the U.S and in various other countries. We do not assure you, however, that pending patents will be issued or that issued patents will be valid or enforceable. Failure to obtain these patents or failure to enforce those patents that are obtained may result in a loss of revenue to us. We do not assure you that the protection of our proprietary rights will be adequate or that our competitors will not independently develop similar technologies, duplicate our services or design around any of our patents or other intellectual property rights.
We are the exclusive licensee under some third-party patents, and may need the assistance of these parties if we choose to enforce any of these patent rights. The cooperation of these third parties cannot be assured. Although we rely on some of these technologies for our products or for our licenses to third parties to date, the licensed patents have not been material to our operations.
As more companies engage in business activities relating to digital watermarking, and develop corresponding intellectual property rights, it is increasingly likely that claims may arise which assert that some of our products or services infringe upon other parties' intellectual property rights. These claims could subject us to costly litigation, divert management resources and result in the invalidation of our intellectual property rights. These claims may require us to pay significant damages, cease production of infringing products, terminate our use of infringing technologies or develop non-infringing technologies. In these circumstances, continued use of our technologies may require that we acquire licenses to the intellectual property that is the subject of the alleged infringement, and we might not be able to obtain these licenses on commercially reasonable terms or at all. Our use of protected technologies may result in liability that threatens our continuing operation.
Some of our contracts include provisions regarding our non-infringement of third-party intellectual property rights. As deployment of our technology increases, and more companies enter our markets, the likelihood of a third party lawsuit resulting from these provisions increases. If an infringement arose in a context governed by such a contract, we may have to refund to our customer amounts already paid to us or pay significant damages, or we may be sued by the party allegedly infringed upon. Similarly, as we seek to broaden the number of companies licensed under our patent portfolio, some may seek contractual assurances that we will pursueby litigation if necessarytheir competitors who use our patented technology but are not licensed to do so. Compliance with any such contract provisions may require that we pursue litigation where our costs exceed our likely recovery.
As part of our confidentiality procedures, we generally enter into non-disclosure agreements with our employees, directors, consultants and corporate partners, and attempt to control access to and distribution of our technologies, solutions, documentation and other proprietary information. Despite these procedures, third parties could copy or otherwise obtain and make unauthorized use of our technologies, solutions or other proprietary information or independently develop similar technologies, solutions or information. The steps that we have taken to prevent misappropriation of our solutions, technologies or other proprietary information may not prevent their misappropriation.
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(20) We do not assure you that our internal controls and procedures will succeed in achieving their stated goals under all potential future conditions, regardless of how remote.
We have deployed significant resources to design, implement, and maintain effective internal controls and procedures, including disclosure controls and procedures. Although our internal controls and procedures are designed to provide reasonable assurance of achieving their objectives, the design of any system of controls is based in part upon various assumptions about the likelihood of future events, and we do not assure you that our system will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Any failure to maintain adequate controls or to adequately implement required new or improved controls could harm our operating results or cause us to fail to meet our reporting obligations in a timely and accurate manner.
(21) If our revenue models and pricing structures relating to products and services that are under development do not gain market acceptance, the products and services may fail to attract or retain customers and we may not be able to generate new or sustain existing revenue.
Some of our business involves embedding digital watermarks in traditional and digital media, including identification documents, secure documents, audio, video and imagery, and licensing our intellectual property. Our revenue stream is based primarily on a combination of development, consulting, subscription and license fees from copyright protection and counterfeit deterrence applications. We have not fully developed revenue models for some of our future digital watermarking applications and licensing endeavors. Because some of our products and services are not yet well-established in the marketplace, and because some of these products and services will not directly displace existing solutions, we cannot be certain that the pricing structure for these products and services will gain market acceptance or be sustainable over time or that the marketing for these products and services will be effective.
(22)While we currently have no material claims, litigation or regulatory actions filed or pending by or against us, future claims, litigation or enforcement actions could arise, and any obligation to pay a judgment or damages could materially harm our business or financial condition.
From time to time, Old Digimarc had been engaged in litigation and incurred significant costs relating to these matters. The inherent uncertainties of litigation, and the ultimate cost and outcome of litigation cannot be predicted. We carry director and officer liability insurance and other insurance policies that provide protection against various liabilities relating to claims against us and our executive officers and directors up to prescribed policy limits. If these policies do not adequately cover expenses and liabilities relating to future lawsuits, our financial condition could be materially harmed. In addition, if this insurance coverage becomes unavailable to us or premiums increase significantly in the future, it could make it more difficult for us to retain and attract officers and directors and could expose us to potentially self-funding certain future liabilities ordinarily mitigated by director and officer liability insurance.
(23) Our common stock price may be volatile, and you could lose all or part of your investment in shares of our common stock.
The price of shares of our common stock may fluctuate as a result of changes in our operating performance or prospects and other factors. Some specific factors that may have a significant effect on the price of shares of our common stock include:
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(24) We have the ability to issue additional equity securities, which would lead to dilution of our issued and outstanding common stock.
The issuance of additional equity securities or securities convertible into equity securities would result in dilution of our existing stockholders' equity interests. We are authorized to issue, without stockholder approval, up to 2,500,000 shares of preferred stock, par value $0.001 per share, in one or more series, which may give other stockholders dividend, conversion, voting, and liquidation rights, among other rights, which may be superior to the rights of holders of our common stock. In addition, we are authorized to issue up to 50,000,000 shares of common stock, par value $0.001 per share. We are authorized to issue, without stockholder approval except as required by law or Nasdaq regulations, securities convertible into either common stock or preferred stock.
Following the spin-off, we issued to our executive officers an aggregate of 10,000 shares of Series A Redeemable Nonvoting Preferred stock. In the event of our liquidation, dissolution or other winding up, before any payment or distribution is made to the holders of common stock, holders of the Series A Redeemable Nonvoting Preferred stock will be entitled to receive a value of $5.00 per share of Series A Redeemable Nonvoting Preferred stock held by the stockholder. The Series A Redeemable Nonvoting Preferred has no voting rights, and may be redeemed by us at any time on or after June 18, 2013.
(25) Our corporate governance documents as well as Delaware law may delay or prevent an acquisition of us that stockholders may consider favorable, which could decrease the value of your shares.
Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include supermajority voting requirements for stockholders to amend our organizational documents and limitations on actions by our stockholders by written consent. In addition, our board of directors has the right to issue preferred stock without stockholder approval, which could be used to dilute the stock ownership of a potential hostile acquirer. Delaware law also imposes some restrictions on mergers and other business combinations between any holder of 15% or more of our outstanding common stock and us. Although we believe these provisions protect our stockholders from coercive or otherwise unfair takeover tactics and thereby provide for an opportunity to receive a higher bid by requiring potential acquirers to negotiate with our board of directors, these provisions apply even if the offer may be considered beneficial by some stockholders.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 2, 2008, we issued to each of Mr. Davis, our Chairman and Chief Executive Officer, Mr. Chamness, our Chief Legal Officer and Mr. McConnell, our Chief Financial Officer, 5,000, 2,500 and 2,500 shares of Series A Redeemable Nonvoting Preferred stock, respectively. The shares of Series A Redeemable Nonvoting Preferred stock were issued by the Company to the executive officers in a transaction not involving a public offering, exempt from registration under Section 4(2) of the Securities Act of 1993.
Item 4. Submission of Matters to a Vote of Security Holders
On July 30, 2008, prior to the distribution of our shares to holders of Old Digimarc common stock, we obtained the consent of our sole stockholder, DMRC LLC, to the following:
On July 31, 2008, prior to the distribution of our shares to holders of Old Digimarc common stock, we obtained the consent of our sole stockholder, DMRC LLC, for approval of our 2008 Incentive Plan, a copy of which is attached as Exhibit 10.9 to Amendment No. 3 of our Form 10, filed with the Securities and Exchange Commission on September 9, 2008.
The sole stockholder's consents to the above listed items were obtained in lieu of a special meeting, the call and notice of which were waived. As such, no proxies were solicited in connection with the submission of these matters to a vote.
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Exhibit
Number |
Exhibit Description | ||
---|---|---|---|
2.1 | Separation Agreement among DMRC Corporation, DMRC LLC, Digimarc Corporation and, with respect to certain sections, L-1 Identity Solutions, Inc. (incorporated by reference to Exhibit 2.1 to Amendment No. 2 to the Company's Registration Statement on Form 10, filed with the Commission on August 13, 2008 (File No. 001-34108)) | ||
|
3.1 |
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Restated Certificate of Incorporation of Digimarc Corporation (incorporated by reference to Exhibit 3.1 to Amendment No. 3 to the Company's Registration Statement on Form 10, filed with the Commission on September 9, 2008 (File No. 001-34108)) |
|
3.2 |
|
Amended and Restated Bylaws of Digimarc Corporation (incorporated by reference to Exhibit 3.2 to Amendment No. 3 to the Company's Registration Statement on Form 10, filed with the Commission on September 9, 2008 (File No. 001-34108)) |
|
4.1 |
|
Rights Agreement, dated July 31, 2008, between DMRC Corporation and Computershare Trust Company, N.A. as Rights Agent (incorporated by reference to Exhibit 4.2 to Amendment No. 2 to the Company's Registration Statement on Form 10, filed with the Commission on August 13, 2008 (File No. 000-34108)) |
|
4.2 |
|
Form of Certificate of Designation of Series R Preferred Stock (attached as an exhibit to the Rights Agreement filed as Exhibit 4.2 hereto) |
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4.3 |
|
Form of Rights Certificate (attached as an exhibit to the Rights Agreement filed as Exhibit 4.2 hereto) |
|
10.1 |
|
Transition Services Agreement between DMRC Corporation and Digimarc Corporation (incorporated by reference to Exhibit 10.1 to Amendment No. 6 to the Company's Registration Statement on Form 10, filed with the Commission on October 14, 2008 (File No. 001-34108))(1) |
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10.2 |
|
License Agreement between DMRC Corporation and L-1 Identity Solutions Operating Company (incorporated by reference to Exhibit 10.2 to Amendment No. 4 to the Company's Registration Statement on Form 10, filed with the Commission on October 2, 2008 (File No. 001-34108))(1) |
|
10.3 |
|
Agreement, dated as of October 1, 2007, between Digimarc Corporation and The Nielsen Company (incorporated by reference to Exhibit 10.3 to Amendment No. 6 to the Company's Registration Statement on Form 10, filed on October 14, 2008 (File No. 001-34108))(1) |
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10.4 |
|
Counterfeit Deterrence System Development and License Agreement, dated as of January 1, 1999, between Digimarc Corporation and the Bank for International Settlements (incorporated by reference to Exhibit 10.4 to Amendment No. 6 to the Company's Registration Statement on Form 10, filed with the Commission on October 14, 2008 (File No. 001-34108))(1) |
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*10.5 |
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Form of Indemnification Agreement between DMRC Corporation and each of its executive officers and directors (incorporated by reference to Exhibit 10.5 to Amendment No. 2 to the Company's Registration Statement on Form 10, filed with the Commission on August 13, 2008 (File No. 001-34108)) |
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*10.6 |
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Employment Agreement, dated as of October 29, 2008, between Digimarc Corporation and Bruce Davis (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the Commission on November 4, 2008 (File No. 001-34108)) |
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Exhibit
Number |
Exhibit Description | ||
---|---|---|---|
*10.7 | Digimarc Corporation 2008 Incentive Plan | ||
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*10.8 |
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Form of Notice of Stock Option Award and Stock Option Award Agreement under Digimarc Corporation 2008 Incentive Plan |
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*10.9 |
|
Equity Compensation Program for Nonemployee Directors under the Digimarc Corporation 2008 Incentive Plan |
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*10.10 |
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Form of Indemnification Agreement between Digimarc Corporation and each of its executive officers and directors (incorporated by reference to Exhibit 10.1 to Digimarc Corporation's Annual Report on Form 10-K, as filed by Digimarc Corporation with the Securities and Exchange Commission on March 13, 2006 (File No. 000-28317)) |
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*10.11 |
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Form of Change of Control Retention Agreement entered into by and between Digimarc Corporation and each of Messrs. McConnell, Chamness and Stager (incorporated by reference to Exhibit 10.1 to Digimarc Corporation's Current Report on Form 8-K, as filed by Digimarc Corporation with the Securities and Exchange Commission on January 4, 2007 (File No. 000-28317)) |
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
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32.1 |
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Section 1350 Certification of Chief Executive Officer |
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32.2 |
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Section 1350 Certification of Chief Financial Officer |
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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.
Date: November 24, 2008 | DIGIMARC CORPORATION | |||
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By: |
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/s/ MICHAEL MCCONNELL Michael McConnell Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer) |
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Exhibit
Number |
Exhibit Description | ||
---|---|---|---|
2.1 | Separation Agreement among DMRC Corporation, DMRC LLC, Digimarc Corporation and, with respect to certain sections, L-1 Identity Solutions, Inc. (incorporated by reference to Exhibit 2.1 to Amendment No. 2 to the Company's Registration Statement on Form 10, filed with the Commission on August 13, 2008 (File No. 001-34108)) | ||
|
3.1 |
|
Restated Certificate of Incorporation of Digimarc Corporation (incorporated by reference to Exhibit 3.1 to Amendment No. 3 to the Company's Registration Statement on Form 10, filed with the Commission on September 9, 2008 (File No. 001-34108)) |
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3.2 |
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Amended and Restated Bylaws of Digimarc Corporation (incorporated by reference to Exhibit 3.2 to Amendment No. 3 to the Company's Registration Statement on Form 10, filed with the Commission on September 9, 2008 (File No. 001-34108)) |
|
4.1 |
|
Rights Agreement, dated July 31, 2008, between DMRC Corporation and Computershare Trust Company, N.A. as Rights Agent (incorporated by reference to Exhibit 4.2 to Amendment No. 2 to the Company's Registration Statement on Form 10, filed with the Commission on August 13, 2008 (File No. 000-34108)) |
|
4.2 |
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Form of Certificate of Designation of Series R Preferred Stock (attached as an exhibit to the Rights Agreement filed as Exhibit 4.2 hereto) |
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4.3 |
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Form of Rights Certificate (attached as an exhibit to the Rights Agreement filed as Exhibit 4.2 hereto) |
|
10.1 |
|
Transition Services Agreement between DMRC Corporation and Digimarc Corporation (incorporated by reference to Exhibit 10.1 to Amendment No. 6 to the Company's Registration Statement on Form 10, filed with the Commission on October 14, 2008 (File No. 001-34108))(1) |
|
10.2 |
|
License Agreement between DMRC Corporation and L-1 Identity Solutions Operating Company (incorporated by reference to Exhibit 10.2 to Amendment No. 4 to the Company's Registration Statement on Form 10, filed with the Commission on October 2, 2008 (File No. 001-34108))(1) |
|
10.3 |
|
Agreement, dated as of October 1, 2007, between Digimarc Corporation and The Nielsen Company (incorporated by reference to Exhibit 10.3 to Amendment No. 6 to the Company's Registration Statement on Form 10, filed on October 14, 2008 (File No. 001-34108))(1) |
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10.4 |
|
Counterfeit Deterrence System Development and License Agreement, dated as of January 1, 1999, between Digimarc Corporation and the Bank for International Settlements (incorporated by reference to Exhibit 10.4 to Amendment No. 6 to the Company's Registration Statement on Form 10, filed with the Commission on October 14, 2008 (File No. 001-34108))(1) |
|
*10.5 |
|
Form of Indemnification Agreement between DMRC Corporation and each of its executive officers and directors (incorporated by reference to Exhibit 10.5 to Amendment No. 2 to the Company's Registration Statement on Form 10, filed with the Commission on August 13, 2008 (File No. 001-34108)) |
|
*10.6 |
|
Employment Agreement, dated as of October 29, 2008, between Digimarc Corporation and Bruce Davis (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed with the Commission on November 4, 2008 (File No. 001-34108)) |
65
Exhibit
Number |
Exhibit Description | ||
---|---|---|---|
*10.7 | Digimarc Corporation 2008 Incentive Plan | ||
|
*10.8 |
|
Form of Notice of Stock Option Award and Stock Option Award Agreement under Digimarc Corporation 2008 Incentive Plan |
|
*10.9 |
|
Equity Compensation Program for Nonemployee Directors under the Digimarc Corporation 2008 Incentive Plan |
|
*10.10 |
|
Form of Indemnification Agreement between Digimarc Corporation and each of its executive officers and directors (incorporated by reference to Exhibit 10.1 to Digimarc Corporation's Annual Report on Form 10-K, as filed by Digimarc Corporation with the Securities and Exchange Commission on March 13, 2006 (File No. 000-28317)) |
|
*10.11 |
|
Form of Change of Control Retention Agreement entered into by and between Digimarc Corporation and each of Messrs. McConnell, Chamness and Stager (incorporated by reference to Exhibit 10.1 to Digimarc Corporation's Current Report on Form 8-K, as filed by Digimarc Corporation with the Securities and Exchange Commission on January 4, 2007 (File No. 000-28317)) |
|
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 |
66
Exhibit 10.7
DIGIMARC CORPORATION
2008 INCENTIVE PLAN
The purpose of the Digimarc Corporation 2008 Incentive Plan is to attract, retain and motivate employees, officers, directors, consultants, agents, advisors and independent contractors of the Company and its Related Companies by providing them the opportunity to acquire a proprietary interest in the Company and to align their interests and efforts to the long-term interests of the Companys stockholders.
Certain capitalized terms used in the Plan have the meanings set forth in Appendix A.
The Plan shall be administered by the Board or the Compensation Committee, which shall be composed of two or more directors, each of whom is a non-employee director within the meaning of Rule 16b-3(b)(3) promulgated under the Exchange Act, or any successor definition adopted by the Securities and Exchange Commission, an outside director within the meaning of Section 162(m) of the Code, or any successor provision thereto.
Notwithstanding the foregoing, the Board or the Compensation Committee may delegate responsibility for administering the Plan, including with respect to designated classes of Eligible Persons, to different committees consisting of one or more members of the Board, subject to such limitations as the Board deems appropriate, except with respect to Awards to Participants who are subject to Section 16 of the Exchange Act or Awards granted pursuant to Section 16 of the Plan. Members of any committee shall serve for such term as the Board may determine, subject to removal by the Board at any time. To the extent consistent with applicable law, the Board or the Compensation Committee may authorize one or more officers of the Company to grant Awards to designated classes of Eligible Persons, within limits specifically prescribed by the Board or the Compensation Committee; provided, however, that no such officer shall have or obtain authority to grant Awards to himself or herself or to any person subject to Section 16 of the Exchange Act. All references in the Plan to the Committee shall be, as applicable, to the Compensation Committee or any other committee or any officer to whom the Board or the Compensation Committee has delegated authority to administer the Plan.
(a) Except for the terms and conditions explicitly set forth in the Plan and to the extent permitted by applicable law, the Committee shall have full power and exclusive authority, subject to such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be adopted by the Board or a Committee composed of members of the Board, to (i) select the Eligible Persons to whom Awards may from time to time be granted under the Plan; (ii) determine the type or types of Award to be granted to each Participant under the Plan; (iii) determine the number of shares of Common Stock to be covered by each Award granted under the Plan; (iv) determine the terms and conditions of any Award granted under the Plan; (v) approve the forms of notice or agreement for use under the Plan; (vi) determine whether, to what extent and under what circumstances Awards may be settled in cash, shares of Common Stock or other property or canceled or suspended; (vii) determine whether, to what extent and under what circumstances cash, shares of Common Stock, other property and other amounts payable with respect to an Award shall be deferred either automatically or at the election of the Participant, subject to Section 409A of the Code and in accordance with Section 6.3 of the Plan; (viii) interpret and administer the Plan and any instrument evidencing an Award, notice or agreement executed or entered into under the Plan; (ix) establish such rules and regulations as it shall deem appropriate for the proper administration of the Plan; (x) delegate ministerial duties to such of the Companys employees as it so determines; and (xi) make any other determination and take any other action that the Committee deems necessary or desirable for administration of the Plan.
(b) In no event, however, shall the Committee have the right, without stockholder approval, to (i) cancel or amend outstanding Options or SARs for the purpose of repricing, replacing or regranting such Options or SARs with Options or SARs that have a purchase or grant price that is less than the purchase or grant price for the original Options or SARs except in connection with adjustments provided in Section 15, or (ii) issue an Option or SAR or amend an outstanding Option or SAR to provide for the grant or issuance of a new Option or SAR on exercise of the original Option or SAR.
(c) The effect on the vesting of an Award of a Company-approved leave of absence or a Participants working less than full-time shall be determined by the Companys chief human resources officer or other person performing that function or, with respect to directors or executive officers, by the Compensation Committee, whose determination shall be final.
(d) Decisions of the Committee shall be final, conclusive and binding on all persons, including the Company, any Participant, any stockholder and any Eligible Person. A majority of the members of the Committee may determine its actions.
Subject to adjustment from time to time as provided in Section 15.1, a maximum of 2,500,000 shares of Common Stock shall be available for issuance under the Plan.
2
Shares issued under the Plan shall be drawn from authorized and unissued shares or shares now held or subsequently acquired by the Company as treasury shares.
(a) Shares of Common Stock covered by an Award shall not be counted as used unless and until they are actually issued and delivered to a Participant. If any Award lapses, expires, terminates or is canceled prior to the issuance of shares thereunder or if shares of Common Stock are issued under the Plan to a Participant and thereafter are forfeited to or otherwise reacquired by the Company, the shares subject to such Awards and the forfeited or reacquired shares shall again be available for issuance under the Plan. Any shares of Common Stock (i) tendered by a Participant or retained by the Company as full or partial payment to the Company for the purchase price of an Award or to satisfy tax withholding obligations in connection with an Award, or (ii) covered by an Award that is settled in cash, or in a manner such that some or all of the shares of Common Stock covered by the Award are not issued, shall be available for Awards under the Plan. The number of shares of Common Stock available for issuance under the Plan shall not be reduced to reflect any dividends or dividend equivalents that are reinvested into additional shares of Common Stock or credited as additional shares of Common Stock subject or paid with respect to an Award.
(b) The Committee shall also, without limitation, have the authority to grant Awards as an alternative to or as the form of payment for grants or rights earned or due under other compensation plans or arrangements of the Company.
(c) Notwithstanding anything in the Plan to the contrary, the Committee may grant Substitute Awards under the Plan. Substitute Awards shall not reduce the number of shares authorized for issuance under the Plan. In the event that an Acquired Entity has shares available for awards or grants under one or more preexisting plans not adopted in contemplation of such acquisition or combination, then, to the extent determined by the Board or the Compensation Committee, the shares available for grant pursuant to the terms of such preexisting plan (as adjusted, to the extent appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in such acquisition or combination to determine the consideration payable to holders of common stock of the entities that are parties to such acquisition or combination) may be used for Awards under the Plan and shall not reduce the number of shares of Common Stock authorized for issuance under the Plan; provided, however, that Awards using such available shares shall not be made after the date awards or grants could have been made under the terms of such preexisting plans, absent the acquisition or combination, and shall only be made to individuals who were not employees or directors of the Company or a Related Company prior to such acquisition or combination. In the event that a written agreement between the Company and an Acquired Entity pursuant to which a merger or consolidation is completed is approved by the Board and that agreement sets forth the terms and conditions of the substitution for or assumption of outstanding awards of the Acquired Entity, those terms and conditions shall be deemed to be the action of the Committee without any further action by the Committee, except as may be required for
3
compliance with Rule 16b-3 under the Exchange Act, and the persons holding such awards shall be deemed to be Participants.
(d) Notwithstanding the other provisions in this Section 4.2, the maximum number of shares that may be issued upon the exercise of Incentive Stock Options shall equal the aggregate share number stated in Section 4.1, subject to adjustment as provided in Section 15.1.
An Award may be granted to any employee, officer or director of the Company or a Related Company whom the Committee from time to time selects. An Award may also be granted to any consultant, agent, advisor or independent contractor for bona fide services rendered to the Company or any Related Company that (a) are not in connection with the offer and sale of the Companys securities in a capital-raising transaction and (b) do not directly or indirectly promote or maintain a market for the Companys securities.
The Committee shall have the authority, in its sole discretion, to determine the type or types of Awards to be granted under the Plan. Such Awards may be granted either alone or in addition to or in tandem with any other type of Award. Any Award settlement may be subject to such conditions, restrictions and contingencies as the Committee shall determine.
Awards granted under the Plan shall be evidenced by a written, including an electronic, instrument that shall contain such terms, conditions, limitations and restrictions as the Committee shall deem advisable and that are not inconsistent with the Plan.
The Committee may permit or require a Participant to defer receipt of the payment of any Award if and to the extent set forth in the instrument evidencing the Award at the time of grant. If any such deferral election is permitted or required, the Committee, in its sole discretion, shall establish rules and procedures for such payment deferrals, which may include the grant of additional Awards or provisions for the payment or crediting of interest or dividend equivalents, including converting such credits to deferred stock unit equivalents; provided, however, that the terms of any deferrals under this Section 6.3 shall comply with all applicable law, rules and regulations, including, without limitation, Section 409A of the Code.
4
Participants may, if and to the extent the Committee so determines and sets forth in the instrument evidencing the Award at the time of grant, be credited with dividends paid with respect to shares of Common Stock underlying an Award in a manner determined by the Committee in its sole discretion. The Committee may apply any restrictions to the dividends or dividend equivalents that the Committee deems appropriate. The Committee, in its sole discretion, may determine the form of payment of dividends or dividend equivalents, including cash, shares of Common Stock, Restricted Stock or Stock Units. Notwithstanding the foregoing, the right to any dividends or dividend equivalents declared and paid on the number of shares underlying an Option or Stock Appreciation Right may not be contingent, directly or indirectly, on the exercise of the Option or a Stock Appreciation Right, and an Award providing a right to dividends or dividend equivalents declared and paid on the number of shares underlying an Option or a Stock Appreciation Right, the payment of which is not contingent upon, or otherwise payable on, the exercise of the Option or a Stock Appreciation Right, must comply with or qualify for an exemption under Section 409A of the Code.
The Committee may grant Options designated as Incentive Stock Options or Nonqualified Stock Options.
The exercise price for shares purchased under an Option shall be at least 100% of the Fair Market Value of the Common Stock on the Grant Date (and shall not be less than the minimum exercise price required by Section 422 of the Code with respect to Incentive Stock Options), except in the case of Substitute Awards.
Subject to earlier termination in accordance with the terms of the Plan and the instrument evidencing the Option, the maximum term of an Option shall be ten years from the Grant Date.
The Committee shall establish and set forth in each instrument that evidences an Option the time at which, or the installments in which, the Option shall vest and become exercisable, any of which provisions may be waived or modified by the Committee at any time.
To the extent an Option has vested and become exercisable, the Option may be exercised in whole or from time to time in part by delivery to or as directed or approved by the Company
5
of a properly executed stock option exercise agreement or notice, in a form and in accordance with procedures established by the Committee, setting forth the number of shares with respect to which the Option is being exercised, the restrictions imposed on the shares purchased under such exercise agreement or notice, if any, and such representations and agreements as may be required by the Committee, accompanied by payment in full as described in Sections 7.5 and 13. An Option may be exercised only for whole shares and may not be exercised for less than a reasonable number of shares at any one time, as determined by the Committee.
The exercise price for shares purchased under an Option shall be paid in full to the Company by delivery of consideration equal to the product of the Option exercise price and the number of shares purchased. Such consideration must be paid before the Company will issue the shares being purchased and must be in a form or a combination of forms acceptable to the Committee for that purchase, which forms may include:
(a) cash;
(b) check or wire transfer;
(c) having the Company withhold shares of Common Stock that would otherwise be issued on exercise of the Option that have an aggregate Fair Market Value equal to the aggregate exercise price of the shares being purchased under the Option;
(d) tendering (either actually or, so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, by attestation) shares of Common Stock owned by the Participant that have an aggregate Fair Market Value equal to the aggregate exercise price of the shares being purchased under the Option;
(e) so long as the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act, and to the extent permitted by law, delivery of a properly executed exercise agreement or notice, together with irrevocable instructions to a brokerage firm designated or approved by the Company to deliver promptly to the Company the aggregate amount of proceeds to pay the Option exercise price and any withholding tax obligations that may arise in connection with the exercise, all in accordance with the regulations of the Federal Reserve Board ( i.e. , a cashless exercise); or
(f) such other consideration as the Committee may permit.
The Committee shall establish and set forth in each instrument that evidences an Option whether the Option shall continue to be exercisable, and the terms and conditions of such exercise, after a Termination of Service, any of which provisions may be waived or modified
6
by the Committee at any time; provided, however, that any such waiver or modification shall satisfy the requirements for exemption under Section 409A of the Code.
If the exercise of the Option following a Participants Termination of Service, but while the Option is otherwise exercisable, would be prohibited solely because the issuance of Common Stock would violate either the registration requirements under the Securities Act or the Companys insider trading policy, then the Option shall remain exercisable until the earlier of the Option Expiration Date and the expiration of a period of three months (or such other period of time as determined by the Committee in its sole discretion) after the Participants Termination of Service during which the exercise of the Option would not be in violation of the Securities Act or the Companys insider trading policy requirements.
Notwithstanding any other provisions of the Plan, the terms and conditions of any Incentive Stock Options shall in addition comply in all respects with Section 422 of the Code, or any successor provision, and any applicable regulations thereunder.
The Committee may grant Stock Appreciation Rights to Participants at any time on such terms and conditions as the Committee shall determine in its sole discretion. A SAR may be granted in tandem with an Option or alone ( freestanding ). The grant price of a tandem SAR shall be equal to the exercise price of the related Option. The grant price of a freestanding SAR shall be established in accordance with procedures for Options set forth in Section 7.2. A SAR may be exercised upon such terms and conditions and for the term as the Committee determines in its sole discretion; provided, however, that, subject to earlier termination in accordance with the terms of the Plan and the instrument evidencing the SAR, the maximum term of a freestanding SAR shall be ten years, and in the case of a tandem SAR, (a) the term shall not exceed the term of the related Option and (b) the tandem SAR may be exercised for all or part of the shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option, except that the tandem SAR may be exercised only with respect to the shares for which its related Option is then exercisable.
Upon the exercise of an SAR, a Participant shall be entitled to receive payment in an amount determined by multiplying (a) the difference between the Fair Market Value of the Common Stock on the date of exercise over the grant price of the SAR by (b) the number of shares with respect to which the SAR is exercised. At the discretion of the Committee as set forth in the instrument evidencing the Award, the payment upon exercise of an SAR may be in cash, in shares, in some combination thereof or in any other manner approved by the Committee in its sole discretion.
7
The Committee shall establish and set forth in each instrument that evidences a freestanding SAR whether the SAR shall continue to be exercisable, and the terms and conditions of such exercise, after a Termination of Service, any of which provisions may be waived or modified by the Committee at any time; provided, that any such waiver or modification shall satisfy the requirements under Section 409A of the Code.
Subject to Section 18.5, the Committee, in its sole discretion, may waive any other terms, conditions or restrictions on any SAR under such circumstances and subject to such terms and conditions as the Committee shall deem appropriate; provided, that any such waiver shall satisfy the requirements under Section 409A of the Code.
The Committee may grant Stock Awards, Restricted Stock and Stock Units on such terms and conditions and subject to such repurchase or forfeiture restrictions, if any, which may be based on continuous service with the Company or a Related Company or the achievement of any performance goals, as the Committee shall determine in its sole discretion, which terms, conditions and restrictions shall be set forth in the instrument evidencing the Award.
Upon the satisfaction of any terms, conditions and restrictions prescribed with respect to Restricted Stock or Stock Units, or upon a Participants release from any terms, conditions and restrictions of Restricted Stock or Stock Units, as determined by the Committee, and subject to the provisions of Section 13, (a) the shares of Restricted Stock covered by each Award of Restricted Stock shall become freely transferable by the Participant, and (b) Stock Units shall be paid in shares of Common Stock or, if set forth in the instrument evidencing the Awards, in cash or a combination of cash and shares of Common Stock. Any fractional shares subject to such Awards shall be paid to the Participant in cash.
Subject to Section 18.5, the Committee, in its sole discretion, may waive the repurchase or forfeiture period and any other terms, conditions or restrictions on any Restricted Stock or Stock Unit under such circumstances and subject to such terms and conditions as the Committee shall deem appropriate.
8
SECTION 11. PERFORMANCE AWARDS
The Committee may grant Awards of Performance Shares, designate the Participants to whom Performance Shares are to be awarded and determine the number of Performance Shares and the terms and conditions of each such Award. Performance Shares shall consist of a unit valued by reference to a designated number of shares of Common Stock, the value of which may be paid to the Participant by delivery of shares of Common Stock or, if set forth in the instrument evidencing the Award, of such property as the Committee shall determine, including, without limitation, cash, shares of Common Stock, other property, or any combination thereof, upon the attainment of performance goals, as established by the Committee, and other terms and conditions specified by the Committee. Subject to Section 18.5, the amount to be paid under an Award of Performance Shares may be adjusted on the basis of such further consideration as the Committee shall determine in its sole discretion.
The Committee may grant Awards of Performance Units, designate the Participants to whom Performance Units are to be awarded and determine the number of Performance Units and the terms and conditions of each such Award. Performance Units shall consist of a unit valued by reference to a designated amount of property other than shares of Common Stock, which value may be paid to the Participant by delivery of such property as the Committee shall determine, including, without limitation, cash, shares of Common Stock, other property, or any combination thereof, upon the attainment of performance goals, as established by the Committee, and other terms and conditions specified by the Committee. Subject to Section 18.5, the amount to be paid under an Award of Performance Units may be adjusted on the basis of such further consideration as the Committee shall determine in its sole discretion.
Subject to the terms of the Plan and such other terms and conditions as the Committee deems appropriate, the Committee may grant other incentives payable in cash or in shares of Common Stock under the Plan.
The Company may require the Participant to pay to the Company the amount of (a) any taxes that the Company is required by applicable federal, state, local or foreign law to withhold with respect to the grant, vesting or exercise of an Award ( tax withholding obligations ) and (b) any amounts due from the Participant to the Company or to any Related Company ( other obligations ) to the extent such amounts are not deferred compensation within the meaning of Section 409A. The Company shall not be required to issue any shares of
9
Common Stock or otherwise settle an Award under the Plan until such tax withholding obligations and other obligations are satisfied.
The Committee may permit or require a Participant to satisfy all or part of the Participants tax withholding obligations and other obligations by (a) paying cash to the Company, (b) having the Company withhold an amount from any cash amounts otherwise due or to become due from the Company to the Participant, (c) having the Company withhold a number of shares of Common Stock that would otherwise be issued to the Participant (or become vested, in the case of Restricted Stock) having a Fair Market Value equal to the tax withholding obligations and other obligations, or (d) surrendering a number of shares of Common Stock the Participant already owns having a value equal to the tax withholding obligations and other obligations. To the extent required to avoid adverse financial accounting consequences to the Company, the value of the shares so withheld or tendered may not exceed the employers minimum required tax withholding rate.
No Award or interest in an Award may be sold, assigned, pledged (as collateral for a loan or as security for the performance of an obligation or for any other purpose) or transferred by a Participant or made subject to attachment or similar proceedings otherwise than by will or by the applicable laws of descent and distribution, except to the extent permitted by the Company, the Participant may designate one or more beneficiaries on a Company-approved form who may exercise the Award or receive payment under the Award after the Participants death. During a Participants lifetime, an Award may be exercised only by the Participant. Notwithstanding the foregoing and to the extent permitted by Section 422 of the Code, the Committee, in its sole discretion, may permit a Participant to assign or transfer an Award subject to such terms and conditions as the Committee shall specify.
In the event, at any time or from time to time, a stock dividend, stock split, spin-off, combination or exchange of shares, recapitalization, merger, consolidation, distribution to stockholders other than a normal cash dividend, or other change in the Companys corporate or capital structure results in (a) the outstanding shares of Common Stock, or any securities exchanged therefor or received in their place, being exchanged for a different number or kind of securities of the Company or (b) new, different or additional securities of the Company or any other company being received by the holders of shares of Common Stock, then the Committee shall make proportional adjustments in (i) the maximum number and kind of securities available for issuance under the Plan; (ii) the maximum number and kind of securities issuable as Incentive Stock Options as set forth in Section 4.2; (iii) the maximum number and kind of securities set forth in Section 4.3; (iv) the maximum numbers and kind of securities set forth in Section 16.3; and (v) the number and kind of securities that are subject to any outstanding Award and the per share price of such securities, without any change in
10
the aggregate price to be paid therefor. The determination by the Committee, as to the terms of any of the foregoing adjustments shall be conclusive and binding.
Notwithstanding the foregoing, the issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services rendered, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, outstanding Awards. Also notwithstanding the foregoing, a dissolution or liquidation of the Company or a Company Transaction shall not be governed by this Section 15.1 but shall be governed by Sections 15.2 and 15.3, respectively.
To the extent not previously exercised or settled, and unless otherwise determined by the Committee in its sole discretion, Awards shall terminate immediately prior to the dissolution or liquidation of the Company. To the extent a vesting condition, forfeiture provision or repurchase right applicable to an Award has not been waived by the Committee, the Award shall be forfeited immediately prior to the consummation of the dissolution or liquidation.
Notwithstanding any other provision of the Plan to the contrary, unless the Committee shall determine otherwise in the instrument evidencing the Award or in a written employment, services or other agreement between the Participant and the Company or a Related Company, in the event of a Change in Control:
(a) All outstanding Awards, other than Performance Shares and Performance Units, shall become fully and immediately vested and exercisable, and all applicable deferral and restriction limitations or forfeiture provisions shall lapse, immediately prior to the Change in Control and shall terminate at the effective time of the Change in Control, and any such Awards constituting deferred compensation within the meaning of Section 409A of the Code shall be paid within 60 days following the effective date of the Change in Control; provided, however, that with respect to a Change in Control that is a Company Transaction, such Awards, other than Awards constituting deferred compensation within the meaning of Section 409A of the Code, shall become fully and immediately exercisable, and all applicable deferral and restriction limitations or forfeiture provisions shall lapse, only if and to the extent such Awards are not converted, assumed or replaced by the Successor Company.
For the purposes of this Section 15.3(a), an Award shall be considered converted, assumed or replaced by the Successor Company if following the Company Transaction the option or right confers the right to purchase or receive, for each share of Common Stock subject to the Award immediately prior to the Company Transaction, the consideration (whether stock, cash or other securities or property) received in the Company Transaction by holders of Common Stock for each share held on the effective date of the transaction (and if holders
11
were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares); provided, however, that if such consideration received in the Company Transaction is not solely common stock of the Successor Company, the Committee may, with the consent of the Successor Company, provide for the consideration to be received upon the exercise of the Option, for each share of Common Stock subject thereto, to be solely common stock of the Successor Company substantially equal in fair market value to the per share consideration received by holders of Common Stock in the Company Transaction. The determination of such substantial equality of value of consideration shall be made by the Committee, and its determination shall be conclusive and binding.
(b) The target payout opportunities attainable under all outstanding Stock Awards and Stock Units with restrictions based on performance criteria, Performance Shares, and Performance Units shall be deemed to have been fully earned based on targeted performance being attained as of the effective date of the Change in Control, and such Awards shall be paid within 60 days following the effective date of the Change in Control.
(c) Notwithstanding the foregoing, the Committee, in its sole discretion, may instead provide in the event of a Change in Control that is a Company Transaction that a Participants outstanding Awards shall terminate upon or immediately prior to such Company Transaction and that such Participant shall receive, in exchange therefor, a cash payment equal to the amount (if any) by which (x) the value of the per share consideration received by holders of Common Stock in the Company Transaction, or, in the event the Company Transaction is one of the transactions listed under subsection (c) in the definition of Company Transaction or otherwise does not result in direct receipt of consideration by holders of Common Stock, the value of the deemed per share consideration received, in each case as determined by the Committee in its sole discretion, multiplied by the number of shares of Common Stock subject to such outstanding Awards (to the extent then vested and exercisable or whether or not then vested and exercisable, as determined by the Committee in its sole discretion) exceeds (y) if applicable, the respective aggregate exercise price or grant price for such Awards.
Subject to Sections 15.2 and 15.3, the Committee shall have the discretion, exercisable at any time before a sale, merger, consolidation, reorganization, liquidation, dissolution or change in control of the Company, as defined by the Committee, to take such further action as it determines to be necessary or advisable with respect to Awards. Such authorized action may include (but shall not be limited to) establishing, amending or waiving the type, terms, conditions or duration of, or restrictions on, Awards so as to provide for earlier, later, extended or additional time for exercise, lifting restrictions and other modifications, and the Committee may take such actions with respect to all Participants, to certain categories of Participants or only to individual Participants. The Committee may take such action before or after granting Awards to which the action relates and before or after any public
12
announcement with respect to such sale, merger, consolidation, reorganization, liquidation, dissolution or change in control that is the reason for such action.
The grant of Awards shall in no way affect the Companys right to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.
In the event of any adjustment in the number of shares covered by any Award, each such Award shall cover only the number of full shares resulting from such adjustment.
Notwithstanding anything in this Plan to the contrary, (a) any adjustments made pursuant to this Section 15 to Awards that are considered deferred compensation within the meaning of Section 409A of the Code shall be made in compliance with the requirements of Section 409A of the Code and (b) any adjustments made pursuant to this Section 15 to Awards that are not considered deferred compensation subject to Section 409A of the Code shall be made in such a manner as to ensure that after such adjustment the Awards either (i) continue not to be subject to Section 409A of the Code or (ii) comply with the requirements of Section 409A of the Code.
Notwithstanding any other provision of the Plan, the Compensation Committee may, at the time of grant of an Award (other than an Option or SAR) to a Participant who is then a Covered Employee, or is likely to be a Covered Employee as of the end of the tax year in which the Company would claim a tax deduction in connection with such Award, specify that all or any portion of such Award is intended to satisfy the requirements for performance-based compensation under Section 162(m) and be subject to this Section 16. With respect to each such Award, the Compensation Committee shall establish, in writing, that the vesting and/or payment pursuant to the Award shall be conditioned on the attainment for the specified Performance Period of specified performance targets related to designated performance goals for such period selected by the Compensation Committee from among the Performance Criteria specified in Section 16.1. Such performance goals shall be set by the Compensation Committee within the time period prescribed by, and shall otherwise comply with the requirements of, Section 162(m), or any successor provision thereto, and the regulations thereunder.
If an Award is subject to this Section 16, then the lapsing of restrictions thereon and the distribution of cash, shares of Common Stock or other property pursuant thereto, as
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applicable, shall be subject to the achievement of one or more objective performance goals established by the Compensation Committee, which shall be based on the attainment of specified levels of one of or any combination of the following performance criteria for the Company as a whole or any business unit of the Company, as reported or calculated by the Company: net earnings or net income (before or after taxes); earnings per share (basic or fully diluted); net sales growth or bookings growth; revenues; operating profit or income (including or excluding depreciation, amortization, extraordinary items, restructuring charges or other expenses); return measures (including, but not limited to, return on assets, capital, net capital utilized, equity or sales); working capital; cash flow (including, but not limited to, operating cash flow, free cash flow or cash flow return on capital); earnings before or after taxes, interest, depreciation and/or amortization; gross or operating profit; cost control; strategic initiatives; market share; improvements in capital structure; productivity ratios; share price (including, but not limited to, growth measures and total stockholder return); expense targets; margins; operating efficiency or margins; capital efficiency; strategic targets; economic profit; employee or customer satisfaction, services performance, subscriber, cash management or asset management metrics; working capital targets; cash value added; or market or economic value added (together, the Performance Criteria ).
Such performance goals also may be based on the achievement of specified levels of Company performance (or performance of an applicable affiliate or business unit of the Company) under one or more of the Performance Criteria described above relative to the performance of other corporations.
The Compensation Committee may provide in any such Award that any evaluation of performance may include or exclude any of the following events that occurs during a Performance Period: (i) asset write-downs, (ii) litigation or claim judgments or settlements, (iii) the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results, (iv) any reorganization and restructuring programs, (v) extraordinary nonrecurring items as described in Accounting Principles Board Opinion No. 30 and/or in Managements Discussion and Analysis of Financial Condition and Results of Operations appearing in the Companys annual report to stockholders for the applicable year, (vi) acquisitions or divestitures, (vii) foreign exchange gains and losses, and (viii) gains and losses on asset sales. To the extent such inclusions or exclusions affect Awards to Covered Employees, they shall be prescribed in a form that satisfies the requirements for performance-based compensation within the meaning of Section 162(m)(4)(C) of the Code, or any successor provision thereto.
After the completion of each Performance Period, the Compensation Committee shall certify the extent to which any Performance Criteria has been satisfied, and the amount payable as a result thereof, prior to payment, settlement or vesting of any Award subject to this Section 16. Notwithstanding any provision of the Plan other than Section 15, with respect to any Award that is subject to this Section 16, the Compensation Committee may adjust downward, but not upward, the amount payable pursuant to such Award, and the
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Compensation Committee may not waive the achievement of the applicable performance goals except in the case of the death or Disability of the Covered Employee.
The Compensation Committee shall have the power to impose such other restrictions on Awards subject to this Section 16 as it may deem necessary or appropriate to ensure that such Awards satisfy all requirements for performance-based compensation with the meaning of Section 162(m).
Subject to adjustment from time to time as provided in Section 15.1, no Covered Employee may be granted Awards other than Performance Units subject to this Section 16 in any calendar year period with respect to more than 750,000 shares of Common Stock for such Awards, except that the Company may make additional one time grants of such Awards for up to 1,000,000 shares to newly hired or newly promoted individuals, and the maximum dollar value payable with respect to Performance Units or other awards payable in cash subject to this Section 16 granted to any Covered Employee in any one calendar year is $2,500,000.
The Compensation Committee shall have the power to impose such other restrictions on Awards subject to this Section 16 as it may deem necessary or appropriate to ensure that such Awards satisfy all requirements for performance-based compensation within the meaning of Section 162(m)(4)(C) of the Code, or any successor provision thereto.
The Board or the Compensation Committee may amend, suspend or terminate the Plan or any portion of the Plan at any time and in such respects as it shall deem advisable; provided, however, that, to the extent required by applicable law, regulation or stock exchange rule, stockholder approval shall be required for any amendment to the Plan; and provided, further, that any amendment that requires stockholder approval may be made only by the Board. Subject to Section 17.3, the Compensation Committee may amend the terms of any outstanding Award, prospectively or retroactively.
Unless sooner terminated as provided herein, the Plan shall terminate ten years from the Effective Date. After the Plan is terminated, no future Awards may be granted, but Awards previously granted shall remain outstanding in accordance with their applicable terms and conditions and the Plans terms and conditions. Notwithstanding the foregoing, no Incentive Stock Options may be granted more than ten years after the later of (a) the Effective Date and (b) the date of approval by the stockholders of any amendment to the Plan that constitutes the adoption of a new plan for purposes of Section 422 of the Code.
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The amendment, suspension or termination of the Plan or a portion thereof or the amendment of an outstanding Award shall not, without the Participants consent, materially adversely affect any rights under any Award theretofore granted to the Participant under the Plan. Any change or adjustment to an outstanding Incentive Stock Option shall not, without the consent of the Participant, be made in a manner so as to constitute a modification that would cause such Incentive Stock Option to fail to continue to qualify as an Incentive Stock Option. Notwithstanding the foregoing, any adjustments made pursuant to Section 15 shall not be subject to these restrictions.
Subject to Section 18.5, the Board shall have broad authority to amend the Plan or any outstanding Award without the consent of a Participant to the extent the Board deems necessary or advisable to (i) comply with, or take into account, changes in applicable tax laws, securities laws, accounting rules and other applicable law, rules and regulations or (ii) to ensure that an Award is not subject to additional taxes, interest or penalties under Section 409A of the Code.
No individual or Participant shall have any claim to be granted any Award under the Plan, and the Company has no obligation for uniformity of treatment of Participants under the Plan.
Furthermore, nothing in the Plan or any Award granted under the Plan shall be deemed to constitute an employment contract or confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Related Company or limit in any way the right of the Company or any Related Company to terminate a Participants employment or other relationship at any time, with or without cause.
Notwithstanding any other provision of the Plan, the Company shall have no obligation to issue or deliver any shares of Common Stock under the Plan or make any other distribution of benefits under the Plan unless, in the opinion of the Companys counsel, such issuance, delivery or distribution would comply with all applicable laws (including, without limitation, the requirements of the Securities Act or the laws of any state or foreign jurisdiction) and the applicable requirements of any securities exchange or similar entity.
The Company shall be under no obligation to any Participant to register for offering or resale or to qualify for exemption under the Securities Act, or to register or qualify under the laws of any state or foreign jurisdiction, any shares of Common Stock, security or interest in a
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security paid or issued under, or created by, the Plan, or to continue in effect any such registrations or qualifications if made.
As a condition to the exercise of an Option or any other receipt of Common Stock pursuant to an Award under the Plan, the Company may require (a) the Participant to represent and warrant at the time of any such exercise or receipt that such shares are being purchased or received only for the Participants own account and without any present intention to sell or distribute such shares and (b) such other action or agreement by the Participant as may from time to time be necessary to comply with the federal, state and foreign securities laws. At the option of the Company, a stop-transfer order against any such shares may be placed on the official stock books and records of the Company, and a legend indicating that such shares may not be pledged, sold or otherwise transferred, unless an opinion of counsel is provided (concurred in by counsel for the Company) stating that such transfer is not in violation of any applicable law or regulation, may be stamped on stock certificates to ensure exemption from registration. The Committee may also require the Participant to execute and deliver to the Company a purchase agreement or such other agreement as may be in use by the Company at such time that describes certain terms and conditions applicable to the shares.
To the extent the Plan or any instrument evidencing an Award provides for issuance of stock certificates to reflect the issuance of shares of Common Stock, the issuance may be effected on a noncertificated basis, to the extent not prohibited by applicable law or the applicable rules of any stock exchange.
Each person who is or shall have been a member of the Board, or a committee appointed by the Board, or an officer of the Company to whom authority was delegated in accordance with Section 3 of the Plan, shall be indemnified and held harmless by the Company against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by such person in connection with or resulting from any claim, action, suit or proceeding to which such person may be a party or in which such person may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by such person in settlement thereof, with the Companys approval, or paid by such person in satisfaction of any judgment in any such claim, action, suit or proceeding against such person; provided, however, that such person shall give the Company an opportunity, at its own expense, to handle and defend the same before such person undertakes to handle and defend it on such persons own behalf, unless such loss, cost, liability or expense is a result of such persons own willful misconduct or except as expressly provided by statute.
The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such person may be entitled under the Companys certificate of incorporation or bylaws, as a matter of law, or otherwise, or of any power that the Company may have to indemnify or hold harmless.
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Unless otherwise provided by the Committee or in the instrument evidencing the Award or in a written employment, services or other agreement, no Award, other than a Stock Award, shall entitle the Participant to any cash dividend, voting or other right of a stockholder unless and until the date of issuance under the Plan of the shares that are the subject of such Award.
In interpreting and applying the provisions of the Plan, any Options granted as an Incentive Stock Option pursuant to the Plan shall, to the extent permitted by law, be construed as an incentive stock option within the meaning of Section 422 of the Code, although the Company makes no representations that Options granted as Incentive Stock will maintain such qualification.
Notwithstanding anything contained in the Plan to the contrary, the Company intends that any and all Awards and compensation payable under the Plan shall satisfy the requirements for exemption from, or compliance with, Section 409A of the Code and that all terms and provisions shall be interpreted to satisfy such requirements. If the Committee determines that an Award, payment, distribution, deferral election, transaction or any other action or arrangement contemplated by the provisions of the Plan would, if undertaken, cause a Participant to become subject to Section 409A of the Code, the Committee, to the extent it deems necessary or advisable in its sole discretion, reserves the right, but shall not be required, to unilaterally amend or modify the Plan and any Award granted under the Plan so that the Award qualifies for exemption from, or compliance with, Section 409A of the Code.
Furthermore, any payment or distribution that is to be made under the Plan (or pursuant to an Award under the Plan) to a Participant who is a specified employee of the Company within the meaning of that term under Section 409A and as determined by the Committee, on account of a separation from service within the meaning of that term under Section 409A of the Code, may not be made before the date which is six months after the date of such separation from service, unless the payment or distribution is exempt from the application of Section 409A of the Code by reason of the short-term deferral exemption or otherwise.
Notwithstanding any other provision in the Plan, the Committee makes no representations that Awards granted under the Plan shall be exempt from, or comply with, Section 409A of the Code and makes no undertaking to preclude Section 409A of the Code from applying to Awards granted under the Plan.
Awards not deferred under Section 6.3 and not otherwise exempt from the requirements of Section 409A of the Code are intended to qualify for the short-term deferral exemption to Section 409A of the Code, and payment shall be made as soon as administratively feasible after the Award became vested, but in no event shall such payment be made later than 2½ months after the end of the calendar year in which the Award becomes vested unless otherwise permitted under the exemption provisions of Section 409A of the Code.
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Without amending the Plan, the Committee may grant Awards to Eligible Persons who are foreign nationals on such terms and conditions different from those specified in the Plan as may, in the judgment of the Committee, be necessary or desirable to foster and promote achievement of the purposes of the Plan and shall have the authority to adopt, amend or rescind such modifications, procedures or subplans under the Plan as may be necessary or desirable to comply with provisions of the laws or regulations of other countries or jurisdictions in which the Company or any Related Company may operate or where Participants may reside to ensure the viability of the benefits from Awards granted to Participants employed in such countries or jurisdictions, meet the requirements that permit the Plan to operate in a qualified or tax-efficient manner, comply with applicable foreign laws or regulations and meet the objectives of the Plan.
The Plan is intended to constitute an unfunded plan. Nothing contained herein shall require the Company to segregate any monies or other property, or shares of Common Stock, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Participant, and no Participant shall have any rights that are greater than those of a general unsecured creditor of the Company.
All obligations of the Company under the Plan with respect to Awards shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all the business and/or assets of the Company.
If any provision of the Plan or any Award is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any person, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or, if it cannot be so construed or deemed amended without, in the Committees determination, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, person or Award, and the remainder of the Plan and any such Award shall remain in full force and effect.
The Plan, all Awards granted thereunder and all determinations made and actions taken pursuant hereto, to the extent not otherwise governed by the laws of the United States, shall be governed by the laws of the State of Oregon without giving effect to principles of conflicts
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of law. Participants irrevocably consent to the nonexclusive jurisdiction and venue of the state and federal courts located in the State of Oregon.
The granting of Awards and the issuance of shares of Common Stock under the Plan are subject to all applicable laws, rules and regulations and to such approvals by any governmental agencies or national securities exchanges as may be required.
The effective date (the Effective Date ) is the date on which the Plan is approved by the stockholders of the Company. If the stockholders of the Company do not approve the Plan within 12 months after the Boards adoption of the Plan, any Incentive Stock Options granted under the Plan will be treated as Nonqualified Stock Options.
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APPENDIX A
DEFINITIONS
As used in the Plan,
Acquired Entity means any entity acquired by the Company or a Related Company or with which the Company or a Related Company merges or combines.
Award means any Option, Stock Appreciation Right, Stock Award, Restricted Stock, Stock Unit, Performance Share, Performance Unit, cash-based award or other incentive payable in cash or in shares of Common Stock as may be designated by the Committee from time to time.
Board means the Board of Directors of the Company.
Cause , unless otherwise defined in the instrument evidencing an Award or in a written employment, services or other agreement between the Participant and the Company or a Related Company, means dishonesty, fraud, serious or willful misconduct, unauthorized use or disclosure of confidential information or trade secrets, or conduct prohibited by law (except minor violations), in each case as determined by the Companys chief human resources officer or other person performing that function or, in the case of directors and executive officers, the Compensation Committee, whose determination shall be conclusive and binding.
Change in Control, unless the Committee determines otherwise with respect to an Award at the time the Award is granted or unless otherwise defined for purposes of an Award in a written employment, services or other agreement between the Participant and the Company or a Related Company, means the occurrence of any of the following events:
(a) an acquisition by any Entity of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 40% or more of either (1) the then outstanding shares of common stock of the Company (the Outstanding Company Common Stock ) or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the Outstanding Company Voting Securities ), provided, however, that the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege where the security being so converted was not acquired directly from the Company by the party exercising the conversion privilege, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Related Company, (iv) an acquisition by any Entity pursuant to a transaction that meets the conditions of clauses (i), (ii) and (iii) set forth in the definition of Company Transaction, or (v) any acquisition approved by the Board;
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(b) a change in the composition of the Board during any two-year period such that the individuals who, as of the beginning of such two-year period, constitute the Board (the Incumbent Board ) cease for any reason to constitute at least a majority of the Board; provided, however, that for purposes of this definition, any individual who becomes a member of the Board subsequent to the beginning of the two-year period, whose election, or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; and provided further, however, that any such individual whose initial assumption of office occurs as a result of or in connection with an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of an Entity other than the Board shall not be considered a member of the Incumbent Board; or
(c) consummation of a Company Transaction.
Code means the Internal Revenue Code of 1986, as amended from time to time.
Committee has the meaning set forth in Section 3.2.
Common Stock means the common stock, par value $0.001 per share, of the Company.
Company means Digimarc Corporation, a Delaware corporation.
Company Transaction , unless the Committee determines otherwise with respect to an Award at the time the Award is granted or unless otherwise defined for purposes of an Award in a written employment, services or other agreement between the Participant and the Company or a Related Company, means consummation of:
(a) a merger or consolidation of the Company with or into any other company;
(b) a sale in one transaction or a series of transactions undertaken with a common purpose of at least 50% of the Companys outstanding voting securities; or
(c) a sale, lease, exchange or other transfer in one transaction or a series of related transactions undertaken with a common purpose of all or substantially all of the Companys assets,
excluding, however, in each case, a transaction pursuant to which
(i) the Entities who are the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Company Transaction will beneficially own, directly or indirectly, at least 50% of the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, of the Successor
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Company in substantially the same proportions as their ownership, immediately prior to such Company Transaction, of the Outstanding Company Common Stock and Outstanding Company Voting Securities;
(ii) no Entity (other than the Company, any employee benefit plan (or related trust) of the Company, a Related Company or a Successor Company) will beneficially own, directly or indirectly, 40% or more of, respectively, the outstanding shares of common stock of the Successor Company or the combined voting power of the outstanding voting securities of the Successor Company entitled to vote generally in the election of directors unless such ownership resulted solely from ownership of securities of the Company prior to the Company Transaction; and
(iii) individuals who were members of the Incumbent Board will immediately after the consummation of the Company Transaction constitute at least a majority of the members of the board of directors of the Successor Company.
Where a series of transactions undertaken with a common purpose is deemed to be a Company Transaction, the date of such Company Transaction shall be the date on which the last of such transactions is consummated.
Compensation Committee means the Compensation Committee of the Board.
Covered Employee means a covered employee as that term is defined for purposes of Section 162(m)(3) of the Code or any successor provision.
Disability , unless otherwise defined by the Committee for purposes of the Plan in the instrument evidencing the Award or in a written employment, services or other agreement between the Participant and the Company or a Related Company, means a mental or physical impairment of the Participant that is expected to result in death or that has lasted or is expected to last for a continuous period of 12 months or more and that causes the Participant to be unable to perform his or her material duties for the Company or a Related Company and to be engaged in any substantial gainful activity, in each case as determined by the Companys chief human resources officer or other person performing that function or, in the case of directors and executive officers, the Compensation Committee, whose determination shall be conclusive and binding. Notwithstanding the foregoing, with respect to Incentive Stock Options, Disability shall have the meaning attributed to that term for purposes of Section 422 of the Code.
Effective Date has the meaning set forth in Section 19.
Eligible Person means any person eligible to receive an Award as set forth in Section 5.
Entity means any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act).
Exchange Act means the Securities Exchange Act of 1934, as amended from time to time.
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Fair Market Value means the closing price for the Common Stock on any given date during regular trading, or if not trading on that date, such price on the last preceding date on which the Common Stock was traded, unless determined otherwise by the Committee using such methods or procedures as it may establish.
Grant Date means the later of (a) the date on which the Committee completes the corporate action authorizing the grant of an Award or such later date specified by the Committee and (b) the date on which all conditions precedent to an Award have been satisfied, provided that conditions to the exercisability or vesting of Awards shall not defer the Grant Date.
Incentive Stock Option means an Option granted with the intention that it qualify as an incentive stock option as that term is defined for purposes of Section 422 of the Code or any successor provision.
Nonqualified Stock Option means an Option other than an Incentive Stock Option.
Option means a right to purchase Common Stock granted under Section 7.
Option Expiration Date means the last day of the maximum term of an Option.
Outstanding Company Common Stock has the meaning set forth in the definition of Change in Control.
Outstanding Company Voting Securities has the meaning set forth in the definition of Change in Control.
Parent Company means a company or other entity which as a result of a Company Transaction owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries.
Participant means any Eligible Person to whom an Award is granted.
Performance Award means an Award of Performance Shares or Performance Units granted under Section 11.
Performance Criteria has the meaning set forth in Section 16.1.
Performance Period means the period of time during which the Performance Criteria must be met in order to determine the degree of payout and/or vesting with respect to an Award. The Compensation Committee may establish different Performance Periods for different Participants, and the Compensation Committee may establish concurrent or overlapping Performance Periods.
Performance Share means an Award of units denominated in shares of Common Stock granted under Section 11.1.
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Performance Unit means an Award of units denominated in cash or property other than shares of Common Stock granted under Section 11.2.
Plan means the Digimarc Corporation 2008 Incentive Plan.
Related Company means any entity that is directly or indirectly controlled by, in control of or under common control with the Company.
Restricted Stock means an Award of shares of Common Stock granted under Section 10, the rights of ownership of which are subject to restrictions prescribed by the Committee.
Retirement , unless otherwise defined in the instrument evidencing the Award or in a written employment, services or other agreement between the Participant and the Company or a Related Company, means Retirement as defined for purposes of the Plan by the Committee or the Companys chief human resources officer or other person performing that function or, if not so defined, means Termination of Service on or after the date the Participant reaches normal retirement age, as that term is defined in Section 411(a)(8) of the Code.
Securities Act means the Securities Act of 1933, as amended from time to time.
Stock Appreciation Right or SAR means a right granted under Section 9.1 to receive the excess of the Fair Market Value of a specified number of shares of Common Stock over the grant price.
Stock Award means an Award of shares of Common Stock granted under Section 10, the rights of ownership of which are not subject to restrictions prescribed by the Committee.
Stock Unit means an Award denominated in units of Common Stock granted under Section 10.
Substitute Awards means Awards granted or shares of Common Stock issued by the Company in substitution or exchange for awards previously granted by an Acquired Entity.
Successor Company means the surviving company, the successor company or Parent Company, as applicable, in connection with a Company Transaction.
Termination of Service means a termination of employment or service relationship with the Company or a Related Company for any reason, whether voluntary or involuntary, including by reason of death, Disability or Retirement. Any question as to whether and when there has been a Termination of Service for the purposes of an Award and the cause of such Termination of Service shall be determined by the Companys chief human resources officer or other person performing that function or, with respect to directors and executive officers, by the Compensation Committee, whose determination shall be conclusive and binding. Transfer of a Participants employment or service relationship between the Company and any Related Company shall not be considered a Termination of Service for purposes of an
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Award. Unless the Compensation Committee determines otherwise, a Termination of Service shall be deemed to occur if the Participants employment or service relationship is with an entity that has ceased to be a Related Company. A Participants change in status from an employee of the Company or a Related Company to a nonemployee director, consultant, advisor, or independent contractor of the Company or a Related Company or a change in status from a nonemployee director, consultant, advisor or independent contractor of the Company or a Related Company to an employee of the Company or a Related Company, shall not be considered a Termination of Service.
Vesting Commencement Date means the Grant Date or such other date selected by the Committee as the date from which an Award begins to vest.
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Exhibit 10.8
DIGIMARC CORPORATION
STOCK OPTION GRANT NOTICE
2008 INCENTIVE PLAN
Digimarc Corporation (the Company ) hereby grants to Participant an Option (the Option ) to purchase shares of the Companys Common Stock under the Companys 2008 Incentive Plan (the Plan ). The Option is subject to all the terms and conditions set forth in this Stock Option Grant Notice (this Grant Notice ) and in the Stock Option Agreement and the Plan, which are attached to and incorporated into this Grant Notice in their entirety.
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1/48 of the shares subject to the Option will vest and become exercisable on each monthly anniversary of the Vesting Commencement Date. |
Additional Terms/Acknowledgement : The undersigned Participant acknowledges receipt of, and understands and agrees to, this Grant Notice, the Stock Option Agreement and the Plan. Participant further acknowledges that as of the Grant Date, this Grant Notice, the Stock Option Agreement and the Plan set forth the entire understanding between Participant and the Company regarding the Option and supersede all prior oral and written agreements on the subject.
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1. Stock Option Agreement
2. 2008 Incentive Plan
3. Plan Summary
PLEASE SIGN AND RETURN THIS COPY TO THE STOCK ADMINISTRATOR
DIGIMARC CORPORATION
2008 INCENTIVE PLAN
STOCK OPTION AGREEMENT
Pursuant to your Stock Option Grant Notice (the Grant Notice ) and this Stock Option Agreement, Digimarc Corporation has granted you an Option under its 2008 Incentive Plan (the Plan ) to purchase the number of shares of the Companys Common Stock indicated in your Grant Notice (the Shares ) at the exercise price indicated in your Grant Notice. Capitalized terms not explicitly defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan.
The details of the Option are as follows:
1. Vesting and Exercisability
Subject to the limitations contained herein, the Option will vest and become exercisable as provided in your Grant Notice, provided that vesting will cease upon the termination of your employment or service relationship with the Company or a Related Company and the unvested portion of the Option will terminate. During any authorized leave of absence, the vesting of the Option will cease after the leave of absence exceeds a period of 90 days. Vesting of the Option will resume upon termination of the leave of absence and your return to employment or service relationship with the Company or a Related Company.
Notwithstanding any other provision of this Agreement, you may not exercise the Option unless the Shares issuable upon exercise are registered under the Securities Act or, if such Shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of the Option must also comply with other applicable laws and regulations governing the Option, and you may not exercise the Option if the Company determines that such exercise would not be in material compliance with such laws and regulations.
You may exercise the Option by giving written notice to the Company, in form and substance satisfactory to the Company, which will state your election to exercise the Option and the number of Shares for which you are exercising the Option. The written notice must be accompanied by full payment of the exercise price for the number of Shares you are purchasing. You may make this payment in any combination of the following: (a) by cash; (b) by check acceptable to the Company; (c) by tendering shares of Common Stock you have owned for at least six months; (d) if the Common Stock is registered under the Exchange Act and to the extent permitted by law, by instructing a broker to deliver to the Company the total payment required; or (e) by any other method permitted by the Committee.
The unvested portion of the Option will terminate automatically and without further notice immediately upon your Termination of Service for any reason. You may exercise the vested portion of the Option as follows:
(a) General Rule . You must exercise the vested portion of the Option on or before the earlier of (i) three months after your Termination of Service and (ii) the Option Expiration Date;
(b) Disability . If your Termination of Service is due to Retirement or Disability, you must exercise the vested portion of the Option on or before the earlier of (i) 12 months after your Termination of Service and (ii) the Option Expiration Date.
(c) Death . If your Termination of Service is due to your death, the vested portion of the Option must be exercised on or before the earlier of (i) 12 months after your Termination of Service and (ii) the Option Expiration Date. If you die after your Termination of Service but while the Option is still exercisable, the vested portion of the Option may be exercised until the earlier of (x) 12 months after the date of death and (y) the Option Expiration Date; and
(d) Cause . The vested portion of the Option will automatically expire at the time the Company first notifies you of your Termination of Service for Cause, unless the Committee determines otherwise. If your employment or service relationship is suspended pending an investigation of whether you will be terminated for Cause, all your rights under the Option likewise will be suspended during the period of investigation. If any facts that would constitute termination for Cause are discovered after your Termination of Service, any Option you then hold may be immediately terminated by the Committee.
It is your responsibility to be aware of the date the Option terminates.
During your lifetime only you can exercise the Option. The Option is not transferable except by will or by the applicable laws of descent and distribution. The Plan provides for exercise of the Option by a beneficiary designated on a Company-approved form or the personal representative of your estate. Notwithstanding the foregoing and to the extent permitted by Section 422 of the Internal Revenue Code of 1986, the Committee, in its sole discretion, may permit you to assign or transfer the Option, subject to such terms and conditions as specified by the Committee.
As a condition to the exercise of any portion of an Option, you must make such arrangements as the Company may require for the satisfaction of any federal, state, local or foreign withholding tax obligations that may arise in connection with such exercise.
Nothing in the Plan or the Option will be deemed to constitute an employment contract or confer or be deemed to confer any right for you to continue in the employ of, or to continue any other relationship with, the Company or any Related Company or limit in any way the right of the Company or any Related Company to terminate your employment or service relationship at any time, with or without Cause.
You will have no right to bring a claim or to receive damages if you are required to exercise the vested portion of the Option within three months (one year in the case of Retirement, Disability or death) of the Termination of Service or if any portion of the Option is cancelled or expires unexercised. The loss of existing or potential profit in the Option will not constitute an element of damages in the event of your Termination of Service for any reason even if the termination is in violation of an obligation of the Company or a Related Company to you.
This Agreement will inure to the benefit of the successors and assigns of the Company and be binding upon you and your heirs, executors, administrators, successors and assigns.
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Exhibit 10.9
EQUITY COMPENSATION PROGRAM
FOR NON-EMPLOYEE DIRECTORS
UNDER THE DIGIMARC CORPORATION 2008 INCENTIVE PLAN
The following provisions set forth the terms of the equity compensation program (the Program ) for non-employee directors of Digimarc Corporation (the Company ) under the Digimarc Corporation 2008 Incentive Plan (the Plan ). The following terms are intended to supplement, not alter or change, the provisions of the Plan, and in the event of any inconsistency between the terms contained in this document and in the Plan, the Plan shall govern. All capitalized terms that are not defined in this document shall be as defined in the Plan.
1. Eligibility
Each director of the Company elected or appointed to the Board who is not otherwise an officer or employee of the Company or a Related Company (an Eligible Director ) is eligible to receive the Awards set forth in the Program.
2. Initial Option Grants
Each Eligible Director who is first elected or appointed to the Board after the date the Program is approved by the Board will automatically receive a Nonqualified Stock Option to purchase 20,000 shares of Common Stock (an Initial Grant ). The Grant Date for an Initial Grant to an Eligible Director is the date of that directors first election or appointment to the Board. In addition, those Eligible Directors already serving as directors on the date the Program is approved by the Board will automatically receive a Nonqualified Stock Option to purchase 20,000 shares of Common Stock (an Existing Director Grant ). The Grant Date for Existing Director Grants will be the date the Program is approved by the Board.
Each Initial Grant will vest and become exercisable over the two-year period commencing on the Initial Options Grant Date, with 50% of the shares to vest and become exercisable on the first anniversary of the Grant Date of the Initial Grant and 1/12th of the remaining shares to vest and become exercisable monthly thereafter. Each Existing Director Grant will vest and become exercisable over a two-year period commencing on the date the director was first elected or appointed to the Board, with 50% of the shares to vest and become exercisable on the first anniversary of the date the director was first elected or appointed to the Board and 1/12th of the remaining shares to vest and become exercisable monthly thereafter.
3. Annual Option Grants .
Commencing with the 2009 annual meeting of stockholders, each Eligible Director will automatically receive immediately following each annual meeting of stockholders a Nonqualified Stock Option to purchase 7,500 shares of Common Stock
(an Annual Grant ). The Grant Date of an Annual Grant will be the date of such annual meeting. Each Annual Grant will vest and become exercisable in twelve equal monthly installments beginning one month after the Grant Date for the Annual Grant.
4. Option Exercise Price
Initial Grants, Existing Director Grants and Annual Grants will have a per share exercise price equal to the Fair Market Value of the Common Stock on the Grant Date of the Option.
5. Term of Options
Each Option expires ten years from its Grant Date, but is subject to earlier termination as follows:
(A) In the event that an Eligible Director ceases to be a director for any reason other than death, the unvested portion of any Option granted to the director will terminate immediately, and the director may exercise the vested portion of the Option only within three years after he or she ceases to be a director or prior to the date on which the Option expires by its terms, whichever is earlier.
(B) In the event of an Eligible Directors death, the unvested portion of any Option granted to the director will become fully vested and exercisable. The Option is exercisable only within three years after the date of death of the director or prior to the date on which the Option expires by its terms, whichever is earlier, and only by the personal representative of the directors estate, the person(s) to whom the directors rights under the option have passed by will or the applicable laws of descent and distribution, or any beneficiary designated pursuant to Section 14 of the Plan.
6. Exercise of Options
An Eligible Director or an individual set forth in Section 5(B), as applicable, may exercise the Options by giving notice to the Company (or a brokerage firm designated or approved by the Company). The notice must state the number of shares of Common Stock exercised and be accompanied by payment in full for the Common Stock. Payment may be made, to the extent permitted by applicable laws and regulations, in whole or in part: (a) in cash or check; (b) by having the Company withhold shares of Common Stock that would otherwise be issued on exercise of the Option that have an aggregate Fair Market Value equal to the aggregate exercise price of the shares being purchased under the Option; (c) by tendering (either actually or by attestation) shares of Common Stock owned by the director that have an aggregate Fair Market Value equal to the aggregate exercise price of the shares being purchased under the Option; (d) if and so long as the Common Stock is registered under the Exchange Act, by delivery of a properly executed exercise notice, together with irrevocable instructions to a broker, to promptly deliver to the Company the amount of proceeds to pay the exercise price, all in accordance with the regulations of the Federal Reserve Board.
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7. Change of Control
Upon a Change in Control or Company Transaction, all Options outstanding as of the date of the Change of Control or Company Transaction, and which are not then exercisable and vested, will immediately become fully exercisable and vested.
8. Amendment
The Board may amend the provisions contained within this Program as it believes advisable. An amendment may not, without the consent of the Eligible Director, impair or diminish any rights of an Eligible Director or any rights of the Company under an Award.
Provisions of the Plan (including any amendments) not discussed above, to the extent applicable to Eligible Directors, continue to govern the terms and conditions of Awards granted to Eligible Directors.
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DIGIMARC CORPORATION
CERTIFICATION
I, Bruce Davis, certify that:
Date:
November 24, 2008
By: |
/s/ BRUCE DAVIS
Bruce Davis Chief Executive Officer |
DIGIMARC CORPORATION
CERTIFICATION
I, Michael McConnell, certify that:
Date:
November 24, 2008
By: |
/s/ MICHAEL MCCONNELL
Michael McConnell Chief Financial Officer |
DIGIMARC CORPORATION
CERTIFICATION
In connection with the periodic report of Digimarc Corporation (the "Company") on Form 10-Q for the period ended September 30, 2008 as filed with the Securities and Exchange Commission (the "Report"), I, Bruce Davis, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the U.S. Code, that to the best of my knowledge:
This Certification has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission.
Date: November 24, 2008
By: |
/s/ BRUCE DAVIS
Bruce Davis Chief Executive Officer |
DIGIMARC CORPORATION
CERTIFICATION
In connection with the periodic report of Digimarc Corporation (the "Company") on Form 10-Q for the period ended September 30, 2008 as filed with the Securities and Exchange Commission (the "Report"), I, Michael McConnell, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the U.S. Code, that to the best of my knowledge:
This Certification has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission.
Date: November 24, 2008
By: |
/s/ MICHAEL MCCONNELL
Michael McConnell Chief Financial Officer |